Chapter 14 Corruption and Development by John Mbaku

1. Chapter 14 Corruption and Developmentby John Mbaku Summary: 1.Introduction, 2. Defining Corruption,3. Causes ,4. Public Choice Perspective, 5. One party Systems & Corruption, 6. Statism & Corruption, 7. The Economic Impact of Corruption , 8.Traditional means of fighting corruption, 9.New ways of fighting corruption-Institutions & Public Choice Approach, 10. Self-Enforcing Constitution, 11.Challenges to Constitutionalism in Africa, 12. Summary and Conclusion

2. 1.Introduction • Corruption is the use of public resources for private gain. • Corruption is an opportunist behavior aimed at producing benefits for individual or group at the expense of society • Corruption can be measured by corruption Index(CPI), which ranks countries based on how investors, political and risk analysts, and the public perceive levels of corruption. • The Index ranges from zero (high corruption), to 10 ( highly clean-minimum corruption) • The CPI is based on 1999 data is shown in table 14.1

3. 1. Introduction • Based on CPI data, Denmark (CPI=10)and Finland (9.8) are the least corrupt or top two cleanest states. Nigeria (CPI=1.6) & Cameroon (CPI=1.5) are the most corrupt states. • Of the 10 most corrupt economies 4 are in Africa (Cameroon, Nigeria, Tanzania, Kenya) • Others- such as Botswana, Mauritius, Namibia, and South Africa are have relatively less corruption & making progress

4. 1.Introduction, contd. • Corruption Debates- Two Views • View 1- It may encourage inefficiency and discourage wealth creation and growth.. • View 2: It may “grease” wheels of bureaucracy, and make government more responsive to the needs of investors and society.

5. 1.Introduction, contd. • 1.But, studies show corruption has negative effects on economic development by contributing to less effective governance and retarding wealth creation, reversing democratic gains made since the end of the cold war, making economies less able to sustain viable and effective economic systems. • 2. Cost of public service is high to provide more income to civil servants- contributes to high transaction costs

6. 1.Introduction, contd • 3. Increases the burden of the public sector on citizens. 4. It demoralizes, and leads to political opportunism such as ‘rent seeking” that contribute to inefficiency. • 5. Leads to inability of a government to sustain professionals and administrators, • 6. Encourages the underutilization of skilled and educated labor cost or the ‘brain drain’.., • 7. Distorts international trade and investment, • 8. discourages investment and leads to capital flight, • 9. May stunt innovation and introduction of new technologies.

7. 1.Introduction, contd. How to deal with Corruption - General Approaches • Examining the incentives and rules that regulate socio-political interaction of society and change those incentives if they are flawed. • Promote good governance that is accountable, transparent, honest, participatory, guarantees economic freedom, rights of individuals to freely exchange and contract, based on well secured property rights by law. • Move forward with constitutional reforms with constitutional limits on government officials to prevent abuse of power, guarantee economic freedoms, and to controls negative incentives. A clear delineation of political/public activities from private economic activities is necessary.

8. 2. Defining & Explaining Corruption • 1. Two elements: Poor Performance of a public duty and deviations from the rules that regulate civil servants. A public servant can be corrupt if the his performance sacrifices the principal (citizens) for his own benefit. • Corruption in Africa is understood in practical terms such as: theft of public resources by civil servants, embezzlement, illegal extraction of public resources, nepotism, favoritism, bribery, etc…

9. 2. Defining & Explaining Corruption cont. • Corruption is an extra-legal institution used by individuals or groups to influence the bureaucracy for self-serving reasons. • In Nigeria and Cameroon, minority ethnic groups are denied for effective participation in governance. Anglophones are excluded from economic and political participation in Cameroon. • In Nigeria, ethnic minorities in the Delta Region are battling the federal government over natural resources and oil. Nigeria, state institutions are used by individuals and groups as tools of plundering local wealth. Rebels have began to kidnap oil company executives. Nigeria is the 5th oil exporter to the USA

10. 2 Defining & Explaining Corruption cont. • The Second Determinant of Corruption is inefficiency & incompetence of the civil service. • Citizens and businesses have no effective way of monitoring opportunistic way civil servants. • In Zaire, 1979, the World Bank determined about 92% of state employees were not able to meet their subsistence needs with their legal salaries. So, they have to take bribes. • Income inequality is another factor. Some teachers and professors are not paid on time in Nigeria, Cameroon and few other countries. So, they are compelled to engage in corruption

11. 3. Causes of Corruption • 1. Most Corrupt State- Example-Nigeria is a leader where institutions are used by individuals as tools of plundering citizens. • 2. Incompetence and inefficiency of civil service. • 3. Poverty and severe inequality in income. • 4. Cultural Norms….

12. 2. Defining and Explaining Corruption cont.- Cultural Factors • Existence of flawed Cultural Norms is another factor. • Corruption may be the cost that countries pay to modernize?. • Loyalty to a group or tribe is more important than individual rights or accountability. • A successful civil servant is expected to share the benefits of his office with members of his group, extended family, or tribe.

13. 3. Causes of Corruption in Africa • 1. Corrupt governments- Example- Nigeria- where institutions are used by individuals as tools of plunder citizens. • 2. Incompetence and inefficiency of civil service. • 3. Poverty and severe inequality in income. • 4. Cultural Norms….

