Corruption Causes, Impact and Cures

                                            Dr. KS Dhillon

Introduction

The origin of the word corruption is from the Latin word “corruptus,” which means “corrupted”. Although the word has been widely deplored, there is no generally accepted definition of corruption. In legal terms, corruption is ‘the abuse of a trusted position in one of the branches of power (executive, legislative and judicial) or in political or other organizations with the intention of obtaining material benefit which is not legally justified for itself or for others’ [1].

Historical perspective

Corruption was labeled as a great sin in the Bible: “You shall not take a bribe, for a bribe blinds the clear-sighted and subverts the cause of the just” (Exodus 23:8).

The earliest records of corruption date back to the thirteenth century BC. Under Roman law, corruption was defined as receiving, giving, or claiming benefits in order to influence an official in connection with his work. Since corruption was so common a new law was introduced where the compensation for damage was double the value of the damage, and the perpetrator of the corrupt act lost his political rights. These laws did not help to alleviate corruption because corruption was mostly practiced by the members of the Senate and senior state officials in Rome and in the Roman provinces. 

The Christian faith in the early days condemned corruption. Despite the condemnation, corruption later reached its peak with the selling of indulgences in the Middle Ages. The selling of indulgences as well other immoral acts of the clergy were condemned by Martin Luther. 

The early feudalism in medieval Europe between the 9th and 15th centuries was familiar with various laws that punished the bribing of courts sometimes with death. In the later days of Feudalism, countries became helpless in the fight against corruption. France in 1716 established a special court that handled cases of abuse of royal finances. These abuses including embezzlement, extortion, bribery, scams, etc. were so extensive that the court was abolished and a general amnesty was introduced in 1717. From then some forms of corruption became a tradition. 

Corruption was also widespread during the time of the Spanish Inquisition. During that period the victim of the accusation could make amends with money. 

Throughout history, several intellectuals dealt with corruption or theorized about it. Machiavelli, the Renaissance political theorist, had a low opinion of republics. He considered them even more corrupt than other regimes. According to him, corruption leads to moral degradation, bad education, and bad faith.

The great philosopher, diplomat, and lawyer Sir Francis Bacon was known both for receiving and taking bribes. He reached the highest judicial position in England and during that time he was caught accepting bribes  28 times. He defended himself in parliament by saying that he accepted a bribe from both parties involved and hence the dirty money did not affect his decisions. The parliament refused to accept his arguments and sent him to jail. He, however, only spent a few days in jail since he was able to bribe the judge.

Historically although corruption has been present in society ever since, it has only garnered more attention in the recent past. Research on corruption and its negative impacts has become more common after 1995 when international institutions and countries began to be aware of this problem. Before that, the attitude of the public toward corruption was rather neutral. 

In 1998, Kaufmann and Gray from the World Bank [2] noted that:

• Bribery is widespread, especially in developing and transition countries. There are significant differences between and within regions. For example, survey responses suggest that Botswana and Chile have less bribery than many fully industrialized countries.
• Bribery has been found to increase transaction costs and it creates insecurity in the economy.
• Bribery usually leads to ineffective economic outcomes and in the long term impedes foreign and domestic investments. It misallocates talents to rent-seeking activities and distorts sectorial priorities and technology choices (for example, it creates incentives for contracting major defense projects or unnecessary infrastructure projects, but does not encourage investments in rural specialist health clinics or in preventive health care). This pushes companies “underground” (outside the formal sector), weakens the state’s ability to increase revenue, and leads to ever-increasing tax rates which are levied on fewer and fewer taxpayers, consequently diminishing the state’s ability to provide enough public goods, including the rule of law. A vicious circle of increasing corruption and underground economic activity can result.
• Bribery is unfair, as it imposes a regressive tax, which heavily burdens, in particular, commercial and service activities performed by small businesses.
• Corruption also destroys the legitimacy of the state.

