Share

SA’s top economic undergrads examine the costs of corruption

accreditation
iStock

In 1972 Old Mutual held its first budget speech competition where it invited some of the top economic graduates to write an essay on a relevant economic topic.

This year, in the undergraduate category, the topic was “What are the economic and fiscal costs of corruption in a country, if any?”

Reproduced below are the abridged essays of four of the finalists.

Find out what the youth of today and the economic leaders of tomorrow handle the topic of corruption and what their perspective is regarding this economic ill that has gripped our nation.


Corruption: costs and cures

Thabani Masuku from Rhodes University outlines the insidious nature of corruption and offers possible solutions.

Corruption as a phenomenon is widespread in societies and governments across the world. The level of corruption in South Africa has recently been alleged to have escalated to the point of state capture.

Nigeria’s long history of corrupt administration has culminated in concerted efforts by the incumbent government not only to effectively and permanently root out corruption from within the Nigerian private and public sector but to also convict the perpetrators of corruption related crimes and recover the ill-gotten gains and invest them into the growth of the Nigerian economy.

Brazil’s supreme courts have ordered that the country’s president be questioned amid allegations of corruption related to the alleged acceptance of bribes and embezzlement of state funds. [Update: Former President Luna da Silva has been convicted of corruption and money laundering.]

The former statistics bureau chief in China has been sentenced to life imprisonment for corruption.

Citizens, corporates and governments across the globe are calling for increased accountability and transparency in both the private and public sectors, in their respective countries as well as internationally.

Corruption gradually erodes governance structures and also poses a serious threat to the quality of life and livelihoods of the citizens in a country. The existence of corruption in any country not only undermines social justice but it also undermines the rule of law; therefore, the significance of efforts to address and ultimately eliminate corruption cannot be overstated.

Corruption bears with it costs, to the state, economy and citizens, whose parameters and reach cannot be accurately defined, because of the illegal nature of corrupt acts and transactions. The illicit enrichment of certain economic agents, stakeholders or factions in a country is hard to capture because of the covert nature of these transactions that operate in a similar nature to those in an underground economy.

In response to the growing rate of corruption, the member states of the United Nations convened and came up with the United Nations Convention against Corruption, a multilateral treaty promoted by the United Nations Office on Drugs and Crime.

Corruption alleviation or elimination?

Corruption is a phenomenon that has been in existence since time immemorial and for that reason, people have become desensitised to the harsh realities accompanying this pernicious scourge.

The question then remains whether it is possible to completely rid society of this contagion; and if it is, what can be done to effectively and successfully do so. Many propositions have been brought forth and each is as unique as the context in which corruption occurs.

It is therefore noteworthy that all efforts to eliminate corruption should be based on the premise that the choice to engage in an act of corruption is largely decided by the perceived ratio between the benefits derived from the act of corruption to the penalties they are likely to suffer in the event that they are exposed, according to USAid research.

Recommendations:

• There should be a concerted effort towards establishing and enforcing laws against corruption so as to inspire and consolidate a sense of trust in the country’s justice systems. This will also serve as a deterrent to corruption.

• In addition to ensuring that the law punishes acts of corruption, there must be a practical aspect of this justice that recovers all ill-gotten gains obtained through acts of corruption and restores them to the rightful owners or to the state to use in advancing the interests of the whole country.

• Fiscal decentralisation as a means to enact increased levels of accountability and transparency within the operations of the public sector would serve a great deal in addressing the incidences of corruption related to abuse of autonomy.

The most important thing to remember is that corruption affects all people and no one is exempt from the ravenous costs to the economic, political and social well-being of a country.

The costs of corruption: a student’s perspective

Jason Kelbrick from Nelson Mandela University explores corruption’s destructive consequences – and points to constructive remedies.

It is evident that in the past years, corruption has become a more prominent issue both in South Africa and throughout the world. Along with corruption comes various economic and fiscal costs which have a direct effect on a country’s allocation of resources and social welfare.

Research indicates that corruption has a significantly lower effect on economic growth in a democratically run country than in a more authoritarian country. Furthermore, it appears that democracy may not purely reduce the level of corruption, but also change the composition of corruption. According to Bueno de Mesquita et al. (2001), a democratic governance system can actually facilitate growth as citizens are better able to remove corrupt politicians.

