This document provides a theoretical analysis of how corruption and business interests interact to influence institutional reforms. It develops a political-economic model where a government sets an optimal institutional level considering the costs of the policy on foreign direct investment and citizens. A corrupted lobby group representing dishonest civil servants makes political contributions to influence the government to adopt a lower institutional level that benefits illegal structures. The analysis finds that the optimal institutional level depends on the relative efficiency of legal versus illegal structures for paying fiscal costs.
This is a presentation of the book "Strategy formation and policy making in government". This book describes the options offered by strategic management in guiding public organisations. The book is based on the idea that planning is only one option in orienting the functioning of public organisations and applies resource-based and network studies. This book examines developments within central governments and public agencies. The book also addresses the strategic distinction between politics and administration, and illustrates the connection between goal setting and actual performance of government organisations.
Strategy formation and policy making in government powerpoint showUniversity of Tampere
The show represents macro government strategies in orienting public policy between economy government and civil society. The show contains strategic orientations of public agencies in the micro level of government. Both macro and micro strategies represent strategy modes of strategic desgin, internal strategic scanning and strategic governance. The show contains links to references and by clicking the pictures you'll find more usefull and entertaining material. The content is based on the book Strategy formation and policy making in government, published By Palgrave in 2019.
This is a presentation of the book "Strategy formation and policy making in government". This book describes the options offered by strategic management in guiding public organisations. The book is based on the idea that planning is only one option in orienting the functioning of public organisations and applies resource-based and network studies. This book examines developments within central governments and public agencies. The book also addresses the strategic distinction between politics and administration, and illustrates the connection between goal setting and actual performance of government organisations.
Strategy formation and policy making in government powerpoint showUniversity of Tampere
The show represents macro government strategies in orienting public policy between economy government and civil society. The show contains strategic orientations of public agencies in the micro level of government. Both macro and micro strategies represent strategy modes of strategic desgin, internal strategic scanning and strategic governance. The show contains links to references and by clicking the pictures you'll find more usefull and entertaining material. The content is based on the book Strategy formation and policy making in government, published By Palgrave in 2019.
China goes Global: Present Theories and Future DirectionsIlan Alon
Chinese globalization is upon us. But the Chinese companies internationalization, speed of internationalization and mode of entry follow a different pattern from their Western peers. The talk will review the extant literature and theories and suggest new ways to think about and research China’s drive to global markets.
There are diverse ideas about governance around the world, and this paper studies them through the following questions: (a) what does the available evidence tell us about the political and institutional requirements for sustained economic growth? (b) What do we need from the state to secure growth? (c) How do a country’s internal characteristics support or impede its growth? (d) How does the external environment of a country influence its economic growth prospects? These elements are then put together into a model of growth, from which we derive conclusions about governance arrangements. Thus the paper outlines a simple framework within which to think about the political economy of growth that can be summed up in five points: good government, with secure political conditions; credible macroeconomic stability; savings and investment high enough to sustain adequate growth; openness to the world economy; and the discipline of external engagement. It then argues that the growth model needs to be underpinned by suitable governance arrangements, and suggests that good governance has two main elements, each quite complex in practice, namely: protection of property rights, and accountability of government.
Authored by: Paul Hare
Published in 2007
Rana Hendy - Doha Institute
Mahmoud Mohieldin - World Bank
ERF 25th Annual Conference
Knowledge, Research Networks & Development Policy
10-12 March, 2019
Kuwait City, Kuwait
This paper studies determinants of income inequality using a newly assembled panel of 16 countries over the entire twentieth century. We focus on three groups of income earners: the rich (P99-100), the upper middle class (P90-99), and the rest of the population (P0-90). The results show that periods of high economic growth disproportionately increases the top percentile
income share at the expense of the rest of the top decile. Financial development is also pro-rich and the outbreak of banking crises is associated with reduced income shares of the rich. Trade openness has no clear distributional impact (if anything openness reduces top shares). Government spending, however, is negative for the upper middle class and positive for the nine lowest deciles but does not seem to affect the rich. Finally, tax
progressivity reduces top income shares and when accounting for real dynamic effects the impact can be important over time.