Many ‘researchers and institutions including the World Bank Institute, the European Commission, the United Nations, and the EBRD have investigated corruption and its impact on macroeconomic and microeconomic indicators through various forms of corruption, as well as its connection with local customs and habits, and how it affects the everyday lives of people’ [1]. Most of the studies are mainly the analyses of the effects of corruption on various economic indicators, such as GDP growth, employment, investments, tax revenues, and foreign investments [1] or the study of various forms of corruption in relation to politics and the economic environment [1]. 

Causes of corruption

The level and extent of corruption differs from country to country. There are key common driving forces that generate it. Svensson [3] has identified what is common to all countries that are the most corrupt. They are developing countries or countries in transition and with rare exceptions low-income countries. Most of the corrupt countries have a closed economy, the influence of religion is visible (Protestant countries have far the lowest level of corruption), they have low media freedom and a relatively low level of education.

Corruption usually arises from an array of several interrelated factors, such as political factors, economic environment, professional ethics, legislation, customs, habits as well as traditions.

1. Political and economic environment

The political and economic environment has a great role to play in the phenomenon of corruption. When the economic activity in the country is heavily regulated and limited, the greater is the authority and the power of officials in decision making and this increases the possibility of corruption. In such situations, individuals are willing to pay or offer payment in order to avoid restrictions. When regulations are such that officials are given the opportunity to decide on the basis of discretion, a great potential for corruption exists.

The level of corruption is also affected by the monetary policy. A strong link between monetary policy and corruptive activity has been found. Countries with a well-regulated financial sector that do not have a lot of informal economies or black markets are less corrupt than those where the opposite is true. There is also less corruption in countries with higher economic and political freedom.

The level of efficiency of public administration determines the extent to which corruption can sprout. Such efficiency is determined by the type of regulations and permits. Ineffective and unclear regulations help to increase the level of corruption in two different ways:

• Artificially created monopoly of power enables civil servants to obtain bribes based on their superior position.
• Ineffective and unclear regulations cause inhibition and encourage people to pay bribes in order to speed up the bureaucratic procedure.

Corruption is also strongly influenced by the low salaries of public employees, who try to improve their financial position by receiving bribes. The socio-economic status of government officials also affects the phenomenon of corruption. 

Corruption arises because agencies, institutions, and governments cannot control corruption effectively due to underpaid officials, and this is especially so in developing countries, where they do not have sufficient tax revenue to properly reward the officials.

Low wages are not the only cause of corruption. The poor state of the public administration, that results from political “overcrowding” of officials is another cause of corruption. Political “overcrowding” of officials leads to loyalty prevailing over professional standards leading to corruption. 

Satisfaction with work done by officials is also an important factor that influences corruption. There is some evidence that the more officials are dissatisfied with their work or place of work, the higher the degree of corruption. The private sector has higher ethical values with higher-level satisfaction with work, than the public sector and hence is less unethical especially with regard to thefts and corruption. In principle, the salary level of civil servants affects the receipt of a bribe. The higher it is, the smaller the chance that the person will accept a bribe. On the other hand, a higher salary also strengthens the negotiating power of the official, which leads to higher bribes. Hence, it is very difficult to determine whether a higher salary will lead to less corruption. It means that the level of salary is not a decisive factor, but merely one of many causes of corruption.

The economy is largely dependent on politics and the rule of law. Individuals exploit various options for eliminating competition, and bribery is just one of the possible weapons in the struggle to obtain a job. 

The cost of a bribe is a substantial business cost, and it is an integral part of the business contract. Some believe that even if they stop giving bribery, their rivals will not, and therefore they have to bribe in order to remain competitive. They believe that bribery and misleading behavior are not crimes, they are just part of the business practice. It is also known that lubricating the bureaucratic wheel by the private sector helps to get certain things moving faster or easier.

There is no doubt that the political influence of corruption is rampant in many countries. When people at the top in politics i.e government, parties, and leading politicians are corrupt, then corruption infiltrates to all levels, and at the same time spreads among the ordinary population. In such situations, nobody trusts the institutions or the rule of law. 