It has been found that countries with higher levels of corruption experience significantly lower government expenditure levels on key economic fundamentals such as education and health. Through this, the quality of both education and health standards are seen to drop substantially and subsequently the country is exposed to further negative effects in areas such as GDP growth and foreign direct investment.

This is mainly due to international stakeholders becoming concerned by the country’s perceived growth prospects as well as a reduction in the overall confidence in leadership.

As government seems to deviate from the long-term goals of the country, that of sustainable economic growth, a positive relationship emerges between corruption and income inequality. South Africa remains a dual economy with one of the highest inequality rates in the world.

Similarly, countries with more corruption experience lower acceptance of established institutions, weakened political institutions and a deficient court system leading to higher political instability. Besides the significantly negative impact of corruption on GDP growth, the interaction between corruption, rule of law and government effectiveness affect growth rates negatively.

Another common influence that corruption has on the general economy is that of increased inflation rates, which tends to lead to further depreciation of a country’s real exchange rate. This depreciation could have positive effects for export-orientated countries and sectors but will harm net importers – which form the bulk of developing countries.

Another concern for countries experiencing higher tax and inflationary rates due to corruption is the “encouraged” development of the shadow economy. This rise in the shadow economy is purely down to the extra costs of corruption that have essentially been burdened by newly established small and medium-sized enterprises that don’t have the financial backing to cover additional costs. As a consequence, entrepreneurs might be reluctant to start businesses in the official economy. As more enterprises go underground, a government’s revenue base can be substantially eroded, resulting in long-term negative effects on economic growth.

Another area in which the burden of fiscal corruption is quite substantial is in the delivery of public services. Corruption, through several different channels, is able to decrease the efficiency and raise the price of public goods. First, fiscal corruption in its various different forms decreases the total funds available to finance public goods and services. Second, through the procurement of productive inputs, corruption raises the price of publicly procured inputs and increases the costs of public services. Recent unscientific evidence demonstrates that corruption in the public sector can increase the costs of services by 30% to 50%.

Remedies

  • Promote transparency and an ethical judicial system

Researchers indicate that the level of corruption highly depends on the extent to which the laws of the land are binding and enforced. The potential cost of corruption is the loss of a job and the jail time if caught and persecuted. In South Africa, officials will continue to act corruptly so long as the perceived gains from corruption outweigh the costs. With a weak judicial system, corruption will continue to grow as the probability of detection and punishment is lower.

Lack of transparency in government dealings and expenditure policies has been a major contributor towards corruption in South Africa.

South Africa must ensure that a rigid judicial system is implemented going forward as it will significantly increase the risk and cost of taking part in corrupt activities. The greater the free flow of information and environment of awareness, both of rules and regulations, the more corruption can be exposed and reduced.

  • Reform public administration and financial management

An efficient, responsive, transparent and accountable public administration is a central part of democratic governance.

South Africa has not taken part in any reform processes of late, resulting in ill-prepared civil servants and lower levels of corporate governance adopted by political parties. Financial management also plays a pertinent role in an efficiently run democratic system as it allows insight into the future prospects of any given economy. It is, therefore, imperative to implement a sound financial management system to accurately distribute resources and funds appropriately.

Fiscal decentralisation can be seen as an effective method to improve the framework of both public administration and financial management.

“Fiscal decentralisation” refers to the percentage of total government expenditure executed by subnational governments. In this context, fiscal decentralisation holds great promise for improving the delivery of public services while maintaining economic growth, but the actual result depends on its design and the institutional arrangements for its execution. Decentralisation can also act as a vertical separation of powers which will effectively reduce corruption and create multiple veto powers.

In short, to reduce the level of corruption in South Africa, a clear strategy such as the National Development Programme must be successfully implemented through placing focus on leadership that provides policy consistency, ownership of the plan by all society formations and a strong institutional capacity at technical and managerial levels.

How corruption can destroy economies

Khayelihle Madlopha from the University of Zululand clearly outlines the devastating effects of corruption.

According to Transparency International, corruption is “one of the greatest challenges of the contemporary world”, particularly for developing countries.

