Corruption and Shadow Economies: Some New Results

Transcription

1 Prof. Dr. Dr.h.c.mult. Friedrich Schneider Department of Economics Johannes Kepler University of Linz A4040 LinzAuhof ShadEconomyCorruption_short.ppt Phone: Fax: Corruption and Shadow Economies: Some New Results June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 1

2 Outline 1 Introduction: Statements about Corruption and the Shadow Economy 2 Some Theoretical Considerations about Corruption and the Shadow Economy 3 Interactive Effects between Corruption and the Shadow Economy 4 Summary and Conclusions June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 2

3 1. Introduction Statements about the Shadow Economy and Corruption (1) Corruption as well as the shadow economy are hot scientific and political topics around the world. (2) Numerous political statements that corruption as well as the shadow economy cause severe damages on the official economy. (3) Unfair (Ruineous) competition between the enterpreneurs working in the shadow economy or being corrupt and the ones working in the official economy and being honest! (4) Mostly only one common policy measure: increase effective punishment to get rid of corruption and the shadow economy. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 3

4 1. Introduction (5) The World Bank estimates the size of corruption for the year 2006 of 1,300 (approx. 1.4% of World GDP) and in 2007 of 1,400 (approx. 1.5% of World GDP) billion dollars. (6) The average size of the shadow economy accounts for 39% (of official GDP) in the year 2006/07 in 86 developing countries and in 40% in 25 transition countries and 14% in 21 highly developed OECD countries. (7) Aim of this presentation is an empirical investigation about the importance and interaction of the shadow economy and corruption. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 4

5 2. Some theoretical considerations about the Shadow Economy and Corruption 2.1. Definition of Corruption Corruption is commonly defined as the misuse of public power for private benefit. The term private benefit relates to receiving money or valuable assets. Public power is exercised by bureaucrats, appointed to their office, and by politicians. Corruption can also happen in large (private) corporations/firms (e.g. in Germany Siemens, VW). June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 5

6 2. Some theoretical considerations about Corruption and the Shadow Economy 2.2. The Definition of the Shadow Economy (i) The shadow economy includes all legal production and provision of goods and services that are deliberately concealed from public authorities for the following four reasons: (1) To avoid payment of income, value added or other taxes, (2) To avoid payment of social security contributions, (3) To avoid having to meet certain legal standards such as minimum wages, maximum hours, safety standards, etc., and (4) To avoid complying with certain administrative procedures, such as completing statistical questionnaires or other administrative forms. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 6

7 2. Some theoretical considerations about the Shadow Economy and Corruption 2.2. The Definition of the Underground and Informal Household Economy (ii) (iii) (iv) Underground (classical crime) activities are all illegal actions that fit the characteristics of classical crime activities like burgarly, robbery, drug dealing, etc. Informal household economy consists of household enterprises that are not registered officially under various specific forms of national legislation. These two sectors ((ii) classical crime and (iii) household production) are not included in the shadow economy activities. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 7

8 2. Some theoretical considerations about the Shadow Economy and Corruption Figure 2.2.1: The size of corruption Corruption Index (Transparency International), Year 2006 CPI bis 10 (8) 8bis 9 (5) 7bis 8 (7) 6bis 7 (6) 5bis 6 (8) 4 bis 5 (14) 3 bis 4 (19) 2 bis 3 (17) 1bis 2 (6) k.a. (126) Source: Transparency International, Berlin June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 8

9 2. Some theoretical considerations about the Shadow Economy and Corruption Figure 2.2.2: The size of the shadow economy (in % of GDP) worldwide Year 2006/07 in % des BIP 0 bis 15 bis bis Quelle: Schneider (2007) June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 9

10 3. Interactive Effects between Corruption and the Shadow Economy Corruption leads to (1) lower investment with the consequences of lower GDP growth, (2) misallocation of resources, especially of educated people again lower GDP growth, (3) reduction of (foreign) aid flows, again lower GDP growth, (4) loss of tax revenues lower public infrastructure lower GDP growth, and (5) lower quality of state institutions and less effective court and police system. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 10