Corruption is low in situations where openness and independence of the institutions are in balance and the officials are accessible. They should not be excessively exposed to private influences and should be able to make authoritative decisions, without using their power to arbitrate.

The possibility of corruption is high where the official power is poorly institutionalized and is too exposed to private influence. In such instances, the officials’ independence is reflected in excessive exploitation of their power and they can do as they please.

2. Professional ethics and legislation

Corruption emerges and spreads when there is a lack of professional ethics and there are deficient laws regulating corruption as a criminal offense. Ineffective sanctioning of corruption encourages those involved in corrupt practices to continue with such practices. It also encourages others to get involved in such practices. 

In transition countries, the lack of professional ethics is a particular issue. In some countries, ethics and professional standards change rapidly and approach that in developed countries. In some countries, the standards remain the same. In transition countries, the “softer” acts of corruption are often considered to be justifiable and acceptable. In some countries with professional ethics which manage illegal corruption well, there is nevertheless a widespread form of legal corruption.

Lack of transparency and a lack of control by supervisory institutions provides fertile grounds for corruption to flourish. Non-transparent functioning of both politics and the economy creates an atmosphere for corruption to flourish. Corruption is also affected by extensive, non-transparent, and incomplete legislations which allows for laws to be interpreted in different ways for the benefit of those who are willing to pay.

3. Customs, habits, tradition, and demography

Different countries have different views about corruption. In Europe for example, we can find two extremes; in the North where corruption is not tolerated, and in the South, corruption is an almost normal, socially acceptable phenomenon. 

Countries with a democratic past traditionally prosecute corruption, while in former socialist countries, corruption in the state apparatus was a part of their tradition. 

There are also different customs; for example in some cases, a “thank you” in the form of a gift for a service is an expression of courtesy, while elsewhere it is considered corruption. Everything is a matter of ethics and morality, and it can be very different in different areas and different countries.

Corruption apparently prospers better in countries where Islam and Orthodoxy are the main religion. 

Protestantism has been tested several times and has been found to be associated with low levels of corruption in a country. 

The least corrupt countries are those countries where the rule of law is the strongest. They were predominantly Protestant in 1900 and the most corrupt were predominantly Orthodox in the same year. There is a link between religion and corruption on one hand and respect for the rule of law on the other. The question that arises is: Why do some religions respect the rule of law more than others and control corruption?. 

A study by Melgar et al [5] titled Perception of corruption tried to find out which groups of people are more likely to pay for corruption. They found that people who think that there is a lot of corruption also perceive it so and are more willing to pay for it. It has been shown that social status and personal characteristics also play an important role in the shaping of corruption perception.

 Divorced women, unemployed individuals, people working in the private sector, and those who are self-employed are considered to be in positive correlation with the perception of corruption. The opposite applies to married individuals, full-time employees, people who frequently attend religious ceremonies, and people with at least secondary education. They perceive less corruption and are also not willing to pay. 

In all African and Asian countries, the former socialist countries, and most of the East Asian countries, people perceive more corruption than people living in other countries. Most European countries and some of the former English colonies show lower perceptions of corruption. They also found that better economic results reduce the perception of corruption, while macroeconomic instability and income inequalities have precisely the opposite effect [5]. 

High unemployment and low purchasing power increases the perception of corruption. 

Demographics is also a very important factor that affects corruption. There is evidence that a patriarchal society is more prone to corruption. There are several studies that have found that women are less corrupt than men. An influential study by the World Bank [6] of 150 countries in Europe, Africa, and Asia showed that women are more reliable and less prone to corruption.

A study by Rivas [7] also showed that women are less corrupt than men and he believed that an increase in the number of women in the labor market and in politics could help fight corruption.

