Ppt on economic costs of corruption


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  • Monopoly Power of Officials.
  • Ppt on economic costs of corruption

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    3. 3. C0NTENTS • Introduction • Definition • Types of corruption • Factors causing corruption • Effects of corruption • Measurement of corruption • Measures to curb corruption • Fight against corruption • Conclusion 3
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    5. 5. • The degree of attention now paid to corruption leads naturally to the question of why.• Two factors that had impact on corruption in recent years are the growth of international trade and business and the economic changes that have taken place in many countries and especially in the economies in transition. 5
    6. 6. Those Economic changes are: (1) a large increase in the level of public spending; (2) a large increase in the level of taxation in many countries and (3) a large increase in regulations and controls on economic activities on the part of governments. 6
    7. 7. DE INIT F IONWorld Bank defines Corruption as “It isthe abuse of public power for privatebenefit.” One definition that has the virtue ofsimplicity is “the act by which ‘insiders’profit at the expense of ‘outsiders’ ”. 7
    8. 8. • Corruption is the misuse of office for unofficial ends. (Klitgaard, 1998).• It covers fraud (theft through misrepresentation), embezzlement (misappropriation of corporate or public funds) and bribery (payments made in order to gain an advantage or to avoid a disadvantage). 8
    9. 9. Forms of corruption Bribes: payments to public officials to persuade them to do something (quicker, smoother or more favorably). Collusion: secret agreement between contractors to increase profit margin Fraud: falsification of records, invoices etc. Extortion: use of coercion or threats. E.g. a payment to secure / protect ongoing service – (cf. collusive corruption where both sides benefit) Favoritism/ Nepotism in allocation of public office Embezzlement: misappropriation of corporate or 9
    10. 10. T E OF CORRUP ION YP S TActs of corruption can be classified in different categories. Corruption can be Bureaucratic (or "petty") or political (or "grand"); for example, corruption by the bureaucracy or by the political leadership; Cost-reducing (to the briber) or benefit enhancing; Briber-initiated or bribee-initiated; Coercive or collusive; Centralized or decentralized; Predictable or arbitrary; and Involving cash payments or not. 10
    11. 11. Riley categorizes corruption underthree headings.Incidental corruption:This is small-scale. It involves junior public officials, such as policemen or customs officers; it produces profound public alienation; it has little macro-economic cost, but it is often hard to curb. CONTD… 11
    12. 12. Systematic corruption: This is corruption that affects, for example, a whole government department or parastatal. It may divert trade and/or development. It can only be dealt with by sustained reform.Systemic corruption: That is, kleptocracy or government by theft. In this situation honesty becomes irrational, and there is a huge developmental impact. 12 
    13. 13. Iron Triangle Of Corruption Source: own illustration based on Misas 13 2005: 90-1
    14. 14. Corruption equation• =CORRUPTION MONOPOLY DISCRETION ACCOUNTABILITY C=M+D–A Bryan R Evans : The cost of corruption 14
    15. 15. Factors Contributing to Corruption:Regulations and Authorizations:• In many countries, and especially in developing countries, the role of the state is often carried out through the use of numerous rules or regulations.• The existence of these regulations and authorizations gives a kind of monopoly power to the officials who must authorize or inspect the activities.• Thus, they can use their public power to extract bribes from those who need the 15 authorizations or permits.
