Economics of corruption deals with the misuse of public power for private benefit and its economic impact on society. Economies that are afflicted by a high level of corruption are not capable of prospering as fully as those with a low level of corruption. Also, economies that are corrupted are not able to function properly since the natural laws of the economy can not function freely. As a consequence, corruption, for instance, leads to an inefficient

allocation of resources In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning. In project management, resource allocation ...

, poor education, and healthcare or the presence of a

shadow economy A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the s ...

, a kind of economy that includes illegal activities as well as unreported income from the production of legal goods and services for which taxes should be paid, but are not.How Corruption Affects Emerging Economies
In: Investopedia nline 19.05.2019 it. 2020-03-21 Dostupné z, The institutional economics of corruption and reform: Theory, evidence, and policy Corruption can be measured objectively by counting the number of criminal indictments for corruption; however, this can be ineffective due to the fact that the ratio of indictments to actual corruption may be highly variable. Often corruption goes unpunished and is thus not counted in this measure. Subjective measures, typically curated via survey data, may be a useful tool to measure corruption. Comparisons between countries may be more comprehensive and consistent, though a fair amount of bias is present in this data as well due to the nature of the subject it measures. The International Country Risk Guide is a survey of firms on the likelihood they will be asked to make illegal or extralegal payments. The Corruption Perceptions Index is a detailed survey incorporating data from many nations and groups. Finally, the

World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...

produces an annual "control of corruption" index that uses similar sources to the International Country Risk Guide and Corruption Perception Index.Grimard, Franque. "Corruption". University Lecture. McGill University Leacock Building, Montreal, QC. 2019. Course Content.

History of the discipline

In 1968, Nobel laureate economist

Gunnar Myrdal Karl Gunnar Myrdal ( ; ; 6 December 1898 – 17 May 1987) was a Swedish economist and sociologist. In 1974, he received the Nobel Memorial Prize in Economic Sciences along with Friedrich Hayek for "their pioneering work in the theory of money a ...

found corruption 'almost a taboo (among economists) as research topic'. Indeed, it has mostly been a matter of

political science Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and la ...

and

sociology Sociology is a social science that focuses on society, human social behavior, patterns of social relationships, social interaction, and aspects of culture associated with everyday life. It uses various methods of empirical investigation an ...

. However, the scenario changed since the 1970s. Since Rose-Ackerman's article "The Economics of Corruption", published in the ''Journal of Public Economics'' in 1975, more than 3,000 articles have been written with 'corruption' in the title, at least 500 of which directly focus on different aspects relating to corruption using an economic framework. Some books have also been published on the subject.

Most corrupt countries

No country has been able to eliminate corruption, but studies show that the level of corruption in countries with

emerging market An emerging market (or an emerging country or an emerging economy) is a market that has some characteristics of a developed market, but does not fully meet its standards. This includes markets that may become developed markets in the future or wer ...

economies, which means that the nation's economy is progressing toward becoming more advanced, usually through significant

GDP Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...

growth and industrialization, is much higher than it is in developed countries.Most Corrupt Countries Population. (2020-02-17). Retrieved 2020-03-21, from http://worldpopulationreview.com/countries/most-corrupt-countries/ It has been proven that countries with relatively low levels of GDP per capita tend to have higher corruption levels. In addition, countries that developed early tend to have lower corruption scores. Treisman, Daniel. "What have we learned about the causes of corruption from ten years of cross-national empirical research?." Annu. Rev. Polit. Sci. 10 (2007): 211–244. This may be due to the strong relationship between political institutions and corruption: those with more democratic and inclusive institutions tend to be less corrupt. For example, countries that have parliamentary democracies seem to have higher levels of corruption than democratically elected presidents. Note that this effect may be skewed by historical evidence from Latin America. Closed-list and proportional election systems may also breed more corruption than open-list electoral rules. High levels of legal formalism and regulation, as well as large natural resource endowments, are also correlated with higher levels of corruption.