 Lee and Guven [8] in a study: Engaging in corruption—the influence of cultural values and the contagion effects at the micro-level, also raised the question of whether men are more corrupt than women. Their findings support the thesis that women are less susceptible to corruption than men, and this is especially true in cultures that require men to be ambitious, competitive, and materially successful. 

In 2009, the Peruvian government decided to involve more women in the police units because women were supposed to be less corrupt than men. When 2,500 female police officers joined as traffic police officers, bribery was drastically reduced, and the people in Peru welcomed the female police officers on the streets [9].

The impact of corruption on the economy

In 1997, Tanzi and Davoodi [10] published an IMF working paper on the impact of corruption on public finances. In the working paper several important findings came to light:

• Corruption leads to an increase in public investments at the expense of private investments. There are many ways in which public expenditure can be manipulated and this is carried out by high-level officials so they can get bribes. In simple terms, it means that more government expenditures and a large budget offer more opportunities for corruption.
• Corruption redirects the public expenditure from that necessary for basic functioning and maintenance to expenditure on new pieces of equipment.
• Corruption tends to take away allotments for public expenditure from essential areas such as health and education since there is less chance of getting commissions in these areas as compared to areas where there are unnecessary projects.
• Corruption reduces the effectiveness of public investments as well as effectiveness of the infrastructure of a country.
• Corruption can also reduce tax revenues by compromising the ability of the state administration to collect taxes and fees.

The influence of corruption on the economy was also studied by Tanzi and Davoodi [10]. The influence of corruption on the economy occurs through several means:

• Through the effect of corruption on businesses. The impact of corruption on a business to a large extent depends on the size of the company. Large companies are better protected in environments that are prone to corruption. They can avoid taxes more easily and their size protects them from petty corruption. They are also often politically protected. The survival of small and middle-sized companies, regardless of their economic importance, is much more difficult than the survival of large companies.
• Through the effect of corruption on investments. Corruption affects total investments, the size, and form of investments by foreign investors, and the size of public investments. It also affects the quality of investment decisions and investment projects.
• Through the effect of corruption on public spending. Corruption has a negative impact on public spending, especially on education and health. There is a strong correlation between corruption and military expenditure. When there is corruption the military expenditure is higher. Higher military expenditure reduces economic growth. 
• Through the effect of corruption on taxes: Because of corruption, fewer taxes are levied than would otherwise be, since some of the taxes go into the pockets of corrupt tax officials. In corrupt countries, there are also frequent tax relieves selective taxes and various types of progressive taxes. Hence, there will be much less money in the country. Therefore corruption, through the country’s fiscal deficit, will affect economic growth.

A study by Smarzynska and Wei [11] on the effects of corruption on the size and composition of investments showed that corrupt countries are less attractive for investors. If they do invest, they often enter the market with a joint venture with local partners who usually understand or control matters of the home country better. The local partner can also help foreigners with the acquisition of local licenses and permits as well as negotiate with the bureaucratic labyrinths at a lower cost. 

Corruption also affects employment for various reasons, because the job does not go to the most qualified or suitable person, but goes to the one who is ready to pay for it in some form or another. 

Corruption also affects the total investments, the size and composition of foreign investments, and the size of public investments. Corruption also affects the effectiveness of investment decisions and projects. When there is corruption, investments are smaller, because investors are aware that they will have to bribe the officials or even give them a profit share for a successful implementation of a business. Because of these increased costs, the investors are usually not keen to invest.

Wei [12] made a projection which predicted that if corruption in Bangladesh could be brought to the level of corruption in Singapore then the growth rate of GDP per capita in Bangladesh could increase by 1.8% per year between 1960 and 1985 and the average per capita income could have been more than 50% higher. The Philippines could have raised their investments in relation to GDP by as much as 6.6% (which means a significant increase in the investments) if the level of corruption could be brought down to that of Singapore. 