    16. 16. Taxation:• Taxes based on clear laws and not requiring contacts between taxpayers and tax inspectors are much less likely to lead to acts of corruption.• However, when the following situations arise, corruption is likely to be a major problem in tax and customs administrations.• The laws are difficult to understand and can be interpreted differently so that taxpayers need assistance in complying with them.• The wages of the tax administrators are low.16
    17. 17. • Acts of corruption on the part of the tax administrators are ignored.• The administrative procedures (e.g., the criteria for the selection of tax- payers for audits) lack transparency.• Tax administrators have discretion over important decisions, such as those related to the provision of tax incentives, determination of tax liabilities, selection of audits, litigations, and so on. 17
    18. 18. Provision of goods and services at below market prices:• In most countries, the government engages in the provision of goods, services, and resources at below- market prices. Sometimes, because of limited supply, rationing or queuing becomes unavoidable.• Excess demand is created and decisions have to be made to apportion the limited supply. These decisions are often made by public employees.• Those who want these goods (the users) would be 18 willing to pay a bribe to get access (or a higher
    19. 19. Quality of the Bureaucracy:Absence of politically motivated hiring, patronage, and nepotism, and clear rules on promotions and hiring, all contribute to the quality of a bureaucracy.Level of Public Sector W ages:• Over the years many observers have speculated that the wages paid to civil servants are important in determining the degree of corruption.• One can speculate that there may be corruption due to greed and corruption due to need. 19
    20. 20. Trade off between wage level and corruptionIn Figure 1, CC represents the trade-off between the level of corruptionand the level of wages.. Vito, 20 1998
    21. 21. Penalty Systems:• The penalty imposed plays an important role in determining the probability that criminal or illegal acts would take place.• Higher the penalty the less will be corruption.Institutional Controls:• Honest and effective supervisors, good auditing offices, and clear rules on ethical behavior should be able to discourage or discover corrupt activities.• Supervisors should be able to monitor the activities of their subordinates and they should themselves be held accountable for acts of corruption in their offices that go 21 unpunished.
    22. 22. Transparency of Rules, Laws, and Processes:• In many countries, the lack of transparency in rules, laws, and processes creates a fertile ground for corruption.• Rules are often confusing, the documents specifying them are not publicly available, and, at times, the rules are changed without properly publicized announcements.Examples by the Leadership:• A final contributing factor is the example provided by the leadership. When the top political leaders do not provide the right example, either because they engage in acts of corruption or, as is more often the case, because they condone such acts on the part of 22
    23. 23. Effects of CorruptionGrowth, Productivity, and Investments:• Corruption negatively affects productivity. An indicator for productivity is the ratio of a country’s GDP to its capital stock.• Estimations by Lambsdorff (2003) suggest that an increase in corruption in the Corruption Perception Index by one point lowers productivity by 4% of GDP.• Corruption deters investments. One of the reasons for this is because the effects of corruption are comparable to a tax on investments. Mauro (1997) finds that if a country improves on the BI corruption index by 2 points, 23 investments increase by 4 %.
    24. 24.  Foreign Direct Investments (FDI) are also negatively affected. In particular FDI involving sophisticated technology suffer from corruption because investors fear for the leakage of technological know-how to opportunistic and corrupt local partners. According to Mauro(1995), a one-standard deviation improvement in the corruption index is associated with an increase in the investment rate by 2.9 % of GDP, controlled for red tape. 24
    25. 25. Education, Health andEnvironment:• Corrupt governments and corrupt political systems are likely to allocate more to military purposes and arms procurement and less to education and health.• It is simply easier to extract corrupt gains from such type of deals as from labour intensive projects in schooling or hospitals..• Mauro (1998) finds a very strong negative correlation between corruption and government expenditures on education.• Life expectancy is of course closely related to public health policies, and as mentioned before, corruption is likely to diminish government spending on health. 25
    26. 26. • Child mortality rates in countries with high levels of corruption are about one-third higher than in countries with low corruption.• Infant mortality rates and the share of low-birth-weight babies are almost twice as high. And again, the poor are disproportionably hurt by corruption.• Environmental quality also suffers from corruption, and corruption undermines effectiveness of environmental policies.• Indeed, pollution increases due to a less effective environmental regulation which can be circumvented 26 through bribes.
    27. 27. Inequality and Poverty:• Even if rich and poor would be equally confronted with corruption (which is unlikely) the impact on the individual budget of the poor as percentage of their income would be much higher.• 40% of all countries in the CPI 2007 that are scoring less than 3 points are rated by the World Bank as "low income" countries. 27
    28. 28. Democracy and Good Governance:• A core function of a democratic state is the control over public funds through the public finance system.• Corruption can undermine this system in three ways.• First of all, in most countries a social and political consensus has been established that private wealth is subject to a redistributive system to guarantee the provision of public goods and to prevent excessive social inequality. Therefore, income is taxed. Through bribing tax officials or through tax evasion, corrupt practices undermine the ability of the state to tax private 28 wealth and revenues.
