Ways in which corruption affects a countrys development

Corruption in the way deals are made, contracts are awarded, or economic operations are carried out, leads to monopolies or oligopolies in the economy. Those business owners who can use their connections or money to bribe government officials can manipulate policies and market mechanisms to ensure they are the sole provider of goods or services in the market.

Monopolists , because they do not have to compete against alternative providers, tend to keep their prices high and are not compelled to improve the quality of goods or services they provide by market forces that would have been in operation if they had significant competition. Embedded in those high prices are also the illegal costs of the corrupt transactions that were necessary to create such a monopoly. If, for example, a home construction company had to pay bribes to officials to be granted licenses for operations, these costs incurred will, of course, be reflected in artificially high housing prices.

In best practice, companies choose their suppliers via tender processes requests for tender or requests for proposal , which serve as mechanisms to enable the selection of suppliers offering the best combination of price and quality. This ensures the efficient allocation of resources. In corrupted economies, the companies that otherwise would not be qualified to win the tenders are often awarded projects as a result of unfair or illegal tenders e.

This results in excessive expenditure in the execution of projects and substandard or failed projects, leading to overall inefficiency in the use of resources. Public procurement is perhaps most vulnerable to fraud and corruption due to the large size of financial flows involved. Corrupted economies are characterized by a disproportionately small middle class and significant divergence between the living standards of the upper class and lower class.

Because most of the country's capital is aggregated in the hands of oligarchs or persons who back corrupted public officials, most of the created wealth also flows to these individuals.

In a corrupt economy, small businesses are not widely spread and are usually discouraged because they face unfair competition and illegal pressures by large companies that are connected with government officials. Certain industries are more prone to corruption than others, making small businesses in these sectors even more vulnerable to unethical business practices.

Because little confidence can be placed in the legal system of corrupted economies in which legal judgments can be rigged, potential innovators cannot be certain their invention will be protected by patents and not copied by those who know they can get away with it by bribing the authorities.

There is thus a disincentive for innovation, and as a result, emerging countries are usually the importers of technology because such technology is not created within their own societies. Small businesses in corrupt countries tend to avoid having their businesses officially registered with tax authorities to avoid taxation. As a result, the income generated by many businesses exists outside the official economy, and thus are not subject to state taxation or included in the calculation of the country's GDP.

Another negative of shadow businesses is they usually pay their employees decreased wages, lower than the minimum amount designated by the government. Also, they do not provide acceptable working conditions, including appropriate health insurance benefits for employees.

Corruption is one of the disincentives for foreign investment. Investors who seek a fair, competitive business environment will avoid investing in countries where there is a high level of corruption. While investing in emerging markets remains a popular investment area, investors are naturally hesitant to put their money at risk in countries known to have high corruption levels. Studies show a direct link between the level of corruption in a country and measurements of the competitiveness of its business environment.

A working paper of the International Monetary Fund IMF shows corruption has an adverse impact on the quality of education and healthcare provided in countries with emerging economies. Corruption increases the cost of education in countries where bribery and connections play an important role in the recruitment and promotion of teachers.

As a result, the quality of education decreases and this affects the overall health of the economy. Also, corruption in the designation of healthcare providers and recruitment of personnel, as well as the procurement of medical supplies and equipment, in emerging economies results in inadequate healthcare treatment and a substandard or restricted, medical supply, lowering the overall quality of healthcare.

Many countries with emerging economies suffer from a high level of corruption that slows their overall development. The entire society is affected as a result of the inefficient allocation of resources, the presence of a shadow economy, and low-quality education and healthcare. Corruption thus makes these societies worse off and lowers the living standards of most of their populations. Emerging Markets.

Same concept applies to money, goods and services. The idea of Marginal Utility is conceptualized. When applied in political economy it means that governments will take from the better doing and give to the less fortunate because economic policy is all about utility added value.

And utility is maximized whenever the greatest number of people benefit from it. The challenge is to balance social well-fare policies so as not to discourage productivity by robbing people of any individual incentive to produce Efficiency Cost. For a free market economy to function a certain legislative infrastructure should pre-exist. They call for democracy, independent civil societies 55 independent state institutions, 56 better law enforcement, market-friendly legislations, free trade, free transfer of funds, free transfer of labour, and more direct foreign investments.

