One of the most baffling questions that economists have to contend with is why people in different geographical regions in the world have entirely different living standards despite the proclaimed influence associated with globalization. Despite the answer being elusive due to its multifaceted nature, it is an important one to ask nonetheless as it helps to identify root causes and bridge the existing gaps. A common observation is that developing countries will, at times, respond favorably to recommended solutions, while others continue to stagnate. Scholars have developed several theories to address the issue of economic stagnation, but most seem to revolve around the idea of reduced investment in the regions. According to Lecuna & Chavez (2018), institutional voids and barriers may encourage unproductive and destructive forms of entrepreneurship and breed negative societal attitudes towards entrepreneurs. Hence, high-growth entrepreneurial activity from domestic or foreign investors may not thrive in an institutional context of voids and barriers. The current research focuses on corruption as a factor argued to undermine institutional ability to promote investment in developing countries and foster growth (Asiedu & Freeman, 2009; Amarandei, 2013). The primary argument made is that corruption adversely impacts resource distribution and that developing economies need to develop robust institutions, in addition to anti-corruption policies, to help identify and solve corruption-related problems.
The report divides into three critical sections. The introduction section introduces the topic under study, including the research gap, the research question to guide the discussion, and motivation behind the analysis. The second section involves a critical analysis of past literature on the impact that corruption has on developing countries. The analysis from past authors will help develop a summative argument, which will help inform the recommendation section of the report.
From a narrow perspective, corruption represents an activity that leads to the use of public office for private gain. A broader definition, according to Lopez Lopez et al. (2017), characterizes corruption as an antisocial behavior by individuals or social groups that seeks to benefit its perpetrators by going against established legal norms and prevailing moral ethos and subverting or diminishing the capacity of legitimate authorities to guarantee material or spiritual well-being of the society in a just and equitable manner. Dimant & Tosato (2018) state that corruption has significant impacts on both economic and societal development, having permeated entire portions of the society and economy. Based on the definition, it would be understandable why there is a negative connotation surrounding the influence that corruption has on society and the economy. Most studies have corroborated the assertion that corruption and growth share an inverse relationship (Fernandez-Torres et al., 2018). However, corruption is a complex social phenomenon, as noted by Dimant & Tosato, and the motivations to engage in corrupt behavior are multifaceted.
While on the issue of motivation, there are two critical points of view. From a relativist perspective, a country with a diverse culture may have different opinions as to the motivation behind engaging in corrupt behavior. In such cases, an investor would have to incline towards the most common behaver within that region (Napal, 2014). However, universalists do not support engaging in unethical transactional conduct, in whatever retrospective, and would thus recommend entrepreneurs to repulse corrupt behavior. The two opposing arguments highlight the mixed perceptions, and possible outcomes, that corruption might have in various economies. Some economies might thrive within a culture of corruption, while it could be detrimental to others. The lack of clarity on whether corruption has a positive or adverse impact on the economy, especially for developing economies may make policy development quite challenging.
Research Objectives and Question
The research aims to establish the impact of corruption on developing economies. The discussion will achieve this by first corroborating what most of the studies have indicated regarding the adverse impact of corruption on developing economies. The research will then review various criticisms of the pre-supposed negative relationship between corruption and growth, together with their limitations. The question to ask is;
Motivation for Study
The motivation behind the study closely associates with increasing global integration and the importance placed on corruption as being an international issue. The impact that corruption on economic development and polítical stability may sometimes spill over to neighboring countries or the international community, which emphasizes the significance of the gains from policies fighting corruption (Corres et al., 2016). An issue paper from the Organization for Economic Cooperation and Development (OECD) noted that both public and private international organizations had become increasingly involved in the fight against corruption. They play an essential role in generating information that countries can use to tackle corruption, including advice and capacity building assistance. Disseminating this information and facilitating access to best practices in anti-corruption practices can help accelerate and improve on-going reforms at the domestic level (Sturm, 2013).