The top 10 most corrupted countries

Corruption and income inequality

The impact of corruption on

income inequality There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of we ...

was investigated Gupta et al. (2002). They find a significant positive impact of corruption on inequality while taking into account exogenous variables. Corruption has also an impact on income inequality through numerous channels, for instance, economic growth, biased tax system, asset ownership, etc.SANJEEV, Gupta, Davoodi HAMID a Alonso Terme ROSA. Does Corruption Affect Income Inequality and Poverty?. 1998. Working paper. International Money Fund. Firstly, corruption can significantly affect the targeting of social problems. When the economy is corrupted, and government-funded programs are used to extend benefits to wealthy population groups or when poverty reduction funds are not used as they should because of corruption, the impact of social programs on income distribution could significantly diminish. Also, the higher corruption, the lower tax revenue, which results in lower resources for funding services such as education, etc. Secondly, corruption can affect income inequality also through a biased tax system. Corruption can lead to poor tax administration or exemptions that could favor the wealthy ones with connections. As a result, the progressivity of the tax system could reduce; thus income inequality is possible. Furthermore, when most of the asset is owned by elite groups of the population, they can take advantage of their wealth and lobby the government for favorable trade policies, which potentially could result in income inequality.

Corruption and its effect on price

If the economy is corrupted, there may be some business owners who can use their connections and money to

bribe Bribery is the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official, or other person, in charge of a public or legal duty. With regard to governmental operations, essentially, bribery is "Corru ...

government officials, as a result, not only policies but also market mechanisms are manipulated, and such companies could become a sole provider of goods or services, in other words, those companies could become a monopolistic or oligopolistic company. Monopolistic companies do not have to compete against others; thus they tend to set prices high and do not have an incentive for innovation and improving the quality of goods or services.

Corruption and disincentive for innovation

There may be a disincentive for

innovation Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entit ...

also because the legal system of corrupted economies is not trustworthy enough. Potential inventors cannot be sure that their invention will be protected by patents and not copied by those who could bribe the authorities. That could be the reason why emerging countries usually import technology instead of innovating within their societies.

Corruption and growth of GDP

Corruption breeds inefficiencies that may affect the static level of output. In order for corruption to affect economic growth as a whole, it must affect population growth, capital accumulation, or total factor productivity. A 1995 study by Paulo Mauro shows that capital accumulation, in the form of investment, is negatively correlated with corruption, particularly foreign direct investment. Due to the fact that technological advances are primarily driven by investment, this correlation also reveals that corruption can negatively affect total factor productivity. According to Pak Hung Mo,

political instability Political decay is a political theory, originally described by Samuel P. Huntington, which describes how chaos and disorder can arise from social modernization increasing more rapidly than political and institutional modernization. Huntington provid ...

is the most important channel through which corruption affects economic growth. This study shows that a 1% increase in the corruption level means that the growth rate is reduced by about 0.72%. In other words, a one-unit increase in the corruption index reduces the growth rate by 0.545 percentage points. Furthermore, income inequality harms the economy, on the contrary, according to new OECD analysis, reducing income inequality would boost economic growth.Inequality hurts economic growth, finds OECD research. In: STEFANO, Scarpetta a Cingano FEDERICO. OECD: Better policies for better life nline 12.09.2014 it. 2020-03-21 For instance, Mexico's rising inequality knocked off more than 10 percentage points off growth over the past two decades up to the Great Recession. Besides, there are countries like Spain, France, and Ireland, where greater equality helped increase GDP per capita before the crisis. The OECD study also finds evidence, that the main mechanism through which inequality affects growth is by undermining education opportunities for children from families with poor socioeconomic status, which measures a person's work experience and also a person's or family's economic and social position to others, which lowers social mobility.

Corruption and education and healthcare

Corruption harms the quality of education and public healthcare in emerging economies, according to the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...

. That is because the cost of education in corrupted countries increases, especially when bribes influence the recruitment and promotion of teachers; consequently, the quality of education decreases. Not only quality of education decreases, but also corruption in healthcare has a huge impact. Many things can be affected by corruption, for instance, the designation of healthcare providers, recruitment of personnel, or procurement of medical supplies and equipment. As a result, it leads to inadequate healthcare treatment and restricted medical supply, which results in lower quality of overall healthcare.