Version of March 25, 2009. Please check for updates https://www.elsevier.com/
Read more research publications at: https://www.hhs.se/site
Leniency policies and asymmetric punishment are regarded as potentially powerful anticorruption
tools, also in the light of their success in busting price-fixing cartels. It has been
argued, however, that the introduction of these policies in China in 1997 has not helped
fighting corruption. Following up on this view, the Central Committee of the Chinese Communist
Party passed, in November 2015, a reform introducing heavier penalties, but also
restrictions to leniency. Properly designing and correctly evaluating these policies is difficult.
Corruption is only observed if detected, and an increase in convictions is consistent
with both reduced deterrence or improved detection. We map the evolution of the Chinese
anti-corruption legislation, collect data on corruption cases for the period 1986-2010, and
apply a new method to identify deterrence effects from changes in detected cases developed
for cartels by Miller (2009). We document a large and stable fall in corruption cases
starting immediately after the 1997 reform, consistent with a negative effect of the reform
on corruption detection, but under specific assumptions also with increased deterrence. To
resolve this ambiguity, we collect and analyze a random sample of case files from corruption
trials. Results point to a negative effect of the 1997 reform, linked to the increased leniency
also for bribe-takers cooperating after being denounced. This likely enhanced their ability
to retaliate against reporting bribe-givers – chilling detection through whistleblowing – as
predicted by theories on how these programs should (not) be designed.
Economics, like all other sciences, has drawn its own set of generalizations or laws. In the economic world, laws are postulated by eminent economists based on observation and analysis. The behaviour of an economy can be described within the parameters of economic laws. Economic laws are the statements of general tendencies. Some of the laws in economics are Law of Demand, Law of Supply, Law of Diminishing Marginal Utility and Law of Diminishing Returns etc.,
Recent work on the so-called resource curse has focused on the importance of the interaction between institutional quality and resource abundance. The combination of low quality institutions and easily appropriable resources (such as oil and minerals) tend to be particularly bad for economic development. On the other hand, if institutions are good these same resources contribute more to economic growth than other types of natural wealth. While certainly pointing in the right direction this strand of literature leaves some open questions. First, it is vague on the precise channels through which institutional quality operates. Second, the empirical measures of institutions are often composite measures that arguably include measures of institutional outcomes rather than durable “rules of the game”. Using data for the period 1970-2003, this paper study the extent to which combinations of resource-types and constitutional setup determine the degree of appropriative activity in a country. Our results show that parliamentary regimes and majoritarian electoral systems are associated with less (or no) resource curse-effect than are presidential and proportional electoral systems. These effects are particularly strong in countries having much ores, metals and fuels.
By Jesper Roine (with A. Boschini and J. Pettersson), proceedings from "Meeting Global Challenges in Research Cooperation", Uppsala.
Describe the meaning and definition of business environment and its role in business.
Describe the features of globalization and its process.
“Business Environment is a set of conditions of social, legal, economical, political or institutional that is uncontrollable in nature and affects the functioning of organization.”
Politics and Power in International Development - The potential role of Political Economy Analysis
Geert Laporte, Deputy Director, ECDPM
VIDC, Vienna, 30 January 2014
There is general agreement over the need to pay attention to the informal sector because of its importance to employment and poverty issues. There are also an increasing number of programmes aimed at supporting similar informal activities in highly diverse national contexts.
This consensus is backed through the adoption, at the highest level, of policy measures that are meeting with growing acceptance and, sometimes, the active support of social actors, in particular among entrepreneurial and trade union organizations. Such a stand is also based on evidence to the effect that policies to promote the informal sector are viable and profitable, even during economic downswings, and have international financial support. Nevertheless, to the extent that it fails to embrace a shared strategic vision, this is a limited consensus that hinders the eff ectiveness of policies implemented in this area.