14. 4. The Public Choice Perspective in understanding Corruption • Corruption is seen as a post-constitutional opportunism aimed at producing benefits for individual or group at the expense of society. • Once the constitution is adapted there is an incentive by individuals and groups to capture the state’s redistributive or transfer power. • The process through which individuals and or groups expend resources to affect distributional outcome is called Rent Seeking • Effective control of corruption must based on institutional reforms including constitutions to constrain the ability of the state to intervene in private transactions.

15. 5. One-Party Political System and Corruption-Centralization of Power • The first generation of African leaders took actions that tried to create a unitary and strong central governments to contain tribalism, by centralizing power and create on party states. • The effect was to create personalistic rule, and other effects such as suffocation of civil society, external debt, economic decay and dependency, military opportunism such as coups, etc..

16. 5. One-Party Political System & Corruption- cont. • Later political competition failed to have a significant impact on corruption since there was no institutional reforms that adequately checks the exercise of a government agency to minimize corruption . • There is a critical need to establish laws and institutions that place constraint on government to avoid opportunistic behavior of bureaucrats.

17. 6. Statism and Corruption in Africa • Market Centered Approach inherited from the colonial era did not work since democratic institutions were missing. • Corruption Africa is opportunistic behavior related to the scope and extent of government regulation of private economic activity. • It can only be eliminated through democratic bottom up inclusive approach of designing institutions that sustain participation, accountability and transparency and economic freedom.

18. 7. The Impact of Corruption On African Economies • There are two views: The damaging effect and the “grease” view. • The grease effect is not supported by the evidence. Corruption continues to help ruling elites to maintain monopoly political power. • Civil Society is still suffering from years of abuse by the state.

19. 7.The Impact of Corruption On African Economies • In some countries the multilateral organizations such as the IMF and the World Bank have become de-facto policy makers. • Only few countries such as South Africa, Botswana, and Mauritius have emerging viable civil societies that can sustain viable democratic institutions.

20. 7.Ways of Minimizing Corruption On African Economies • An important role of institutional reforms is to produce well designed laws and institutions that minimize the number of individuals and groups that are placed at competitive disadvantage. • Also, Building democratic institutions to constrain the abuse of public authority and state officials.

21. 8. Traditional Corrupting Cleanup Strategies • Traditional ways of controlling corruption includes: societal, legal, market, and political • Traditional: civil society norms, vigilance, education. • Legal: Control through laws, courts, police, media.. • Market Strategies: reduce state control of markets- change incentives against corrupt behavior.. • Political: Government decentralization, raise opportunities for citizen participation and liberalization.

22. 8.Traditional Corruption Control Strategies • What are short-comings these strategies? • 1. lack of effective professionalism of the counteracting agencies- such as judiciary, press • 2. Lack of independent press that exposes corruption • 3. Professionals state public servants and officials are not independent of government: They are the same employees… • 4. What should be done” Design institutions (rules ) that constrains state and officials, and more effective counteracting institutions such as independent judiciary and free press

23. 9. Rules, Institutions and Public-choice Approach to Corruption Control • Rules determine incentives faced by participants both in economic and political markets. • Corruption is a problem of constitutional maintenance or defect, which needs reform. • Opportunism is defined as behavior of individuals and organizations at the expense of other citizens such as free riding, adverse selection, moral hazard, and corruption,

24. 9.The Public Choice Approach to Corruption • This is a need to guarantee economic freedom or the rights of individuals to engage in exchange and contract, for economic growth to occur. • Economic freedoms need to be guaranteed by constitution that prevent politicians from abrogating them in legislation, in response to interest groups.

25. 10. Producing Self-Enforcing Constitution • This must include devolution of central or federal government power to local units. • It should allow free mobility of Resources among local, state, regional units. • A highly decentralized federalist structures are one way of minimizing opportunism, including corruption, Since government may be more responsive to the smaller local unitary governments.

26. 11. Challenges to Constitutionalism in Africa • Democratic constitution making provides the development of democratic institutions that prevent individuals to engage in corruption, and other forms of opportunism. • The fall of dictatorships in several African states provides hope for grassroots organizations to overcome opposition from entrenched groups and engage the people in democratic decision making.

27. 12. Summary and Conclusion • If the existing institutions encourage corruption, the only effective way is to change the rules and the flawed incentives. • An attempt to manipulate outcome such as by policing, and regulating may fail. • Corruption cleanup requires institutional reform that changes incentive structure to secure desired social outcomes. • For example, problems of agro-ecological degradation and exploitation of environmental and natural resources can be minimize by establishing a well defined and secured property rights and land rights.

28. Read Chapter 9-Agriculture for Thursday • Study Guide for Test 3 will be handed out on Thursday (3/9) for the test on March 16 • Review questions will be over Nnadozie Chapter PP handouts and over Chapter 9 of Todaro & Smith on Agriculture.

29. Econ 388 T2-Answers Part I (35 points) 1A, 2D, 3D, 4A, 5A, 6C, 7A, 8D, 9B, 10B, 11D, 12A, 13B, 14D, 15B, 16C, 17B, 18D, 19D, 20D, 21B, 22A, 23A, 24B, 25C, 26C, 27C, 28A, 29B, 30A, 31D, 32B, 33D, 34D, 35D Part II: 3 short essay questions (15)

30. Econ 388 T2 Curve • 43-50 A • 40