Corruption and shadow economy

Many studies were carried on the relationship between corruption and the shadow economy, which is still not very clear. The majority of them found that corruption is associated with

tax evasion Tax evasion is an illegal attempt to defeat the imposition of taxes by individuals, corporations, trusts, and others. Tax evasion often entails the deliberate misrepresentation of the taxpayer's affairs to the tax authorities to reduce the tax ...

, because of bribery of officials by entrepreneurs. In this case, corruption increases the shadow economy and lowers economic growth. For instance, studies that were carried by Johnson et al. (1997), Fjeldstad (1996, 2003), Buehn and Schneider (2009), and Kaufman (2010) revealed such empirical findings that showed a positive relationship between corruption and shadow economy.BORLEA, Sorin, Monica-Violeta ACHIM a Miron MONICA. Corruption, Shadow Economy and Economic Growth: An Empirical Survey Across the European Union Countries. 2017. Studia Universitatis Vasile Goldis Arad, Seria Stiinte Economice ER. However, in high-income countries, public goods are more efficient and only small businesses tend to pay bribes and avoid taxation. Consequently, the income generated by such businesses exists outside the official economy; therefore the income is not included in the calculation of the country's GDP. Also, such business not only that pay their employees lower than the minimum wage, that is designed by the government in the country, but also they do not provide for instance health insurance benefits and other employee benefits. On the contrary, the big companies tend to bribe officials to get a contract from the public sector, which means, that the contract is conducted in the official sector. In consequence, the relationship between corruption and shadow economy has been found negative in high-income countries.

Corruption and low foreign investment

Investors often seek a fair competitive, business environment; thus they will mostly avoid investing in countries where there is a high level of corruption. Studies show a positive relationship between the level of corruption in a country and measurements of the competitiveness of its business environment.

Combatting corruption on the micro level

According to Robert Klitgaard's equation, corruption = monopoly + discretion - accountability. Therefore, corruption is able to emerge and grow when there is a private or public monopoly over a good or service, and this individual or group has the discretionary power to allocate the good or service with few checks and balances and few, if any, consequences. By targeting individual components of the equation, there are several ways to fight corruption. First of all, reducing monopoly necessitates encouraging competition. This may be accomplished by publishing public procurement data online or making government contracts available to a wider range of potential firms. Successful examples of this include the case of countries such as Mexico, which made all government contracts and procurement plans available online so the general public could view plans, prices, and bid winners. Secondly, limiting discretion means making laws and government procedures accessible for a broad cross-section of society to view. This may be accomplished by the publication of documents detailing legal requirements for acquiring permits etc. in common languages and in an accessible format. Finally, increasing accountability may be accomplished by inviting impartial third parties to conduct government audits, as well as continually monitor and evaluate government procedures. This has been a success in countries such as Singapore and Hong Kong.

Books on economics of corruption

Some books have been produced with the specific title of "economics of corruption". One of these is ''The Economics of Corruption'' edited by Ajit Mishra published by the

Oxford University Press Oxford University Press (OUP) is the university press of the University of Oxford. It is the largest university press in the world, and its printing history dates back to the 1480s. Having been officially granted the legal right to print books ...

in 2005. This book is an anthology of 11 essays under 4 categories, written by 16 economists. The titles of the essays give an idea of the various approaches taken by different economists. They are quoted below : * Corruption : an Overview * Corruption : Its causes and Effects * Hierarchies and Bureaucracies: On the role of Collusion in Organizations * A Theory of Misgovernance * Pervasive Shortages under Socialism * Corruption and Growth * Corruptible Law Enforcers : How should they be compensated? * Notes on bribery and control of corruption * The Choice between Market failures and corruption * Rents, Competition and corruption * Electoral competition and Special Interest Politics One can observe that these essays do not capture corruption in all its economic essence. Hundreds of essays have been published during the last two decades that deal with many more aspects of corruption from an economic perspective. Some other books are : * Rose-Ackerman, S. : ''Corruption - A study in Political Economy'', 1978, Academic Press, New York. * Ekpo, M. U. (ed.) : ''Bureaucratic corruption in sub-Saharan Africa'', 1979, University Press of America, Washington. * Noonan, J. T. ''Bribes'', 1984, Macmillan, New York. * Chowdhury, F. L. ''Corrupt Bureaucracy and Privatization of Tax Enforcement'', 2006, Pathak Samabesh, Dhaka. * Fisman, R. and Golden, M. : ''Corruption: What Everyone Needs to Know'', 2017, Oxford University Press, New York.