Corruption’s various guises include:

1. Political corruption, which refers to corrupt acts of political leaders and activities by which they exploit their decision-making power to make national policies serve their own interests;

2. Bureaucratic corruption, which refers to corrupt acts of bureaucrats, where in many cases the public may bribe bureaucrats to receive a service to which they have a right or to quicken a bureaucratic procedure;

3. Legislative corruption, which refers to the extent to which voting behaviour of legislators can be influenced. Through this type of corruption, legislators can receive bribes from interest groups (for example business people and politicians) to enforce legislation that can generate or change the economic rents associated with assets; and

4. Private sector corruption, which can manifest itself as bribery, undue influence, fraud, money laundering and collusion.

Investors discouraged

Business International’s Corruption Index indicates that more corrupt countries experienced significantly lower investment rates, because of a negative relationship between corruption and investments.

This negative relationship is attributable to the fact that corruption acts like a tax that discourages Foreign Direct Investments. Economists have estimated that a corrupt country is likely to achieve aggregate investment levels of almost 5% less than a country that is relatively “incorrupt”.

Corruption’s negative effect on South Africa’s total investment is indisputable. Even local investors tend to “park” (hold back) their big investment projects and operations. For instance, after the most recent presidential Cabinet reshuffle – which was widely labelled as a product of corruption within the state – big industry players like Pioneer Foods and some big mining companies announced that they were parking their investments.

In a Grant Thornton survey 58% of executives interviewed indicated that they were delaying their business expansions in South Africa.

Service delivery undermined

Corruption also fuels poor service delivery, according to Corruption Watch. This is because huge amounts of money that could be used for service delivery are lost to corruption every year.

There are many examples that prove that corruption leads to poor service delivery, and the lack of textbooks in Limpopo in 2012 is one of them. A report by the Special Investigative Unit in 2011 highlighted irregularities and wasteful expenditure within the education sector. The report also found that an R680-million contract was awarded to EduSolutions not because of the ability to provide the service but because of political connections.

Other examples include roads built using poor material in order to gain surplus money for private gain. This is a serious economic problem because poor government delivery hinders business growth. In South Africa 32% of private business owners surveyed by Grant Thornton in 2016 identified poor service delivery relating to utilities (water and electricity) as having the greatest negative impact on their growth.

Revenue services hampered

In a study of 68 countries over the period 1980-1995, researchers Tanzi and Davoodi found a significant negative impact of corruption on state revenues.

There are various reasons behind this. First, widespread corruption undermines the culture of compliance, thereby increasing tax evasion, which erodes state revenue. It also creates mistrust and thus demoralises entrepreneurs from establishing new businesses in the formal sector, further eroding state revenue.

Taxes finance government spending and empirical evidence suggests that there is a positive relationship between government spending and economic growth. Hence, a lower government revenue collection may have detrimental effects on the economy in general.

Public spending inflated

Corruption also tends to distort government expenditure and may even lead to the provision of goods and services that are not needed. It can also take the form of cost inflation – where costs of goods or projects are inflated illegally to gain surplus money from purchases or projects. Such cost inflation leads to leakages in public spending programmes, especially in big public investments, where procurement costs can be easily inflated.

It’s estimated the country loses about R25 billion each year to corruption in government procurement.

Fiscal deficit and debt accumulation

The combined result of excessive public expenditure and lower state revenue collection can be spiralling fiscal deficits and considerable debt accumulation.

Since corruption increases government spending and reduces government revenue in South Africa, it can be concluded that corruption has some contribution to the large budget deficit (3.9% in 2016) and government debt (currently 51% of GDP).

In conclusion, corruption is a chronic economic and social ill that we must fight. Through collaborative work and dedication, we can do this. We must free our country from corruption and “economic gangsters”.

The spectre of corruption

Schalk Bothma from the University of Stellenbosch unpacks the repercussions of rampant corruption.

Very few issues provoke public discourse to the same extent as the problem of corruption. The rise of populist politicians promising to break the cycle of corruption, during various 2016 elections, show that people worldwide are growing increasingly unhappy with the way corruption is allowed to prosper.

The massive discontent with rampant corruption is completely justified. According to Corruption Watch, it has far reaching effects on a country and its people and is central to many other issues a nation experiences.

A commonly accepted definition states that corruption is the abuse of entrusted power for private gain. This definition is used by various public institutions and civil society organisations, including the World Bank and Transparency International.

Although corruption is mostly transactional in nature (such as bribery), it often manifests as more than simply a shady business transaction between two entities. Powerful business elites collude with politicians to control state-owned enterprises, capture political institutions, and turn tender processes and procurement into monopolies.

