Why corruption matters: The adverse effects of corruption – A Case Illustration of the Impact of Corruption
Patriotic economists are getting highly critical of the World Bank’s lending practices, which have become Corruption superhighways in the developing world. For example, Many argue that the World Bank facilitates large scale corruption by making huge development loans to notoriously corrupt governments without imposing a regime of due diligence to ensure the loan is used for the intended project.
This lack of due diligence opens the door to theft of 20-40% of loans by corrupt leaders or through the companies they hire to complete the project.
Ultimately it is the citizens of the corrupt borrowing country who pay, since they are responsible for full repayment of the loan with interest even if part of the loan is stolen.
World Bank President Jim Yong Kim described Corruption as “Public Enemy No. 1” in the developing world, and “every dollar that a corrupt official or corrupt business person puts in his or her pockets is a dollar stolen from a pregnant woman who needs healthcare, or from a girl or boy who deserves an education, or from communities that need water, roads and schools.”
Recently, it has been estimated that as much as $1 trillion annually is siphoned off from developing countries by corruption, tax evasion and other large financial crimes. The World Bank has estimated that as much as $40 billion in foreign aid to the world’s poorest countries has been lost to corruption in recent years.
Annually, 3.6 million people die from inadequate health care and living conditions each year in part because corruption has stolen away development aid. UN Development Programme Administrator Helen Clark stated that “corruption can stand in the way of people getting basic services,” while UK Prime Minister David Cameron said “don’t let anyone keep corruption out of how we tackle poverty.”
In 2008, the US Assistant Attorney General warned that “corruption is not a gentleman’s agreement where no one gets hurt. People do get hurt. And the people who are hurt the most are often residents of the poorest countries on earth.”
Let us now look at the nature, causes and consequences of corruption that have motivated such strong condemnation of corruption by world leaders.
Agreement setting up the World Bank, which Articles Canada and some 185 countries have agreed to. Second, even if the World Bank did not have immunity, the documents sought did not pass the “likely relevant” test, and therefore a court could not lawfully order their disclosure.
Paul Sarlo exposes the international lender thus, “The Global Financial Crisis and the Transnational Anti-Corruption Regime: A Call for Regulation of the World Bank’s Lending Practices” He give the example of the World Bank lending Indonesia $30 billion during the thirty-year rule of notoriously corrupt General Suharto.
The International Monetary Fund has been subject to similar criticism related to irresponsible lending. For example, a portion of an IMF loan to Russia were used by Boris Yeltsin for his re-election campaign in 1996.
The Organization for Economic and Cooperative Development (OECD) prepared a Background Brief in 2013 entitled “The Rationale for Fighting Corruption” as part of the organization’s Clean Government Business: Integrity in Practice Initiative. The initiative seeks to involve civil society and the private sector in anti-corruption strategies.
The following is an overview of the reasons why everyone should be concerned about corruption:
The Rationale for Fighting Corruption:
The costs of corruption for economic, political and social development are becoming increasingly evident. But many of the most convincing arguments in support of the fight against corruption are little known to the public and remain unused in political debates. This brief provides evidence that reveals the true cost and to explain why governments and business must prioritise the fight against corruption.
What is Corruption?
- Corruption is the abuse of public or private office for personal gain. It includes acts of bribery, embezzlement, nepotism or state capture.
- It is often associated with and reinforced by other illegal practices, such as bid rigging, fraud or money laundering.
- Transparency International describes corruption as “the abuse of entrusted power for private gain.”
What does Corruption Look Like?
- It could be a multinational company that pays a bribe to win the public contract to build the Local highway, despite proposing a sub-standard offer.
- It could be the politician redirecting public investments to his hometown rather than to the region most in need.
- It could be the public official embezzling funds for school renovations to build his private villa. It could be the manager recruiting an ill-suited friend for a high-level position.
- Or, it could be the local official demanding bribes from ordinary citizens to get access to a new water pipe.
- At the end of the day, those hurt most by corruption are the world’s weakest
- and most vulnerable.