While often adequate on an individual basis, they are insufficient and produce limited effects by failing to respond to a more comprehensive approach. The lack of a shared approach is related to the absence of a common definition of the informal sec-tor, which has grown increasingly complex since it was first described in a pioneering ILO report on Kenya in 1972.
Along with the heterogeneous nature of informal economic activities, different perceptions lead to different strategies. These are reviewed in the first section. Too great an emphasis on the regulatory perspective has identified informality with illegality and labour precariousness.
In spite of their ties to informality, however, the two categories are conceptually different. Th e second section is devoted to these subjects and, particularly, to the precariousness of the employment relationship. Lastly, the third section explores strategic options to regulate the informal sector, tracing the features of a different approach to formalizing informal activities, to facilitate their full integration in the modernization process.
For the purpose of this paper, the latter concept is defined as the most dynamic part of the economy operating under a common regulatory framework. Facts and concepts Interpretations and trends The notion of the informal sector was brought forward in a 1972 ILO report on Kenya (ILO, 1972), follow-ing a 1971 paper (Hart, 1973). They highlighted that the problem of employment in less-developed countries is not one of unemployment but rather of employed workers who do not earn enough money to make a living.
They are ‘working poor’. Th is conceptual interpretation was based on their opposition to formality and their lack of access to the market and productive resources. Th is was followed by several contributions (see Tokman, 1978).
Informal Sector, Productivity and Tax CollectionDr Lendy Spires
The informal sector is a prominent characteristic of many developing countries. In recent years, there has been a large body of empirical work that tries to understand what determines the size of the informal.1Nonetheless, we are still far from understanding the relationship between the informal sector and the stage of economic development (La Porta and Shleifer (2008)). Is the informal sector good or bad for development? Some authors have argued that firms operating in the informal sector are less regulated and less taxed than firms in the formal sector, which allows them to operate more efficiently.
This, represents a positive force for development (see Schneider and Enste (2002)). In contrast, other authors have highlighted distortions that might arise in the presence of a large informal sector. For example, Lewis (2004) argues that informality distorts the “natural” competitive process as informal firms enjoy of an “unfair” cost advantage through tax avoidance; Farrell (2004) reports that some informal firms reduce their scale of operation in order to remain undetected by the government, which makes them less efficient; and Levy (2008) states that informality is a drag on the development process because it subsidizes employment in low-productive activities.
In this paper, I study the connection between the informal sector and economic development. I am interested in quantifying the effects on output and productivity of distortions associated with informality. To do this, I develop a general equilibrium model of occupational choice and capital accumulation that includes a tax collection policy with limited enforcement. Individuals have heterogeneous entrepreneurial abilities (as in Lucas (1978)) and each faces a discrete occupational choice: whether to be a formal entrepreneur, an informal entrepreneur or an employee. If formal, the entrepreneur pays taxes, if informal, the entrepreneur faces a probability of being caught that depends positively on the amount of capital hired.
The novelty in this paper is to connect informal sector data for a typical developing country to a general equilibrium model where the consequences of informality can be studied. I calibrate the model using data for Mexico, an economy where 31% of the employees work in informal establishments...
China goes Global: Present Theories and Future DirectionsIlan Alon
Chinese globalization is upon us. But the Chinese companies internationalization, speed of internationalization and mode of entry follow a different pattern from their Western peers. The talk will review the extant literature and theories and suggest new ways to think about and research China’s drive to global markets.
There are diverse ideas about governance around the world, and this paper studies them through the following questions: (a) what does the available evidence tell us about the political and institutional requirements for sustained economic growth? (b) What do we need from the state to secure growth? (c) How do a country’s internal characteristics support or impede its growth? (d) How does the external environment of a country influence its economic growth prospects? These elements are then put together into a model of growth, from which we derive conclusions about governance arrangements. Thus the paper outlines a simple framework within which to think about the political economy of growth that can be summed up in five points: good government, with secure political conditions; credible macroeconomic stability; savings and investment high enough to sustain adequate growth; openness to the world economy; and the discipline of external engagement. It then argues that the growth model needs to be underpinned by suitable governance arrangements, and suggests that good governance has two main elements, each quite complex in practice, namely: protection of property rights, and accountability of government.