International financial institutions and bilateral assistance agencies will concern themselves with ensuring the efficient use of resources intended to assist development in developing countries. On the other hand, developing countries are more concerned that the perceptions that corruption within their jurisdictions will cause them to lag as private capital displaces official finance avenues. Both of these conditions depend on the perceptions held about corrupt behavior in a country. Economists have a consensus that foreign direct investment has a positive impact on developing countries’ economies (Reiter & Steensma, 2010). Developing countries have long on private funding for their activities ever since the 1990s. Hence, investor perceptions about corrupt behavior in the country could prevent them from investing in the country from a lack of trust in sustainability. Alternatively, the perception that foreign investors will incline towards corruption to win businesses, which could potentially handicap local businesses, might hinder entrepreneurial prospects within the country. Either way, governments in developing countries need to generate and implement informed policies or regulations to help their jurisdictions optimize outcomes within a global economy and move in a similar direction as developed countries.
It brings into relevance the current scope of the research. Given the mixed findings regarding the impact of corruption, governments should take into consideration what aspects work for them and those that do not, to develop policies that would enhance their chances of improving their economy. There are three theoretical standpoints to premise the above assertion;
- . Corruption tends to benefit a select few and, therefore, does not work towards human development in the country. The person giving out the bribe is said to be rational and only engages in corruption because they are aware that the realized benefits from doing so will outweigh the potential disadvantages (Persson & Rothstein, 2015). Therefore, the actions of a select few in the government have adverse effects on the economy and continue to worsen the poverty levels in the country.
- argues from a rationality standpoint whereby, the economy suffers if only the institutions involved have disorganized corruption systems. In chaotic corruption, there is no assurance that the work paid for will even happen at all. As such, investors will only consider bribing an institution that has a moreorganized corrupt system as it would work towards their favor more than a chaotic one (Lianju and Luyan, 2011).
- . The perpetuation of inefficiencies in a country serves as indicators of how lengthy and costly the production processes will become. A corrupt government under the transactions-cost dynamics may be motivated to extract a larger bribe volume from the investor by creating delays and barriers in the approval process (Nguyen & Pham, 2016). Investors who are aware of this may take the opportunity to invest elsewhere since such extra costs could very well undermine their return on investment in the country.
Literature Review & Discussion
Negative Impacts of Corruption on Developing Economies
The general observation in today’s society regarding corruption activities provides an intolerable conclusion that despite the best interest of the person engaged in corruption, they are always responsible for their actions since they break the law and influence unethical behavior (Lopez et al., 2017). Corruption has become prevalent, resulting from the practice of unethical behaviors with the excuse of tolerability or acceptability of some of the actions performed by various persons in the society. As a result, the rise of corruption levels has been on an upward trajectory since society continues to accommodate unethical behaviors among its members. According to Suzuki (2018), corruption is an inexcusable vice that corrodes the fabric of society and influences inequality and promotes other damaging socio-economic consequences. Despite the benevolent motives of some of the individuals on corrupt matters, the altruistic decisions usually have a harmful intent since there are legal channels to follow.
Based on literature by Ata & Arvas (2011), corruption can either be a structural problem of politics or economies, or a cultural and individual moral problem. Nonetheless, it is an extremely complex social behavior that combines various social sciences, which is why many notable scholarly studies on corruption have emerged over the years. Most economists have turned their interest to the topic on account of its increasingly evident link to economic performance. According to Gray (2015), corruption is detrimental to the socio-economic aspect of the society since it impacts on the growth of the economy, by affecting businesses and their ability to generate revenue sustainably. Corruption is a consequence of selfish interests by persons in positions of influence who abuse their power and acquire illicit benefits for personal gain, which often leads to negative consequences for other dependents. The economic performance and growth of a country depend on several determinants, all with the potential to cause corrupt behavior. The determinant factors mentioned, among others, include government regulations, the government’s role in the economy, the size of the unregistered economy, public sector recruitment and wage levels, poverty and income distribution inequality, trade openness, inflation, tax system, market competitiveness, and economic freedom (Atas & Arvas, 2011).