Why Fight Corruption?
Corruption is one of the main obstacles to sustainable economic, political and social development, for developing, emerging and developed economies alike.
Overall, corruption reduces efficiency and increases inequality.
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).
It is not only a question of ethics; we simply cannot afford such waste.
- Corruption increases the cost of doing business
- First, bribes and drawn-out negotiations to bargain them add additional costs to a transaction.
- Second, corruption brings with it the risk of prosecution, important penalties, blacklisting and reputational damage.
- Third, engaging in bribery creates business uncertainty, as such behaviour does not necessarily guarantee business to a company; there can always be another competing company willing to offer a higher bribe to tilt the business in its favour.
- The Rationale for Fighting Corruption
- An OECD, 2013, online report sums it thus: <http://www.oecd.org/cleangovbiz/49693613.pdf>.
- On the macro level, corruption distorts market mechanisms, like fair competition and deters domestic and foreign investments, thus stifling growth and future business opportunities for all stakeholders.
- 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.
- Siemens, the German engineering giant, had to pay penalties of US$ 1.6 billion in 2008 to settle charges that it routinely engaged in bribery around the world.
- A significant negative impact of corruption on a country’s capital productivity has been proven
- Corruption leads to waste or the inefficient use of public resources
- As a result of corruption, investments are not allocated to sectors and programmes which present the best value for money or where needs are highest, but to those which offer the best prospects for personal enrichment of corrupt politicians.
- Thus resources go into big infrastructure projects or military procurement where kickbacks are high, to the detriment of sectors like education and health care.
- Moreover, public tenders are assigned to the highest bribe payer, neglecting better qualified companies not willing to bribe, which undermines the quality of the projects carried out.
- In some instances public funds are simply diverted from their intended use, embezzled and exploited for private enrichment.
- Corruption also slows down bureaucratic processes, as inefficient bureaucracies offer more leverage for corrupt public officials: the longer the queue for a service, the higher the incentive for citizens to bribe to get what they want.
- Finally, nepotism – in both private and public organisations – brings incompetent people into power, weakening performance and governance.
- Several studies provide evidence of the negative correlation between corruption and the quality of government investments, services and regulations. For example, child mortality rates in countries with high levels of corruption are about one third higher than in countries with low corruption, infant mortality rates are almost twice as high and student dropout rates are five times as high.
- Numbers on the monetary loss due to corruption vary, but are alarming.
- The African Union (2002) estimates that 25% of the GDP of African states, amounting to US$148 billion, is lost to corruption every year.
- The US health care programmes Medicare and Medicaid estimate that 5% to 10% of their annual budget is wasted as a result of corruption.
- Corruption excludes poor people from public services and perpetuates poverty.
- The poor generally lack privileged access to decision makers, which is necessary in corrupt societies to obtain certain goods and services.
- Resources and benefits are thus exchanged among the rich and well connected, excluding the less privileged.
- Moreover, the poor bear the largest burden [proportionate to their income] of higher tariffs in public services imposed by the costs of corruption…
- They might also be completely excluded from basic services like health care or education, if they cannot afford to pay bribes which are requested illegally.
- The embezzlement or diversion of public funds further reduces the government’s resources available for development and poverty reduction spending.
- The significant impact of corruption on income inequality and the negative effect of corruption on income growth for the poorest 20% of a country have been proven empirically.
- The World Bank (Baker 2005) estimates that each year US$ 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.
- Transparency International (Global Corruption Report 2006) found that
- About 35% of births in rural areas in Azerbaijan take place at home, because poor people cannot afford to pay the high charges for care in facilities where care was supposed to be free.
- Corruption corrodes public trust, undermines the rule of law and ultimately delegitimizes the state Rules and regulations are circumvented by bribes, public budget control is undermined by illicit money flows and political critics and the media are silenced through bribes levering out democratic systems of checks and balances.
- Corruption in political processes like elections or party financing undermines the rule of the people and thus the very foundation of democracy. If basic public services are not delivered to citizens due to corruption, the state eventually loses its credibility and legitimacy.