They preach and stress upon the combat of corruption, international crime and money laundry. They demand for gender equality. They emphasize on informal norms as a source of best practices. The players of the development field today are no longer just the governments and metaphysical market forces. In addition to the government and the market forces we have organizations such as the World Bank, the International Monetary Fund, the International Financial Institutions, International and National non-governmental organizations, civil society, in addition to pressure groups and businessmen.

Trusting in the invisible hand of the market and its Trickling Down Theory to achieve social as well as economic stability is no longer considered prudent. Recognizing the drawbacks of consumption economics 61 economists now prefers to target perfect equality, transparency and stability in any given society. To measure this they usually apply, amongst other things, the Gini Coefficient 62 which measures the extent of inequality in income distribution in a given country.

By measuring income inequality not wealth inequality it distinguishes itself from being a Marxist ideology. Also by excluding non-cash social benefit from the calculation welfare provision through public services is ignored it enables governments create a sort of social balance and economic stability by restoring the inequalities in income distribution by providing subsidized goods and services and thus creating a society wherein individuals are equally empowered no one is suffering poverty but not all are necessarily equally wealthy.

The Development field witnessed a further step forward by the work of Amartya Sen. Typically all the previous developmental theorists would evaluate the development of a given society by means of fiscal measures. However, Professor Sen asserts that this is not immune to critique.

He illustrates that the actual end of development is not to achieve financial welfare but rather to promote human well-being. Research shows that a society with less income inequality better redistribution almost always enjoys more frequent and longer periods of economic growth sustainable development. Research also shows that a society with a higher happiness index approval ratings almost always enjoys more frequent and longer periods of economic growth sustainable development.

It almost goes without saying that corruption is futile to any effective redistribution scheme a government is undertaking. It also goes without saying that corruption frustrates people and leave them disproving of their institutions.

Both things mean that a society with corruption can not possibly enjoy leaps and bounds of sustainable economic growth and development. It is a major hindrance to sustainable development, with a disproportionate impact on poor communities and is corrosive on the very fabric of society. The impact on the private sector is also considerable, it impedes economic growth, distorts competition and requests serious legal and reputational risks. The rapid development of rules of corporate governance around the world is also prompting companies to focus on anti-corruption measures as part of their mechanisms to protect their reputations and the interests of their shareholders.

Their internal controls are increasingly being extended to a range of ethics and integrity issues and a growing number of investment managers are looking to these controls as evidence that the companies undertake good business practice and are well managed. It also demonstrated a new willingness in the business community to play its part in the fight against corruption.

The adoption of the 10th Principle commits UN Global Compact participants not only to avoid bribery, extortion and other forms of corruption but also to develop policies and concrete programs to address corruption. Companies are challenged to join governments, UN agencies and civil society to realize a more transparent global economy.

Legal practitioners specializing in the field of combating corruption not only work in an ever-developing exciting field but also play an important role in the upkeep of global economy.

To learn more about our services and get the latest legal insights from across the Middle East and North Africa region, click on the link below. Through the impact of corruption on investments : Corruption affects a total investments, b the size and form of investments by foreign direct investors, c the size of public investments and d the quality of investment decisions and investment projects.

Through the influence of corruption on the allocation of talents : Indirectly, corruption has a negative impact on economic growth through the allocation of talents, since gifted and prospective students are driven, due to the influence of the environment and the situation in the country, for example, to study law rather than engineering, which would add value to the country. Through the impact of corruption on public spending : Corruption has a negative impact on public spending and has an especially strong impact on education and health.

There are also indications of the correlation between corruption and military expenditure, which means that high level of corruption reduces economic growth due to high military expenditure. Through the impact of corruption on taxes : Because of corruption, less taxes are levied than would otherwise be, as some of the taxes end up in the pockets of corrupt tax officials.

Smarzynska and Wei [ 5 ] came to similar conclusions regarding the effects of corruption on the size and composition of investments. Corrupt countries are less attractive for investors, and if they do opt for an investment, due to non-transparent bureaucracy, they often enter the market with a joint venture, as they usually understand or control matters of the home country better.

The local partner can also help foreign companies with the acquisition of local licenses and permits or can otherwise negotiate with the bureaucratic labyrinths at lower costs. Generally inclined as investors to the joint venture in the corrupt countries are especially the US investors; however, even investors from those European countries, which are among the highest ranked on the CPI, quickly adapt to local conditions.