11 3. Interactive Effects between Corruption and the Shadow Economy Hypotheses about the Interaction between Corruption and the Shadow Economy Theoretically, corruption and the shadow economy can be either complements or substitutes: (1) The model of Dreher et. al (2004) and RoseAckermann (1997) show that corruption and shadow economy are substitutes in the sense that the existence of the shadow economy reduces the propensity of officials to demand grafts. (2) To the contrary Johnson et al. (1997) and Thum (2005) model corruption and the shadow economy as complements. (3) Hindriks et al. (1998) also conclude that the shadow economy is a complement to corruption, as the tax payer colludes with the inspector so that the inspector underreports the tax liability of the tax payer in exchange for a bribe. (4) Dreher and Schneider (2006) hypothesize: Hypothesis 1: In low income countries, shadow economy activities and corruption are complements. Hypothesis 2: In high income countries, shadow economy activities and corruption are substitutes. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 11

12 3. Interactive Effects between Corruption and the Shadow Economy Table 3.1: Beta coefficients for OLS regressions of the Relationship between the Shadow Economy and Corruption Dependent Variable Shadow Economy Corruption Independent Variable Corruption Shadow Economy All High All Low High ICRG index of corruption Cross Section 0.47 (3.57***) Panel, fixed effects 0.12 (2.63**) 0.10 (1.98**) 0.98 (2.88***) 1.32 (2.7***) Panel, random effects 0.10 (4.81***) 0.16 (2.64***) TI index of corruption Cross Section 0.25 (2.35**) World Bank Index of corruption Cross Section 0.17 (2.76**) DKM index corruption Cross Section 0.29 (1.77*) 0.36 (2.49**) Notes: * denotes significant at 10% level; ** significant at 5% level; *** significant at 1% level June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 12

13 4. Summary and Conclusions 4.1 General Finally to conclude what do we really know? (1) A shadow economy is a complex phenomenon, which is present overall in the world with an average size of 34.3% of off. GDP for 145 countries (unweighted average) for 2004/2005. (2) The worldwide extent of corruption was 1,000 bill.$ in 2004 (Kaufmann, World Bank, 2005). June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 13

14 4. Summary and Conclusions 4.1 General (cont.) (3) In summary there is empirival evidence that going underground is an alternative preliminary to corruption in high income countries (substitutive relationship) while corruption and the shadow economy are complements in countries with low and middle income. However, the results depend to some extent on how the regressions are specified and how corruption is measured. (4) Only if it is attractive to additionally engage in the official economy and/or if corruption is strictly prosecuted, then, on the one hand, shadow economy activities will be transferred into the official economy, and on the other hand, it will be either too risky to be corrupt or it will no longer be worthwhile. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 14

15 4. Summary and Conclusions 4.2 Conclusions for Austria Damage caused by corruption in billion Euro This means that the GNP of Austria in the year 2007 would be 23 billion Euro higher in the absence of corruption. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 15

16 4. Summary and Conclusions 4.3 Conclusions for Germany The damage due to corruption for the German Economy: Year Forecast 2008 Damage in bill CPI Transparency Index 8,2 8,2 8,0 7,8 7,6 Assumption: Decrease of the CPI by 0.2 percentage points; i.e. an increase of corruption Source: Own calculations. Without corruption the German GDP in 2007 would be higher by 275 bill.. The damage is primary caused by a decrease of productivity, increase of bankrupty of honest firms, which did not get the contract due to corruption. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 16

17 4. Summary and Conclusions 4.3 Conclusions for Germany (1) If corruption could be reduced, e.g. by increasing the CPI (value 10 = no corruption and value 0 = highly corrupt country) to the value 2004 (up to 8.2), then the damage of the German economy would be decreased by 25 bill.. If corruption could be reduced to the level of Switzerland (2007 Rank 7, value 9.0), the damage for the German economy could be reduced by 48.0 bill.. (2) Measures to efficiently fight the shadow economy: transfer shadow activities in the official one using incentive orientated policies. (3) Measures to efficiently reduce corruption: strict laws and exclusion of corrupt firms from public contracts for several years. June 2008 Prof. Dr. Friedrich Schneider, University of Linz / AUSTRIA 17