Economic Costs of Corruption

• Lower rates of economic growth

Corrupt behaviour leads to suboptimal economic performance wherever it occurs. Corruption impedes economic performance by stifling drivers of inclusive growth. It weakens the state’s capacity to perform core functions, ultimately undermining inclusive economic growth. The World Bank states it has corruption as “the single greatest obstacle to economic and social development”.

• Indirect economic costs

By diverting resources away from collective purposes to private ones, corruption is more damaging than the mere decline in the annual GDP growth rate.

• Inefficient public investment

Corruption lowers the quality of public investment and increases its cost. Fraudulent procurement processes lead to artificial inflation of project cost, undermining efforts to reduce infrastructure gaps and boost growth.

Ultimately it is the general public that bears the brunt of these inefficiencies, since the infrastructure financed is suboptimal or even completely dysfunctional.

• Reduced private and foreign direct investment

Aside from reducing the effectivity of public investment, corruption also leads to a large reduction in private investment. High levels of corruption in a country decrease confidence and lead to higher perceived risk, which makes both foreign and local investors wary and deters them from investing. IMF research points out that an increase of 1 point in the corruption index can lead to a reduction in foreign investment by as much as 8%.

The April downgrades of South Africa’s foreign currency debt to sub-investment grade sent investors fleeing from equities into the higher-yielding bond market.

These downgrades followed a controversial decision by President Jacob Zuma to fire Finance Minister Pravin Gordhan, in a Cabinet reshuffle deemed by many to be the product of cronyism.

Foreign direct investment is a key determinant of long-term growth. Reduced investment caused by corruption, therefore, imposes a significant cost on any country’s economy.

• Reduced entrepreneurial innovation

Corruption hurts innovative activities. Research indicates that innovators looking to enter established markets are more reliant on certain government-supplied goods, such as licences and permits, than established producers. These goods become primary targets of corruption.

• Higher rates of inflation

Research shows that more corrupt countries experience higher rates of inflation. This is due to many factors, but the government’s increased dependence on seigniorage (profit made by a government by printing money) has been cited as the main cause.

Since tax evasion will clearly be higher in corrupt countries, government revenue will decline. The state, therefore, has a motive for creating inflation - to generate seigniorage.

• Increased income inequality

People in poverty are hurt disproportionately by corruption, making them the primary victims of corruption. Bureaucrats divert funds intended for economic development, undermining the state’s ability to provide basic services to citizens, feeding injustice and increasing inequality.

Fiscal costs of corruption

• Losses due to corruption

Annually, a staggering $1.5 trillion is lost due to corruption worldwide, according to the International Monetary Fund. This amounts to roughly 1.8% to 2% of global GDP. Our Parliamentary Monitoring Group estimates the size of the corruption phenomenon in South Africa is about R25 billion annually.

• Change in composition of public expenditure

Corrupt bureaucrats tend to support components of government spending where bribes can more efficiently be levied and collected. Research shows that these components involve projects which are complex in nature, involve large sums of money and are not common or recurring.

Large sums of money can more easily be defrauded in this fashion by inflating the cost of the project. To fund projects like these, state funds are diverted away from projects in sectors such as health and education.

• Lower tax revenue

Widespread corruption promotes a culture of non-compliance with taxation laws, thereby increasing tax evasion, according to the International Monetary Fund.

• Change in public debt and higher financing cost

Due to tax revenue falling short and increased spending, government borrowing is increased. The higher the corruption in a country, the higher is the ratio of sovereign debt to GDP.

Since corruption slows economic growth and performance, it is clear that the more corrupt the government, the less likely it would seem to be able to pay off its debts in the future. This means that the debt (state bonds) it issues has a higher risk for the lender and must therefore offer a higher premium, further increasing the public debt. 

Increased debt and its higher cost of financing place a massive burden on a country’s fiscal structure.

In conclusion, the pervasiveness of the costs of corruption and its widespread consequences are clear. It is also evident that those in poverty are hit the hardest by the corruption pandemic. This creates a vicious cycle that can only be halted by uprooting corruption in its totality.


We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Voting Booth
Do you believe that the various planned marches against load shedding will prompt government to bring solutions and resolve the power crisis?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes
20% - 103 votes
No
80% - 403 votes
Vote