    29. 29. • Second, public expenditure is agreed on in the budget usually approved and controlled by parliament, by central audit authorities and by civil society and media. But, as already mentioned, corruption distorts the budget towards expenditures offering the highest corrupt opportunities, undermining thereby the democratically wished use of resources favouring narrow interests over public interest.• Finally, corruption may also directly seek to influence the policy making and the rules and regulations of a society, thereby undermining democratic processes as well as the legitimacy of the state. 29
    30. 30. M ASURE E OF CORRUP ION: E M NT T• The estimation of the unreported income in India goes back to 1956 when Lord Kaldor, as a part of the Wanchoo Committee, tried to estimate it from the national income estimates, by subtracting the income assessed for income tax.• Acharya (1985) used modified Tanzis method to estimate the unrecorded economy in India. 30
    31. 31. • Estimates suggest that the hidden economy associated with the industrial sector is a better indicator to measure the rate of change in corruptions in India.• Corruption, in terms of bribes and kickbacks, is primarily generated by firms due to regulatory conditions. To recover the cost of bribery, firms hide their production output which then remains unrecorded in the official statistics. Hence, by estimating the unrecorded income of the industrial sector, it is possible to examine the growth of corruption. 31
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    33. 33. A set of estimates following Bhattacharyy’s method 33
    34. 34. • The measurement of corruption increases the difficulty of conducting any empirical study on it.• All the available data are perception indexes provided by private firms and international organizations based on surveys of country citizens or business analysts.• These values are far from being objective measures.• These corruption perception indexes could give even more distort information since the main aim of institutions providing corruption data is to give some country risk assessments to international investors. 34
    35. 35. • According to this view, simple corruption perception indexes, produced by individual sources, like BI (Business International), ICRG (International country Risk Guide), WB (World Bank index), WCR (World Competitiveness Report), should be less reliable than aggregate corruption indicators, like CPI (Corruption perception Index by Transparency International) and Graft (by Kaufmann, Kraay and Loido-Zobaton, 1999) that, being based on corruption data coming from different sources, include perceptions by citizens as well as by risk analysts and experts. 35
    36. 36. Transparency InternationalTransparency International (TI):• A non-governmental organization that monitors and publicizes corporate and political corruption in international development.• It publishes an annual Corruption Perceptions Index, a comparative listing of corruption worldwide.• The headquarters is located in Berlin, Germany but operates through more than 70 national chapters.• TI was founded in May 1993 through the initiative of Peter Eigen, a former regional director for the World Bank. 36
    37. 37. • In 1995, TI developed the Corruption Perceptions Index (CPI).• The CPI ranked nations on the prevalence of corruption within each country, based upon surveys of business people. The CPI was subsequently published annually. It was criticized for poor methodology and unfair treatment of developing nations, while also being praised for highlighting corruption and embarrassing governments. 37
    38. 38. CP scoring in the year 2010 I CPI SCORE NUMBER OF COUNTRIES CPI SCORE 0-4 115 CPI SORE 4-7 41 CPI SCORE 7-10 22 TOTAL 178 Source: http://www.economywatch.com/economic-statistics/economic- indicators/Corruption_Perceptions_Index/ 38
    39. 39. CPI scores and ranks of important countriesCOUNTRY RANK SCOREDENMARK 1 9.3NEW ZEALAND 1 9.3SINGAPORE 1 9.3JAPAN 17 7.8UNITED STATES 22 7.1CHINA 78 3.5INDIA 87 3.3SRI LANKA 91 3.2PAKISTHAN 143 2.3AFGHANISTHAN 176 1.4MYANMAR 176 1.4SOMALIA 178 1.1 Source: http://www.economywatch.com/economic-statistics/economic- 39 indicators/Corruption_Perceptions_Index
    40. 40. World map showing CPI Uzbekistan Turkmenistan Iraq Afghanistan Myanmar Chad Sudan Angola 40
    41. 41. India Corruption Perception Index2001-10 YEAR RANK SCORE 2010 87 3.3 2009 84 3.4 2008 85 3.4 2007 72 3.5 2006 70 3.3 2005 88 2.9 2004 90 2.8 2003 83 2.8 2002 71 2.9 2001 71 2.9 Source: http://www.economywatch.com/economic-statistics/economic- 41 indicators/Corruption_Perceptions_Index