Corruption is an added cost that undermines the attractiveness of a country’s investment climate as it lowers the expected profit margins (Asiedu & Freeman, 2009). On the side of the investor, these activities as a waste of resources driven by rent-seeking activities, which is a double loss for them, especially if they do not achieve what it is, they were looking to attain by offering the bribe (Amarandei, 2013). According to Touny (2016), corruption affects the firm’s investment decisions by promoting unfavorable conditions for investments and other business ventures by lowering compliance levels and influencing increased meddling in business activities. However, it is vital to note that corruption affects the investments of countries with developing economies much more compared to the first-world economies that have more rigid regulations and a culture of ethical business practices. Consequently, corruption impedes not only the sound investments but also affects the economic growth of the society, due to the lack of adequate resources and proper legislature to assist in tackling corruption and other unethical business practices (Touny, 2016).
In the article by Fernandez-Torres et al. (2018) seeking to investigate the effects of business regulation on economic growth in the Caribbean and Latin America, the authors discovered that shrewd business regulations foster economic growth, and consequently promoting incentives for entrepreneurs to succeed. Stalling these incentives leads to the emergence of influences such as corruption that result in ill-advised regulations that impact negatively on the growth of the economy. The inference made here is that corruption has an indirect influence on economic growth in the Caribbean and Latin America, through the implementation of business regulations. Lecuna & Chavez (2018) note the critical contribution that entrepreneurship has to economic growth, innovation, effective and beneficial political and economic institutions, stable and unbiased business regulations, the production and introduction of new proacts, and high-net foreign direct investment (FDI). Corruption tends to undermine these aspects, weakens institutions in the subnational government, and contributes to lower government legitimacy to the extent of causing civil wars (Lecuna & Chavez, 2018).
One of the reasons forwarded as to why corruption shares an inverse relationship to investment in a country is the uncertainty that it causes. Investors who pay for a service exchange receive no guarantee that they will, in the end, receive the promised benefits even after making payments. Most of these transactions are carried out in secrecy and therefore have no laws regulating how to manage these transactions. Investors, therefore, stand to lose from contract-related risks (Amarandei, 2013). The study by Suzuki (2018) analyzes corruption within the context of interest shock uncertainty and concludes that the worsening state of corruption impacts negatively on the macroeconomy of the society, motivated by the rising country-specific interest rates.
The research proves that corruption increases the cost to the firm and the overall default risk by governments and firms alike. Institutions in the country will then increase the interest rates across the board as a risk management approach. The increase will deter investment and output growth, especially for small economies. The research by Suzuki (2018) is vital in underlining the damage to the economy, influenced by corruption in a country, by negatively promoting untenable interest rate shocks. Country-specific interest rates motivate the apparent concerns of subpar economies concerning corruption activities and their influences on the economy. In addition to the uncertainty created by corrupt activities in a given region, it also reduces the productivity of public inputs such as infrastructure. Corruption significantly reduces the country’s locational attractiveness (Amarandei, 2013). Egunjobi (2013) captures this in the research conducted on the impact of corruption on economic growth in Nigeria. The author points out that corruption tends to neglect crucial sectors such as education and health, to favor more lucrative endeavors. In the process, crucial elements that make the country an attractive destination for capital inflows and investment fail to receive sufficient resource allocation, thus widening the public investment by government, while reducing its overall productivity all the same. The research by Wren-Lewis (2015) found that corruption influences the decline of growth and deteriorates productivity, which subsequently creates a decline in the functioning and operation of network infrastructure. Also, public institutions are affected by corruption more than their private-sector counterparts.
Corruption can also create depriving conditions in developing countries that further limit its ability to grow economically. As corruption takes root in a country, so does the unavailability of open and equal market access to all the people interested in investing in the geographic location. Pedauga et al. (2017) have supported the above statement with empirical evidence that finds a direct relationship between corruption and inequality in developing countries. More importantly, corruption will facilitate the functioning of large informal sectors in the developing economies. Andres & Ramlogan-Dobson (2011) are of similar opinion that corruption is influential in promoting income disparities since the influential leaders and people in the society, create conditions that affect the poor in their efforts to attain economic gains with the presence of ulterior motives in their activities Some of the direct consequences of market distortions caused by corruption include higher expenses and lower value for money in public procurement and privatization (Søreide, 2014). It creates distortions to the price and quality of market forces in a country as it is impossible to equate the amount of money lost to corruption since the corrupt individuals have to keep their activities secret (Olken & Pande, 2012). It is worth noting that the money accrued has no market value and tends to make goods and services very expensive to produce or acquire, which discourages investment.
