How corruption eats into an economic and political system?

Y’day’s post was on IMF bailout packages do not imposing austerity. The paper was a lecture Rogoff gave at CGDEV as part of Richard H. Sabot Lecture series.

I was seeing previous lectures and saw this 2007 lecture by Ngozi Okonjo-Iweala, former finance minister and minister of foreign affairs of Nigeria (Review the pictures, video, and transcript from the lecture). Ngozi gives an amazing lecture on corruption in developing economies and role the developed economies play in the same.

In this lecture, I would like to take a more in-depth look at corruption, and the way it undermines development in poor countries. In the course of the lecture, I would touch on this idea of myth and reality: what are the easy assumptions on corruption? And what are the realities? Are we focusing adequately on important aspects of corruption? What solutions can one proffer to guide developing countries with very weak institutions such as we find on the African continent? And what can be done, and has been done as good practice, to tackle corruption in developing countries?

She says corruption is often seen as a greaser in an economy mired with bureaucracies and delays. So it has been accepted by many economies and economists. But this leads to a much larger problem with corruption becoming systemic:

Some literature even showed evidence of growth and economic development in countries with high degrees of corruption (such as Indonesia under Suharto, Bangladesh, and China) as evidence that corruption had a limited or ambiguous impact on growth.

The problem with many of these arguments above is that they point to the microeconomic efficiency of an isolated corrupt event without examining its long-run systemic impacts. In the long-run, widespread corruption often creates much larger negative externalities which could hinder the long-term dynamic efficiency of an economy. We understand this in Nigeria, and many countries in Africa where we have long struggled with systemic corruption that has diverted resources, corrupted values, and led to rent-seeking activities in place of productive ones.

She points to 4 tales of corruption in Nigeria.  The cases range from looting and transferring public assets by former dictator, mismanagement in public health program, foreign companies brining to get public contracts. But this one is really sad:

The third tale is a tale of corruption in education on a small yet worrying scale. It is the tale of Rose, a twenty one-year old university student, who finally made it out of her village and family as the first child to get a university education. Rose, from a poor rural family, could not purchase the series of class notes sold by her lecturer to students as part of the reading material for the class. The lecturer, who used these monies to supplement his income noticed Rose was not purchasing the notes and penalized her through low grades for her work.

When she explained she couldn’t pay she was asked to make up with other favors which she refused. The failing grade she was given in the course was instrumental in her withdrawal from the university which put an end to her higher education. An individual and entire family lost their hope and pathway to escape poverty. When I followed up on this story, I found that it was by no means an isolated case. It was part of a systemic rot that had befallen what had once been a very good tertiary education system in Nigeria.

Story of so many corrupt economies…

She then adds an interesting point. She says much of corruption focus on economic corruption. Not much on political corruption:

In many instances, the corruption debate is centered on economic corruption – on cases of rent-seeking, on procurement fraud, on leakages in government budgets and so on. If you look at the World Bank’s Governance and Anti-Corruption Action Plan you will see that it says its focus is on strengthening state accountability and capability. This is interpreted all in economic terms – looking at the area of economic corruption- financial management, budget, procurement, judiciary etc. Politics and money are mentioned but there is never any elaboration because the Banks’ articles forbid it from entering the political arena. Indeed, during my time in Government, my colleagues and I worked tirelessly to tackle various forms of economic corruption. Yet, we will all be deluding ourselves if we believed this myth that economic corruption is the key to tackling corruption in developing countries. I want to argue that the big elephant in the room which is often ignored is political corruption, and unless tackled this will and does undermine all the focus on fighting economic corruption and improving governance in the economic sphere.

She points how this winning elections using private sector finance has become such an illicit practice:

Political corruption, particularly relating to political party finance and to campaign finance, is increasingly becoming the major challenge in developing countries. Running a multiparty democracy is becoming an increasingly difficult and expensive business.

Well, political parties and the political process in emerging democracies invariably become very prone to corruption. I am worried that political corruption in pernicious forms may be taking hold on the African continent as ways are sought to emulate Western forms of campaign finance but without the strong institutions and safeguards existing in Western democracies. Politicians in Africa have observed that in the UK and USA, big business and wealthy individuals help to finance elections and sometimes develop a symbiotic relationship with those in power. In the absence of big indigenous businessmen and women, the attempt is to create them by granting special favors, licenses, and concessions in a manner that enables these business people to make huge sums of money – a good deal of which is then kicked back into political finance. This is the new frontier in corruption and the financing of democracy. 

She says developed economies have not set right example by indulging in this kind of political campaigns. Another issue is how developed economies have become sanctuaries for funds looted from developing countries.

estimated US$20 and US$40 billion of funds is said to have been stolen by corrupt leaders in many poor countries particularly in Africa and hidden overseas. This matter is under-discussed in international fora. To me, it falls within the category of what Amartya Sen terms as an underdiscussed serious problem of global “commission” that must be addressed for elementary global justice9. There are a number of important international cases, such as former President Marcos of the Philippines who is alleged to have stolen about US$5 to $10 billion of public funds during his 21 years in power, while as noted above military leader of Nigeria, General Abacha, looted about US$3 – 5 billion from the Nigerian treasury. In many instances, developed country (and now increasingly emerging market) financial centers become recipients of these funds.

He proposes reforms for both developing and developed. Developing need to have an institutional and serious approach to tackling corruption. Developed need to reform their political finance and monitoring all these stolen funds. Civil society should be as active.

One could just replace all these Nigerian case studies for India as well. It is amazing how corruption has become so ingrained and essential part of Indian society. It was seen as a grease earlier thanks to draconian laws where work was possible only via bribing and corruption. Now even though many laws have been reformed, we still struggle and pay bribes/donations for every service under the sun. Like the example of the little girl in Nigeria stopping education as she could not pay the lecturer. We have similar standards in India where parents are forced into paying donations to even the top schools in the city. Though who have the monies/borrowing sources pay, those who don’t are forced into looking for other low-rung schools.

Such things happening at even top cities is a serious problem. But is just ignored. One could understand these things happening at smaller cities where rule of law is weak. But it happening right in country’s political and financial capital is amazing. But who cares… India is shining, people are earning more so let them pay more. How does it matter!

Then this issue of political vs economic corruption is well said. But we really did not need to learn from west here. Political campaign  finance has been happening for so long in highly innovative ways. So much so, Wall Street executives have some lessons to learn from Indian political system.

Anyways, there seems to some global agreement to tackle corruption now. Indian government has also decided to be part of this agenda. Let’s see what happens ..

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