Employment, because the job does not go to the most suitable or qualified person, but the one who is ready to pay for it or in any other way return the favor. Also affects total investments [ 24 ]. The effectiveness of investment decisions and projects. In the presence of corruption, the investments are smaller, as entrepreneurs are aware that they will have to bribe the officials or even give them a profit share for a successful implementation of a business.

Due to these increased costs, the entrepreneurs are not interested in investing. Wei [ 25 ] even made a projection which predicted that in the case of reduction in corruption in Bangladesh to the level of corruption in Singapore, the growth rate of GDP per capita would increase by 1. He therefore asks himself whether this would even be possible.

However, he notes that in the event of a large increase in salaries, a new form of corruption would likely arise when everyone would be prepared to pay a bribe for a well-paid official job.

The state is thus also losing part of the income from the taxes due to corruption, while the public spending, resulting from corruption or narrow private interests leads to negative effects on the budget. In the study Corruption and the Shadow Economy [ 31 ], the same authors explore the relationship between the degree of corruption and the emergence of the shadow economy, and their findings are that the high level of shadow economy and the high degree of corruption are strongly linked to one another.

One of the hypotheses in this survey which has been confirmed is also: the higher the degree of corruption, the lower the economic development measured by GDP per capita. The authors detected a positive correlation; corruption thus affects the economic development.

However, the extended practice of finding annuity outside the logic of the market and competition can therefore lead to a neo liberal conclusion that the root of the existence of corruption is in the very existence of the state—especially in excessive, selective and deforming state interventions and subsidies that create fertile soil for the development of corruption.

The truth is that the devastating combination consists of widespread state intervention and subsidies in the simultaneous absence of a strong institutional framework and detailed rules of the game, including the control of public finances and effective anti-trust legislation and legal practices. On the other hand, however, there is no clear evidence that private monopolies are more effective and less corrupt than the public ones and that privatization, especially long-lasting, gradual and non-transparent one so-called gradualism , reduces positive developmental and social effects, including the reduction of corruption [ 32 ].

Yet market deregulation, legal and judicial reform and transparent management of public procurement would significantly reduce corruption in many developing countries as well as in transition countries , at which point the government should play an important role in the shaping of the anti-corruption policy. There should be a strong strengthening of the public procurement institution.

The law is admittedly strict about the public procurement, but one of the main reasons for public procurement problems is the lack of a skilled workforce, and public procurement is thus still the breeding ground of corruption. Poverty destroys all ethical and moral values. One of the important aspects of the damage to the global economy is also the failure to respect copyright and intellectual property.

The more corrupt countries are also inclined to lower respect for the aforementioned, and the economic damage amounts to billions of dollars. Cavazos-Cepeda et al. There are also theories that corruption can act as the lubricant of the economic wheel and at least in some cases has a positive impact on the economic growth. The empirical analysis done by Dreher and Gassebner [ 34 ] on a sample of 43 countries between and shows that corruption is even useful, but with some reservations.

In particular, they investigated the short-term effects of corruption and found, for example, that in countries where corruption is widespread, more new entrepreneurs enter the market corruption in the public sector is expected to promote private entrepreneurial activity. They are, however, not necessarily to succeed, as there is a high likelihood that they will go bankrupt due to the rigid regulations that block the activity and because of which bribes are needed.

They do acknowledge, on the other hand, that most authors who have been doing research for a longer period of time admit the harmfulness of corruption both for society and the economy. Something similar show the data for some Asian countries, where, unlike their findings short-term benefit , the high degree of corruption coincides with the long-term economic growth. Svendson [ 10 ] also notes that, in light of the theoretical literature and various research studies, notwithstanding that these show the negative impact of corruption on the economic growth, but this cannot be said for sure, since there are difficulties in measuring corruption, and at the same time, the question arises whether the econometric models that were made are good enough to capture all the important variables.

He also states that corruption appears in many forms and that there is no reason to assume that all types of corruption are equally harmful to the economic growth. Recent empirical researches also attest to that; while many countries have suffered, as a characteristic consequence of corruption, the decline in economic growth, other countries have had economic growth in some cases a very positive one despite corruption.

The latter is also to be expected, since corruption has many manifestations and it would be surprising if all types of corrupt practices had the same effect on economic performance. Analyses show that one of the reasons for this is the extent to which the perpetrators of corrupt practices—in this case the bureaucrats—coordinate their behavior.