Ultimately, the impacts discussed above contribute to what economists refer to as the ‘grabbing’ hand of the host country. The term ‘grabbing’ hand, with relation to corruption, means that indulgence in the host country will result in increased costs of carrying out business, investment, or any other productive activity, as the country takes more than it should (Barassi and Zhou, 2012). From the perspective of a globalized economy, the attractiveness of a country will depend on the comparative advantage product of international production and the domestic investment climate. The addition of ‘other’ factors such as corruption, which in turn increase the riskiness or uncertainty of the market, enhances the risk profile of the country, thus inhibiting investment. The inference made from the literature is that corruption impedes investment or engaging in productive activities in the country, thus inhibiting economic growth. The result is economic stagnation. Nevertheless, some authors do not concur with the negative attribute ascribed to corrupt behaviors in developing countries. Some argue that corruption is beneficial to the economy, while others report mixed findings, suggesting that there lacks sufficient data to support either claim.
Critical Discussion of Opposing Views
The most prominent argument that scholars opposing the negative attributes associated with the influence that corruption has on the economy inclines towards the concept of “greasing the wheel.” The “grease the wheel” argument posits that corruption can be beneficial since it compensates for issues that cause institutions to perform poorly (Fernandez-Torres, 2018). Some researchers argue that corruption indeed helps to save time and helps people/investors who want to circumvent the lengthy bureaucratic processes such as the reduction in taxation rates, request for government funding, or even applications for special treatment within the country (Fernandez-Torres, 2018). When met with rigid regulation and inefficient bureaucracies, corruption serves to increase the bureaucracy’s efficiency. It does so by speeding up the process of decision making (Al-Sadig, 2009). In line with this line of thought, Amarandei (2013) discovered that corruption could assist foreign investors gain access to projects that are publicly financed, thus providing the ‘helping hand’ that they require to maximize their return on investments.
Lecuna & Chavez (2018) identified the number of days required to start a business as a critical impediment to the realization of entrepreneurship in society by discouraging prospective entrepreneurs from starting a business. To this regard, corruption may play one of two roles; each argued to benefit the country’s economy. The first is invokes the implication of the “grease the wheels” perspective, which the authors argue that corruption alludes to as an element of efficiency since it provokes the timely completion of bureaucratic processes (Lecuna & Chavez, 2018). The other relates to how governments may use corruption to filter out significant investments. Extant literature from the research by Quazi (2014) found out that corruption can indeed help countries determine which of the foreign investors are serious about investing. In the process, they can pick out the ones who bring maximum value to the country through competitive bidding. Competitive bidding on projects and location setting helps identify the most capable and efficient firm, which end up paying the highest bribes (Quazi, 2014).
These findings indicate that corruption does not necessarily lead to a deteriorated economy. Napal (2014) supports the conclusion, indicating that developing countries must, in some cases, allow corrupt behavior, especially if it relates to investment in the country. Napal notes that if bribery, as a financial or any other form of payment, is done for an overall good cause, then this different kind of corruption contravenes the universal laws of honesty and trust. It contradicts the earlier assertion that corruption is harmful despite its benevolent and altruistic aims by Lopez Lopez et al. (2017). The problem with Napal’s argument is that sometimes the lure associated with corrupt behaviors and the benefits that accrue from it may incentivize individuals to intentionally create situations where they benefit themselves at the expense of others. An example is a scenario given by Lecuna & Chavez (2018), where the corrupt officials will benefit from the corruption continuously by creating decelerations of the services, they offer to influence corruption.
Guardado (2018) investigates the impacts of the selection and quality of colonial officials on the long-term growth of the society that is often overlooked by researchers. The author also investigates the influence of colonial office prices sold by the Spanish Crown towards the emergence of an extractive ruling class in Peru, during colonial times. The results of the study show that the officials during the war were likely to pay exorbitant prices for low-quality purchases since they offered more significant opportunities to generate profit at the time. The findings are independent of influences by unselfishness, career benefits, wages, and prestige, to promote the purchases made by officials during the war. The implications for these unethical practices by officials during the war, facilitated the economic withdrawals of rooted ethnic identities to ensure the marginalization of minority groups in the Spanish- Mestizo world. Guardado (2018) gives significance to the damaging effects of altruistic intentions towards the economy of a country, which has hampered the development of the region to date. Despite the short-term gains associated with corruption, society becomes exposed to stagnation due to the lack of proper strategies to accomplish positive long-term development (Lecuna & Chavez, 2018).
