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What is Corruption

The broad definition of corruption is the abuse or misuse of power by a person in power for private gains. Corruption is usually associated with people in public positions, for example; politicians, civil servants, government officials, police officers etc. It also extends to non-governmental personnel such as Chief Executive Officers and Chief Financial Officers of companies, administrators, Union leaders, sport teams coaches etc.

Activities such as bribery, embezzlement, quid pro quo, favouritism, nepotism are forms of corruption that exist in public and private organizations. Scandals in high places such as the United Nations, major political parties, multi-national organizations such as Enron, Siemens highlights the existence of corruption as not only third world problem but a global issue that require attention.

There are various factors that contribute to or aid corruption.  Examples are; Poverty, Political Instability, Gender Inequality, low level of education, high level of government centralization etc.

Corruption can occur on different scales as petty, grand, political and systemic.  The classification depends on the size of people involved, the amount of money lost, private or public sector.

Petty corruption does not cost much because it occurs on a smaller scale.  it usually occurs in the low-and mid-level end of public services in their interactions with the public. Venues for this type of corruption are in places like schools, police stations, hospitals, public and private agencies.

Grand Corruption is the type of corruption that occurs at the highest level of government that requires the distortion of policies and destabilization of economic, political and legal systems. This type of corruption usually involves large sums of money with multiple layers. Examples of Grand corruption can be found in countries with authoritarian leaders with the aim of benefiting themselves at the expense of the public.

Political Corruption is the corruption of manipulating policies, institutions, and rules of procedures by political decision-makers to sustain their power, status and wealth.

Systemic Corruption occurs because of the weaknesses of organizations or process.

Political and Systemic Corruption can easily become a culture where it is acceptable to engage in such activities.

True Costs of Corruption

This section provides an overview of estimates of the costs of corruption, ranging from bribery to illicit financial flows. Illicit financial flows are closely linked to large-scale corruption but go beyond the latter since corruption is only one possible predicate offense (for more information on the link between illicit flows and corruption please see this 2011 U4 report entitled Corruption and illicit financial flows: The limits and possibilities of current approaches) Given the challenges inherent to calculating global costs of corruption, this section also includes a list of studies providing estimation of the cost of corruption at the national and household level.

This background brief offers a comprehensive overview of widely accepted estimates of the costs of corruption: 

  • Estimates show that the cost of corruption equals more than 5% of global GDP (US$ 2.6 trillion, World Economic Forum) with over US$ 1 trillion paid in bribes each year (World Bank).
  • Corruption affects economic growth and foreign investment: IMF research has shown that investment in corrupt countries is almost 5% less than in countries that are relatively corruption-free.
  • The World Economic Forum estimates that corruption increases the cost of doing business by up to 10% on average. The significant impact of corruption on income inequality and the negative effect of corruption on income growth for the poorest 20% of a country have been proven empirically (Gupta et al. 2002).
  • The World Bank (Baker 2005) estimates that each year US$20 to US$40 billion, corresponding to 20% to 40% of official development assistance, is stolen through high-level corruption from public budgets in developing countries and hidden overseas.
  • Estimates of the monetary loss due to corruption vary but are significant regardless of the source. The African Union (2002) estimates that 25% of the GDP of African states, amounting to US$148 billion, is lost to corruption every year.

Corruption helps evade taxes

We analyze more than 180 countries and find that more corrupt countries collect fewer taxes, as people pay bribes to avoid them, including through tax loopholes designed in exchange for kickbacks. Also, when taxpayers believe their governments are corrupt, they are more likely to evade paying taxes.

We show that overall, the least corrupt governments collect 4 percent of GDP more in tax revenues than countries at the same level of economic development with the highest levels of corruption.

A few countries’ reforms generated even higher revenues. Georgia, for example, reduced corruption significantly and tax revenues more than doubled, rising by 13 percentage points of GDP between 2003 and 2008. Rwanda’s reforms to fight corruption since the mid-1990s bore fruit, and tax revenues increased by 6 percentage points of GDP.

Corruption also prevents people from benefiting fully from the wealth created by their country’s natural resources. Because of the exploration of oil or mining generates huge profits, it creates strong incentives for corruption. Research shows that resource-rich countries, on average, have weaker institutions and higher corruption.

IMF

Corruption wastes taxpayers’ money

The Fiscal Monitor shows that countries with lower levels of perceived corruption have significantly less waste in public investment projects. We estimate that the most corrupt emerging market economies waste twice as much money as the least corrupt ones.

Governments waste taxpayers’ money when they spend it on cost overruns due to kickbacks or bid rigging in public procurement. So, when a country is less corrupt, it invests money more efficiently and fairly.

Corruption also distorts government priorities. For example, among low-income countries, the share of the budget dedicated to education and health is one-third lower in more corrupt countries. It also impacts the effectiveness of social spending. In more corrupt countries school-age students have lower test scores.

Corruption is also a problem in state-owned enterprises, such as some countries’ oil companies, and public utilities like electric and water companies. Analysis suggests that these enterprises are less efficient in countries with high levels of corruption.

IMF

Corruption causes leakage in Public Sector

Diagram. Corruption causes leakages

What does this Corruption mean for businesses?

