The spectre of corruption

Transcription

1 The spectre of corruption Every year the Nedbank & Old Mutual Budget Speech Competition invites economics students to submit essays on urgent topical issues. The winners are announced on the evening of the day of the Budget Speech. This year undergraduates addressed the economic and fiscal costs of corruption. In this summarised essay, finalist Schalk Bothma from the University of Stellenbosch unpacks the repercussions of rampant corruption. Very few issues provoke public discourse to the same extent as the problem of corruption. The rise of populist politicians promising to break the cycle of corruption, during various 2016 elections, show that people worldwide are growing increasingly unhappy with the way corruption is allowed to prosper. The massive discontent with rampant corruption is completely justified. According to Corruption Watch, it has far reaching effects on a country and its people and is central to many other issues a nation experiences. A commonly accepted definition states that corruption is the abuse of entrusted power for private gain. This definition is used by various public institutions and civil society organisations, including the World Bank and Transparency International. Although corruption is mostly transactional in nature (i.e. bribery), it often manifests as more than simply a shady business transaction between two entities. Powerful business elites collude with politicians to control stateowned enterprises, capture political institutions, and turn tender processes and procurement into monopolies. Economic Costs of Corruption Lower Rates of Economic Growth

2 Corrupt behaviour leads to suboptimal economic performance wherever it occurs. Corruption impedes economic performance by stifling drivers of inclusive growth. It weakens the state s capacity to perform core functions, ultimately undermining inclusive economic growth. The World Bank states it has corruption as the single greatest obstacle to economic and social development". Indirect Economic Costs By diverting resources away from collective purposes to private ones, corruption is more damaging than the mere decline in the annual GDP growth rate. Inefficient Public Investment Corruption lowers the quality of public investment and increases its cost. Fraudulent procurement processes lead to artificial inflation of project cost, undermining efforts to reduce infrastructure gaps and boost growth. Ultimately it is the general public that bears the brunt of these inefficiencies, since the infrastructure financed is suboptimal or even completely dysfunctional. Reduced Private and Foreign Direct Investment Aside from reducing the effectivity of public investment, corruption also leads to a large reduction in private investment. High levels of corruption in a country decrease confidence and lead to higher perceived risk, which makes both foreign and local investors wary and deters them from investing. IMF research points out that an increase of 1 point in the corruption index can lead to a reduction in foreign investment by as much as 8%.

3 The April downgrades of South Africa s foreign currency debt to subinvestment grade sent investors fleeing from equities into the higher-yielding bond market. These downgrades followed a controversial decision by President Jacob Zuma to fire Finance Minister Pravin Gordhan, in a cabinet reshuffle deemed by many to be the product of cronyism. Foreign direct investment is a key determinant of long-term growth. Reduced investment caused by corruption, therefore, imposes a significant cost on any country s economy. Reduced Entrepreneurial Innovation Corruption hurts innovative activities. Research indicates that innovators looking to enter established markets are more reliant on certain governmentsupplied goods, such as licences and permits, than established producers. These goods become primary targets of corruption. Higher Rates of Inflation Research shows that more corrupt countries experience higher rates of inflation. This is due to many factors, but the government s increased dependence on seigniorage (profit made by a government by printing money) has been cited as the main cause. Since tax evasion will clearly be higher in corrupt countries, government revenue will decline. The state, therefore, has a motive for creating inflation - to generate seigniorage. Increased Income Inequality People in poverty are hurt disproportionately by corruption, making them the primary victims of corruption. Bureaucrats divert funds intended for economic

4 development, undermining the state s ability to provide basic services to citizens, feeding injustice and increasing inequality. Fiscal Costs of Corruption Losses due to Corruption Annually, a staggering $1.5 trillion is lost due to corruption worldwide, according to the IMF. This amounts to roughly 1.8-2% of global GDP. Our Parliamentary Monitoring Group estimates the size of the corruption phenomenon in South Africa is about R25 billion annually.

5 Change in Composition of Public Expenditure Corrupt bureaucrats tend to support components of government spending where bribes can more efficiently be levied and collected. Research shows that these components involve projects which are complex in nature, involve large sums of money and are not common or recurring. Large sums of money can more easily be defrauded in this fashion by inflating the cost of the project. To fund projects like these, state funds are diverted away from projects in sectors such as health and education. Lower Tax Revenue Widespread corruption promotes a culture of non-compliance with taxation laws, thereby increasing tax evasion, according to the IMF. Change in public debt and higher financing cost Due to tax revenue falling short and increased spending, government borrowing is increased. The higher the corruption in a country, the higher is the ratio of sovereign debt to GDP. Since corruption slows economic growth and performance, it is clear that the more corrupt the government, the less likely it would seem to be able to pay off its debts in the future. This means that the debt (state bonds) it issues has a higher risk for the lender and must therefore offer a higher premium, further increasing the public debt. Increased debt and its higher cost of financing place a massive burden on a country s fiscal structure. In conclusion, the pervasiveness of the costs of corruption and its widespread consequences are clear. It is also evident that those in poverty are hit the

6 hardest by the corruption pandemic. This creates a vicious cycle that can only be halted by uprooting corruption in its totality.