The current report’s primary objective was to identify and clarify what the impact of corruption was on developing economies to help develop solutions that could effectively remedy the problem and foster economic development. The analysis was to take note of the three choice theories – public choice, game theory, and transaction-cost economics – during development. Most of the arguments that find corruption hurts developing economies have a public choice theory basis. Ideally, the authors ascertain that it is the selfish actions of some individuals in positions of power that promote disproportionality in the distribution of resources, thus undermining productivity. Conversely, most of the authors whose findings suggest a positive relationship between corruption and developing economies make their arguments from a transaction-cost dynamic. Corruption, in this case, helps to speed up inefficiencies in the operations and bureaucraticprocesses within the systems of developing countries, which are bound to be many due to their backwardness in the growing global economy. Finally, the research that finds both positive and negative impacts of corruption on developing economies inclines towards game theory, since decisions to engage in corrupt behavior in the country are contingent on a cost-benefit analysis of the corrupt institution’s organization.
Popular opinion has it that corruption is detrimental to economies since it not only deprives people of the necessary resources to contribute to the country’s overall GDP but also acts as a deterrent to those with sufficient resources to do so – both locally and internationally. The uncertainty around bribing and engaging in corrupt behavior is bound to reduce investment prospects as well as create a negative perception about the country as a prime location for foreign direct investment (FDI). Corruption is an added cost, and reduces the value of a country’s infrastructure, thus leading investors to view investments in the country as having lower returns than expected – hence not favorable. These are the direct effects of corruption. The research also highlights the potential for corruption to emanate from institutional voids and barriers, which can also lead to deteriorated economic growth or even stagnation.
However, various authors have identified corruption to promote economic growth in the following ways. The first is through the “grease the wheels” perspective, which argues that corruption helps compensate for poor-performing institutions, and helps fasten bureaucratic processes. The second is that corruption helps filter out individuals’ intent on making meaningful investments, behind the notion that investors bent on investing in the country will invest regardless of a requirement to bribe relevant officials. Finally, if engaging in corrupt behavior results in net benefits, or for altruistic intentions, then it is considered non-harmful. However, research also states that despite corruption having positive attributes associated with it, governments and society should not promote it since there are always alternatives to promoting economic growth. More importantly, corruption helps achieve short-term goals, and thus not a sustainable way to tackle the issue of economic growth in developing economies.
The findings by Avis et al. (2018) suggest that corruption results from a lack of accountability among governmental institutions in ensuring public resources are always protected and accounted for in developing economies. Also, the authors established that through the use of audits to take accounts of the various departmental operations of the government, creates a perceived detection probability, which influences the levels of corruption. The authors conclude that anti-corruption audits provide an active policy in the fight against corruption in the government since it creates a platform for accountability for public resources. Finally, audits promote legal action by influencing political and judicial sectors to act based on first-hand shreds of evidence that audits provide on abused resources.
Since audits are influential in provoking legal actions against corruption, it is vital to create a policy that promotes regular audits for all governmental entities involved with public resources. Corruption impedes not only sound investments but also affects the economic growth of the society due to the lack of adequate resources and proper legislature to assist in tackling corruption and other unethical business practices (Touny, 2016). Yanguas and Hulme (2015) reason that despite corruption and its effects promoting economic growth barriers, it remains persistent due to a lack of dedication by the concerned authorities to tackle the vice among influential leaders of the society. While the execution of a successful anti-corruption strategy aims to strengthen both judicial and political sectors, the effectiveness of these institutions ultimately depends on the government’s ability to detect and penalize corruption (Avis et al. 2018). Instituting robust institutions to aid in mitigating the factors of corruption and embezzlement that deteriorate these institutions in a country can be one way to ensure the efficient identification and address of issues related to corruption.
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