According to CEOs the mining sector is most suspectible corruption

High levels of corruption act like an additional tax on businesses and so tend to increase the cost of doing business. This has implications for consumer welfare as these costs are typically passed on to consumers, especially if demand for the associated products or services are less sensitive to changes in prices. 

Figure 3 shows the top five and bottom five sectors where CEOs think bribery and corruption is a threat to business. We have sourced the data from our own Global CEO Survey, which is carried out annually. We have averaged the responses over the last two years.

Our analysis suggests that commodity-intensive industries such as mining, construction and oil and gas extraction are areas where CEOs feel that corruption poses a significant threat. This makes sense as extractive industries are often in less developed economies, where corruption tends to be more of a problem and require a set of permits and official interactions with government which can create opportunities for bribery, and so, corruption. Also, these are sectors where demand for commodities is expected to be inelastic partly due to the lack of alternatives.

Conversely, sectors like retail, healthcare (excluding pharmaceuticals) and utilities appear less threatened by the effects of bribery and corruption partly because of the transparency of some of these sectors, particularly in terms of pricing. 

Illicit Financial Flows from the Least Developed Countries: 1990-2008

This United Nations Development Program (UNDP) commissioned report from Global Financial Integrity (GFI) on illicit financial flows from the Least Developed Countries (LDCs) founds that approximately US$197 billion flowed out of the 48 poorest developing countries and into mainly developed countries, on a net basis over the period 1990-2008. Based on available data, African LDCs accounted for 69 % of total illicit flows, followed by Asia (29 %) and Latin America (2 %).

The study’s indicative results find that illicit financial flows from the LDCs have increased from US$9.7 billion in 1990 to US$26.3 billion in 2008 implying an inflation-adjusted rate of increase of 6.2 % per annum. Conservative estimates indicate that illicit flows have increased from US$7.9 billion in 1990 to US$20.2 billion in 2008. The top ten exporters of illicit capital account for 63 % of total outflows from the LDCs while the top 20 account for nearly 83 %.

illicit Money: Can It Be Stopped?

  • According to the World Bank, illicit financial flows range from $1 trillion to $1.6 trillion annually, of which about half—$500 billion to $800 billion— comes out of developing countries.
  • The authors attempt to calculate the difference between the estimated amounts of foreign aid and of illicit financial flows. Through the 1990s and into the current decade, overseas development assistance to poor countries has totalled about $50 billion to $80 billion a year from all sources. When compared to the World Bank’s estimate of $500 billion to $800 billion of capital that is being sent illegally out of these same countries, this would mean that: for every $1 handed out across the top of the table, financial institutions in developed countries have been receiving back up to $10 under the table.
  • This study also examines data on illicit financial flows from Africa for a 39-year range from 1970 to 2008, and finds that, over this period of time, the continent lost US$854 billion in illicit financial outflows, as a conservative estimate. The report indicates that the amount of lost funds might be as high as US$1.8 trillion.

How to Curb Corruption

Curbing corruption can be a daunting task, but it is necessary to restore public trust in government. The fight against corruption can also bring significant economic and social gains over time. It starts with domestic political will, continuous strengthening of institutions to promote integrity and accountability, and global cooperation.

Invest in high levels of transparency and independent external scrutiny. This allows audit agencies and the public at large to provide effective oversight. For example, Colombia, Costa Rica, and Paraguay are using an online platform that allows citizens to monitor the physical and financial progress of investment projects. Norway has developed a high standard of transparency to manage its natural resources.

Analysis also shows that a free press enhances the benefits of fiscal transparency. In Brazil, the results of audits impacted the reelection prospects of officials suspected of misuse of public money, but the impact was greater in areas with local radio stations.

Reform institutions. The chances for success are greater when countries design reforms to tackle corruption from all angles. For example, reforms to tax administration will have a greater payoff if tax laws are simpler and they reduce officials’ scope for discretion. To help countries, the IMF has built comprehensive diagnostics on the quality of fiscal institutions, including public investment management, revenue administration, and fiscal transparency.

Build a professional civil service. Transparent, merit-based hiring and pay reduce the opportunities for corruption. The heads of agencies, ministries, and public enterprises must promote ethical behavior by setting a clear tone at the top.

Keep pace with new challenges as technology and opportunities for wrongdoing evolve. Focus on areas of higher risk—such as procurement, revenue administration, and management of natural resources—as well as effective internal controls. In Chile and Korea, for example, electronic procurement systems have been powerful tools to curtail corruption by promoting transparency and improving competition.

More cooperation to fight corruption. Countries can also join efforts to make it harder for corruption to cross borders. For example, more than 40 countries have already made it a crime for their companies to pay bribes to gain business abroad under the OECD anti-corruption convention. Countries can also aggressively pursue anti-money laundering activities and reduce transnational opportunities to hide corrupt money in opaque financial centers.

Curbing corruption is a challenge that requires persevering on many fronts, but one that pays huge dividends. It starts with political will, continuously strengthening institutions to promote integrity and accountability, and global cooperation.

The Reference Shelf

Anti-corruption Resource Centre – Here

PWC – Here

World Economic Forum – Here

IMF – Here

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