Wei [12] also notes that in order to reduce the corruption level to that of Singapore in countries such as India, Ghana, Kenya, Turkey, Sri Lanka, Colombia, and Mexico, the salaries of officials have to be increased by 400—900% which is unlikely to be possible. He goes on to say that if there was such a hike in salaries, a new form of corruption would arise when people would be prepared to pay a bribe to get these well-paid jobs.

The effectiveness of various financial assistance programs is reduced when there is corruption because the money is lost along the way and does not reach the intended target. Furthermore, the financial benefits deriving from corruption cannot be taxed because they are hidden. The state hence loses part of the income from the taxes due to corruption. 

The European Commission in its 2014 report noted that corruption alone cost the EU economy EUR 120 billion per year, which is just a little less than the annual budget of the European Union [13]. According to the European Commissioner for Home Affairs, Cecilia Malstotröm, corruption in Europe is mainly present in public procurement, financing of political parties, and health care [13].

According to the United Nations, Afghanistan’s cost of corruption in 2012 was estimated to be $ 3.9 billion. 

According to Transparency International, Suharto, the former leader of Indonesia, embezzled between $15 and $35 billion. Embezzlements by Mobutu in Zaire, Ferdinand Marcos in the Philippines, and Abacha in Nigeria have been estimated to amount to $5 billion [14]. 

According to a World Bank survey, $1 billion in bribes is paid annually in both the rich and developing countries [15]. This actually means that even the developed countries are not immune to corruption. Political corruption is present in large infrastructure projects. 

Bađun [29] studied the relationship between political corruption and public investment in Croatia. They found that countries with high public investment have bigger political corruption. According to Badun, Croatia's infrastructure is in a bad state despite a high share of public capital expenditure in their GDP. The existence of huge allocations for public investment in the presence of weak control mechanisms provides plenty of opportunities for political corruption. 

There is a strong relationship between the degree of corruption and the emergence of the shadow economy. When there is a high degree of corruption, the level of the shadow economy is also higher. There is a link between low quality of institutions, the holders of the rule of law, and the shadow economy. When the law is weak, higher is the degree of corruption and level of shadow economy. Higher the degree of corruption, lower is the economic development as measured by GDP per capita. Hence, corruption affects the economic development of countries.

A devastating combination of widespread state intervention and subsidies in the absence of a strong institutional framework and lack of control of public finances and lack of effective anti-trust legislation promotes corruption. There is no clear evidence that private monopolies are more effective and less corrupt than the public ones. Public procurement is the breeding ground of corruption. 

Failure to respect copyright and intellectual property has a damaging effect on the global economy. This is obvious in corrupt countries. The economic damage can amount to billions of dollars when there is a failure to respect copyright and intellectual property.

Year after year the perception of corruption is increasing. Despite all the anti-corruption initiatives and anti-corruption moves, people still do not hesitate to accept and offer a bribe. The individuals who give bribes are becoming more innovative. They adapt to the situation and their innovations in paying bribes and hiding them are becoming more visible. The negative effects of corruption are the same all over the world. It reduces both foreign direct and domestic investments and increases inequality and poverty. Corruption increases the number of renter seekers in the economy and it also distorts and exploits public investments as well as reduces public revenues.

Remedial Measures

Corruption exists in all countries but it is more widespread in low-income countries. This is not because people in poor countries are more corruptible than in rich countries. It is because conditions in poor countries are more conducive for corruption to flourish. Bribery and graft are crimes of calculation. When the benefits are large, chances of getting caught are small, and penalties are light, then many people will succumb to corruption.

Low-income countries usually have highly regulated economies with large monopoly rents. Accountability is usually weak, political competition and civil liberties are often restricted. Laws and principles of ethics are poorly developed and legal institutions charged with enforcing them are ill-prepared to address the task. Watchdog organizations are not well developed and are often suppressed. The discretionary powers of administrators are extensive, with poorly defined rules and regulations which makes the situation worse [17] Given these constraints, what can be done to redress the situation?