- As a result, disappointed citizens might turn away from the state, retreat from political processes, migrate – or – stand up against what they perceive to be the corrupt political and economic elites. This explains the emergence of large numbers of independent candidates in 2107 General Election in Kenya.
- The global uprisings from the Arab world to India, Brazil and occupy Wall Street are proving that business as usual can no longer be an option for a number of countries.
- Other Related Concerns About Corruption
In addition to the four concerns described above, several other concerns are worthy of specific note, namely corruption’s impact on (i) human rights, (ii) gender equality, (iii) global security and (iv) climate change and environmental degradation.
Human Rights and Corruption
In Corruption: Economic Analysis and International Law, Arnone and Borlini elaborate on the impact of corruption on the rule of law and human rights states:
- Massive corrupt dynamics, indeed, weaken the basic foundations both of the representative
- mechanisms underlying the separation of powers and of human rights.
- Since corruption generates discrimination and inequality, the relationship between human rights and government corruption bears on civil and political rights.
- For instance, it strengthens the misappropriation of property in violation of legal rights
- It likely leads to the rise of monopolies which either wipe out or gravely vitiate freedom to trade.
- Corruption strikes at economic and social rights as well: the commissioning by a public entity of useless or overpriced goods or services, and the choice of poorly performing undertakings through perverted public procurement mechanisms are mere examples of how corruption can endanger the second generation of human rights.
- The relationship between fundamental Human Rights and corruption could not be expressed more vividly than in the words of the UN High Commissioner for Human Rights, Navy Pillay: “Let us be clear. Corruption kills. The money stolen is enough to feed the world’s hungry every night, many of them children; corruption denies them their right to food, and in some cases, their right to life”
- The departure point and organizational principle of the 2004 UN Development Program’s analyst study is that “Corruption affects the poor disproportionately, due to their powerlessness to change the status quo and inability to pay bribes, creating inequalities that violate their human rights.”
- In their article “The International Legal Framework Against Corruption: Achievements and Challenges,” Jan Wouters et al. note the increasing tendency to frame corruption as a human rights.
To help understand the link between corruption and human rights, the International Council on Human Rights Policy divides corruption-based human rights violations into direct, indirect and remote violations.
- Bribing a judge directly violates the right to a fair trial,
- Embezzling public funds needed for social programs indirectly violates economic and social rights.
Citizens Against Corruption will focus on human rights aspect to create new human rights-based remedies and assist in anti-corruption efforts.
The coupling of corruption and human rights remains an increasingly popular trend. In April 2015 in Doha, at the thirteenth United Nations Congress on Crime Prevention and International Justice, Dean and Executive Secretary of the International Anti-Corruption Academy, Martin Kreutner, stated, “All the universal goals run the risk of being severely undermined by corruption. . . Corruption is the antithesis vis-à-vis human rights, the venom vis-à-vis the rule of law, the poison for prosperity and development and the reverse of equity and equality.”
While recognizing the important connection between corruption and human rights, however, there is potential dangers and limitations of confining discussions of corruption to the language of human rights. A closer look at the connection between corruption and human rights in particular geographic areas.
An entirely different set of questions concerns the proceedings in which such a human rights violation might be claimed and whether the change in perspective – away from a primarily criminal law approach to anti-corruption toward human rights – is practical in terms of legal policy and valuable in terms of legal ethics.
Opportunity for moral and practical strengthening of the anti-corruption agenda
Citizens Against Corruption as proponents of endowing the anti-corruption instruments with a human rights approach believe that this will upgrade these instruments in political and moral terms and thus ensure improved implementation of anti-corruption measures.
The main argument is “empowerment”. The human rights approach can elucidate the rights of persons affected by corruption, such as the rights to safe drinking water and free education, and show the how, for instance, the misappropriation of public funds in those areas interferes with their enjoyment of the goods to which they are entitled. In that way, affected persons would be empowered to denounce corruption to which they otherwise would be helplessly exposed.