In the presence of such a network, the collective bureaucracy reduces the total value of the bribe, which results in lower bribe payments and higher innovation, and the economic growth is consequently higher in the latter case than in the former case.

The interesting question is not so much why is the degree of corruption in poor countries higher than in the rich ones, but rather why the nature of corruption differs between countries. The extent to which corruption is organized is just one aspect of this, but there are other aspects.

For example, it is common practice in some countries to pay ex post as a share of profit, for example instead of ex ante in advance, as a bribe to officials or politicians, so it is assumed that the effects on the economy will be different.

The precise reason why corruption should take on one form and not the other is an important issue which has been largely ignored and which could have to do with cultural, social and political reasons, as well as economic circumstances [ 35 ].

In the fight against corruption, a remarkable role was also played by the debt crisis. The crisis is supposed to dry up monetary resources and thus reduce the chances of corruption. Also, the crisis has changed the perception of the society, and bad business practices, which were acceptable before the crisis, are acceptable no longer. However, the fight against corruption is often similar to the fight against windmills. The case of India shows how corruption is changing, getting new dimensions, not only in scope, but also in methods.

Just as the population in India is growing, so is corruption, and there are always new ways how to cheat both the state and the society.

The perception of corruption is increasing year after year. Despite all the anti-corruption moves and anti-corruption initiatives, people do not hesitate to offer or accept a bribe. The bribers are becoming innovative, they adapt to the situation and the innovation of companies in paying bribes and hiding them is also visible.

However, just as elsewhere in the world, the negative effects of corruption are the same; it reduces foreign direct and domestic investments, increases inequality and poverty, raises the number of freeloaders renters, free-riders in the economy, distorts and exploits public investments and reduces public revenues. Corruption is, in fact, a multidirectional process. On one hand, the provider benefits, on the other the recipient, and both are aware of the deed that remains hidden.

The third link in the chain is everyone else, the victims. Although not every act of corruption is yet a criminal offense, it is, however, unethical and detrimental to the economic and political development of a society. Usually, there are persons involved with political, economic and decision-making power, and as the philosopher Karl Popper wrote in his book, The Open Society and its Enemies , that the greatest problem is not the question of who should give orders, but how to control the one who gives them.

How to organize the political and social institutions in order to prevent the weak and incompetent rulers from doing too much harm? However, as there is no general and unmistakable way of preventing the tyranny or corruptions of the heavyweights, the price of freedom is eternal alertness [ 37 ]. Greediness, ambition, rapacity and immorality have been known to the human society ever since the emergence of civilization and use every tool available to them: kinship, common past, school contacts, common interests, friendship and, of course, political as well as religious ties.

We have established a basic model of three factors risk, benefit and consciousness that was created on the basis of the merger of several known, scientifically proven factors that cause or reduce corruption or affect its level in the individual country. According to this degree of corruption, we have identified five groups, classified the countries and analyzed their common characteristics. The findings were as follows:. Corruption is related to the level of education the higher the average level of education, the lower the level of corruption.

Corruption is strongly linked to the geographical location. Corruption is linked to freedom in the country personal freedom, freedom of speech, economic freedom, etc. Many researchers are still involved in corruption. The findings show that there is a link between corruption and its negative effects, but from most of the studies it is not possible to determine what the cause is and what the consequence.

Whether is the level of corruption lower due to high GDP, or is it vice versa, cannot be directly identified, since the corruption depends on economic indicators, while at the same time affecting them [ 39 ].

It is also very difficult to claim that the average low level of education is due to corruption or, conversely, that corruption is a result of low education. Similarly goes for the rule of law and in efficiency of public administration.

This interdependence will surely continue to be the subject of numerous researches in the future, for the only way to be successful in the fight against corruption is if we know the causes and begin to eliminate them. Nevertheless, there remains something that needs to be emphasized. Almost all of the studies ignore the fact that the top of the most corrupt countries consists of countries with one of the various forms of armed conflict civil war, intertribal conflicts, inter-religious wars or some other form of aggression , which means that peace in the country is a prerequisite for a successful fight against corruption.

The least corrupt countries are countries that have a lasting peace on their territory most since the Second World War or even longer , which is confirmed by the above fact.