The pessimist says nothing can be done. There are, however, others with more optimistic views. The more optimistic people point out that there are developing countries in the world, such as Chile and Botswana that, at present, have less bribery than many industrialized countries. They also point out that developing economies like Singapore, Hong Kong, and China have been able to transform themselves from being very corrupt to relatively clean within a reasonably short period of time [17].

Some ideas and suggestions of the optimistic groups to fight corruption include [17]: 

(i) Leadership: There are many authors, including Professor Syed Hussein Alatas of Malaysia, a noted authority on corruption, who are of the view that the leadership in a country has a key role to play in fighting corruption [18].

Asians traditionally hold their leaders and those in authority in high regard and esteem. Top leaders are expected to set a good example with respect to honesty, integrity, and capacity for hard work. Fighting corruption involves taking difficult decisions, hence the leadership must display firmness, political will, and commitment to carry out reforms that are required. Honest and dedicated leaders are necessary to counter corruption. 

(ii) Credibility: For success in the drive against corruption, the offenders on the demand and supply side of a corrupt deal have to be convinced that the government is serious about fighting corruption. There have been suggestions that some well-known corrupt people in the country should be publicly tried and punished.

In several Asian countries, some highly publicized trials and convictions of important officials and businessmen on charges of corruption have taken place.

(iii) Involving people: People should be involved in campaigns to eradicate corruption. Publicity campaigns to create greater awareness of the adverse effects of corruption can be useful. There should be clear and unequivocal official pronouncements by the authorities on the desirability to bring corruption under control. 

Help and cooperation of ordinary citizens, who have a lot of first-hand experience with corruption, should be solicited for the successful launch of anti-corruption drives. People will extend their full cooperation once they are convinced that a sincere and genuine effort to combat corruption is underway. Providing opportunities for people to express their views on such matters will bring forth an outpouring of information, ideas, and suggestions.

 (iv) Responsible press: A responsible press can go a long way to help fight corruption. Secretiveness helps politicians and public officials to get away with corruption. A responsible press can gather, analyze, organize, present, and disseminate information which is vital to create greater public awareness as well as to provide the momentum for undertaking reforms necessary to overcome corruption. A responsible and investigative press can play an important role in exposing misconduct as well as in serving as a watchdog to reduce corruption. It can also prevent the spread of corruption. The power of the press to limit misconduct and improper behavior should not be underestimated.

(v) Oversight bodies: There are mixed views on the effectiveness of anti-corruption oversight or watchdog bodies. In some situations, the views have been useful. The Independent Commission Against Corruption in Hong Kong, China, and similar institutions in other countries such as

Botswana, Chile, Malaysia, and Singapore have apparently done a good job. According to surveys and interviews of public officials and members of civil society organizations, many respondents do not believe that these organizations have done a good job to reduce corruption. 

For such bodies to be effective, they have to be created in an environment where leaders are honest and civil servants are insulated from political interference. Better incentives have also to be provided to discourage corruption. Oversight bodies are often misused for political gain which renders these oversight bodies useless.

Conclusion

Corruption is a symptom of deep-seated economic, political, and institutional weaknesses and shortcomings in a country. To tackle corruption the underlying causes must be addressed. Root causes of corruption must be tackled by undertaking economic, political, and institutional reforms. 

Anti-corruption enforcement measures such as a strengthened police force oversight bodies and more efficient courts will not be sufficient to tackle corruption without making serious efforts to address the fundamental causes of corruption. 

Corruption is prevalent where there are other forms of institutional weaknesses, such as bureaucratic red tape, political instability, and weak legislative and judicial systems. Corruption and such institutional weaknesses are usually linked together and they feed upon each other. Getting rid of corruption helps a country to overcome institutional weaknesses, and reducing institutional weaknesses helps to curb corruption.

Undertaking reforms (both economic and political) by reducing institutional weaknesses offers the best hope of overcoming corruption. Reforms will not make corruption disappear but reforms will bring it under control so that adverse consequences can be minimized so that the country can progress to become a modern, developed nation [17]. 

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