Courses on economics of corruption

Some universities and institutions including the University of Regina in Canada, Florida State University in the United States, and the University of Passau in Germany have started to offer courses on the economics of corruption. Additionally, the University of Rochester offers a course related to the history of economic corruption. One of the course outlines is given below. The course is offered by New Economic School, an institution in

Russia Russia (, , ), or the Russian Federation, is a transcontinental country spanning Eastern Europe and Northern Asia. It is the largest country in the world, with its internationally recognised territory covering , and encompassing one-eig ...

. The course includes 14 lectures, the themes of which are as follows. *1. Corruption as an economic, social and political problem. Corruption's specific features in economies in transition. *2. Corruption and rent-seeking behavior. Basic model of rent-seeking and its research. Problem of rent's dissipation. *3. Static and dynamic models of

Rent-seeking Rent-seeking is the act of growing one's existing wealth without creating new wealth by manipulating the social or political environment. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effic ...

. Cases of pure and mixed public goods. *4. Rent-seeking behavior and free-riding. Rent-seeking in teams. *5. Rent-seeking in hierarchical systems. *6. "Artificial" rents and seeking for them. *7. Examples when rent-seeking arises in economies. Criminal rent-seeking. *8. Basil model of corruption and its analysis. Corruption models' classification. *9. Game-theoretical approaches towards corruption. *10. Corruption in hierarchical structures. *11. Dynamic corruption models. *12. Economic systems with corruption efficiency. *13. Statistical and econometrical approaches towards the research of corruption. *14. Macroeconomics aspects of corruption. Problems in the estimation of corruption influence on economic development.

Approaches to economic analyses of corruption

A systematic pattern in research on corruption from an economic perspective is yet to emerge. However, Ananish Chaudhuri has classified the foci of economic analyses of corruption into fourteen broad categories.

Faizul Latif Chowdhury Faizul Latif Chowdhury ( bn, ফয়জুল লতিফ চৌধুরী; born 3 June 1959) is a civil servant from Bangladesh, who currently serves as the director general of Bangladesh National Museum. Chowdhury has written on a variety ...

, "Economic Approaches in Corruption Studies", ''Fiscal Frontiers'', 2008, Dhaka. These are: * Economic causes of corruption * Rent-seeking in the public offices, including Judiciary * Corruption as an economic behavior, e.g. game-theoretic explanation * Demand for and Supply of corruption, the optimal level of corruption, the optimal level of bribery, the efficiency of the market in corruption * Impact of corruption on the competitiveness in the market for goods and services * Measurement of the level of corruption, comparative county-studies * Corruption in different economic activities, e.g. public procurement, defense procurement * Sources of corruption: Revenue collection, Foreign aid, Foreign Direct Investment * Corruption in the private sector, Economies in transition * Impact of corruption on economic growth, national

development Development or developing may refer to: Arts *Development hell, when a project is stuck in development *Filmmaking, development phase, including finance and budgeting *Development (music), the process thematic material is reshaped * Photograph ...

and the level of poverty * Welfare impact of corruption, Income redistribution resulting from corruption * Factors affecting corruption, e.g.

Shadow economy A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the s ...

, Smuggling, weak state, corruption by politicians * Relation between corruption on the one hand and other economic-social-cultural aspects like technological progress, environment and ecology, * Economic factors relating to anti-corruption programs, e.g. optimal level of punishment for corruption etc.

References

{{DEFAULTSORT:Economics of Corruption Corruption Public economics