    43. 43. India map showing CP scores I Jammu and Kashmir Bihar 43
    44. 44. W hat is the amount of bribes requested by peoplein India? Arun, 2009 44
    45. 45. Bribes taken by public officials Sahakyan, 2010 45
    46. 46. What is the nature of Bribe Demands in India? Arun, 2009 46
    47. 47. W demand bribe in India? ho Arun, 2009 47
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    49. 49. B ACK M L ONEY• $1.4 Trillion India’s Black Money Stashed in Swiss Banks.• According to the data provided by the Swiss bank, India has more black money than rest of the world combined. India topping the list with almost $1500 Billion black money in swiss banks, followed by Russia $470 Billion, UK $390 Billion, Ukraine $100 Billion and China with $96 Billion.• An amount which is 13 times larger than the nations foreign debt. Evert year this amount is increasing at a rapid speed but the Indian government seem to be silent over this matter from a very long time. The black money accounts for 40% of GDP of India, if all the money comes49
    50. 50. T 10 Corruption Scams in India op1) OMC SCAM The CBI claimed to have found incriminating documents at their residences. It has seized over Rs 3 crore in cash and 30 kg of gold from Janardhana Reddy’s house and over Rs 1.5 crore in cash from Srinivas Reddy’s residence 50
    51. 51. 2) 2G Spectrum Scam• We have had a number of scams in India; but none bigger than the scam involving the process of allocating unified access service licenses.• At the heart of this Rs.1.76-lakh crore worth of scam is the former Telecom minister A Raja – who according to the CAG, has evaded norms at every level as he carried out the dubious 2G license awards in 2008 at a throw-away price which were pegged at 2001 prices. 51
    52. 52. 3)Commonwealth Games Scam: Another feather in the cap of Indian scandal list is Commonwealth Games loot. Even before the long awaited sporting bonanza could see the day of light, the grand event was soaked in the allegations of corruption. It is estimated that out of Rs. 70000 crores spent on the Games, only half the said amount was spent on Indian sportspersons. 52
    53. 53. 4) Telgi Scam Abdul Karim Telgi had mastered the art of forgery in printing duplicate stamp papers and sold them to banks and other institutions. The tentacles of the fake stamp and stamp paper case had penetrated 12 states and was estimated at a whooping Rs. 20000 crore plus. The Telgi clearly had a lot of support from government departments that were responsible for the production and sale of high security stamps. 53
    54. 54. 5) Satyam ScamThe scam at Satyam Computer Services is something thatwill shatter the peace and tranquillity of Indian investors andshareholder community beyond repair. Satyam is thebiggest fraud in the corporate history to the tune of Rs.14000 crore. 54
    55. 55. 6) Bofors Scam The Bofors scandal is known as the hallmark of Indiancorruption. The Bofors scam was a major corruptionscandal in India in the 1980s; when the then PM RajivGandhi and several others including a powerful NRI familynamed the Hindujas, were accused of receiving kickbacksfrom Bofors AB for winning a bid to supply India’s 155 mmfield howitzer. 55
    56. 56. 7) The Fodder Scam In this corruption scandal worth Rs.900 crore, an unholynexus was traced involved in fabrication of “vast herds offictitious livestock” for which fodder, medicine and animalhusbandry equipment was supposedly procured.8) The Hawala Scandal: The Hawala case to the tune of $18 million briberyscandal, which came in the open in 1996, involved paymentsallegedly received by country’s leading politicians throughhawala brokers. 56
    57. 57. 9) IPL Scam:• The scandal already claimed the portfolios of two big- wigs in the form of Shashi Tharoor and former IPL chief Lalit Modi.10) Harshad Mehta & Ketan Parekh Stock Market Scam:• There is no way that the investor community could forget the unfortunate Rs. 4000 crores Harshad Mehtha scam and over Rs. 1000 crore Ketan Parekh scam which eroded the shareholders wealth in form of big market jolt. 57
    58. 58. Cures for corruption in India Effective and regular vigilance: Strict action should be taken against lazy and corrupt officials. Number of agencies and officials should be increased. They should be properly trained in the latest investigative skills. Government should supervise and monitor these agencies. They should be quick and active in their duties. 58
    59. 59. Strong and Effective leadership andadministration: All those who are granted powers and authority bypeople should fulfill their promises and pledge. 59
    60. 60. Transparency:• Every process of selection, dealing and appointments of different fields should be made transparent. People should be made aware of reasons and merit for selection of candidates, contracts, tenders, etc.Media:• Media has wider coverage and impact. It should frequently expose the cases of corruption.• It should educate people against corruption . Journalists and editors should give complete information about issues , so that public is visualized. 60
    61. 61. Legislation: Government should frame strict and stringent anti- corruption laws . Severe punishments and penalties should be imposed on corrupt people. The justice and proceedings should not be delayed. Immediate action should be taken against corrupt people. The punishment should act as a good lesson for other corrupt people. 61
    62. 62. Responsible citizen: If an individual is corrupt, he cannot expect those in power to be free from corruption. Hence, it is essential for every citizen to perform his duties faithfully and to the best of their abilities . Every citizen should strive hard to eradicate corruption. People of India should report cases of corruption to vigilance department immediately without delay. They should follow up the cases of corruption. Since, merely reporting the evil practice is not sufficient for its complete eradication. 62
    63. 63. F T AGAINST CORRUP ION: IGH T JAN LOKPAL BILL: The Jan Lokpal Bill (Citizens ombudsman Bill) is a draft anti-corruption bill drawn up by prominent civil society activists seeking the appointment of a Jan Lokpal, an independent body that would investigate corruption cases, complete the investigation within a year and envisages trial in the case getting over in the next one year. 63
    64. 64.  Drafted by Justice Santosh Hegde (former Supreme Court Judge and former Lokayukta of Karnataka), Prashant Bhushan (Supreme Court Lawyer) and Arvind Kejriwal (RTI activist), the draft Bill envisages a system where a corrupt person found guilty would go to jail within two years of the complaint being made and his ill-gotten wealth being confiscated. It also seeks power to the Jan Lokpal to 64 prosecute politicians and bureaucrats without government
    65. 65. Right to information act: The Right to Information Act (2005) and equivalent acts in the states, that require government officials to furnish information requested by citizens or face punitive action, computerization of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances. 65
    66. 66. Anti-corruption organizations• A variety of organizations have been created in India to actively fight against corrupt government and business practices. Notable organizations include:• 5th Pillar is most known for the creation of the zero rupee note, a valueless note designed to be given to corrupt officials when they request bribes.• India Against Corruption is a movement created by a citizens from a variety of professions and statuses to work against corruption in India. It is currently headed by Anna Hazare. 66
    67. 67. • Jaago Re! One Billion Votes is an organization originally founded by Tata Tea and Janaagraha to increase youth voter registration. They have since expanded their work to include other social issues, including corruption.• Association for Social Transparency, Rights And Action (ASTRA) is an NGO focused on grass-roots work to fight corruption in Karnataka.• One organization, the Lok Satta Movement , has transformed itself from a civil organization to a full- fledged political party, the Lok Satta Party. 67
    68. 68. CONCLUSIONIn any case, any serious strategy to attempt to reduce corruption will need action on at least four fronts:1. Honest and visible commitment by the leadership to the fight against corruption, for which the leadership must show zero tolerance;2. Policy changes that reduce the demand for corruption by scaling down regulations and other policies such as tax incentives, and by making those that are retained as transparent and as nondiscretionary as possible; 68
    69. 69. 3. Reducing the supply of corruption by increasing public sector wages, increasing incentives toward honest behavior, and instituting effective controls and penalties on the public servants; and 4. Somehow solving the problem of the financing of political parties. Societies can do much to reduce the intensity of corruption, but no single action will achieve more than a limited improvement and some of the necessary actions may require major changes in existing policies. 69
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