Authored by: Paul Hare
Published in 2007
Rana Hendy - Doha Institute
Mahmoud Mohieldin - World Bank
ERF 25th Annual Conference
Knowledge, Research Networks & Development Policy
10-12 March, 2019
Kuwait City, Kuwait
This paper studies determinants of income inequality using a newly assembled panel of 16 countries over the entire twentieth century. We focus on three groups of income earners: the rich (P99-100), the upper middle class (P90-99), and the rest of the population (P0-90). The results show that periods of high economic growth disproportionately increases the top percentile
income share at the expense of the rest of the top decile. Financial development is also pro-rich and the outbreak of banking crises is associated with reduced income shares of the rich. Trade openness has no clear distributional impact (if anything openness reduces top shares). Government spending, however, is negative for the upper middle class and positive for the nine lowest deciles but does not seem to affect the rich. Finally, tax
progressivity reduces top income shares and when accounting for real dynamic effects the impact can be important over time.
Version of March 25, 2009. Please check for updates https://www.elsevier.com/
Read more research publications at: https://www.hhs.se/site
Leniency policies and asymmetric punishment are regarded as potentially powerful anticorruption
tools, also in the light of their success in busting price-fixing cartels. It has been
argued, however, that the introduction of these policies in China in 1997 has not helped
fighting corruption. Following up on this view, the Central Committee of the Chinese Communist
Party passed, in November 2015, a reform introducing heavier penalties, but also
restrictions to leniency. Properly designing and correctly evaluating these policies is difficult.
Corruption is only observed if detected, and an increase in convictions is consistent
with both reduced deterrence or improved detection. We map the evolution of the Chinese
anti-corruption legislation, collect data on corruption cases for the period 1986-2010, and
apply a new method to identify deterrence effects from changes in detected cases developed
for cartels by Miller (2009). We document a large and stable fall in corruption cases
starting immediately after the 1997 reform, consistent with a negative effect of the reform
on corruption detection, but under specific assumptions also with increased deterrence. To
resolve this ambiguity, we collect and analyze a random sample of case files from corruption
trials. Results point to a negative effect of the 1997 reform, linked to the increased leniency
also for bribe-takers cooperating after being denounced. This likely enhanced their ability
to retaliate against reporting bribe-givers – chilling detection through whistleblowing – as
predicted by theories on how these programs should (not) be designed.
Economics, like all other sciences, has drawn its own set of generalizations or laws. In the economic world, laws are postulated by eminent economists based on observation and analysis. The behaviour of an economy can be described within the parameters of economic laws. Economic laws are the statements of general tendencies. Some of the laws in economics are Law of Demand, Law of Supply, Law of Diminishing Marginal Utility and Law of Diminishing Returns etc.,
Recent work on the so-called resource curse has focused on the importance of the interaction between institutional quality and resource abundance. The combination of low quality institutions and easily appropriable resources (such as oil and minerals) tend to be particularly bad for economic development. On the other hand, if institutions are good these same resources contribute more to economic growth than other types of natural wealth. While certainly pointing in the right direction this strand of literature leaves some open questions. First, it is vague on the precise channels through which institutional quality operates. Second, the empirical measures of institutions are often composite measures that arguably include measures of institutional outcomes rather than durable “rules of the game”. Using data for the period 1970-2003, this paper study the extent to which combinations of resource-types and constitutional setup determine the degree of appropriative activity in a country. Our results show that parliamentary regimes and majoritarian electoral systems are associated with less (or no) resource curse-effect than are presidential and proportional electoral systems. These effects are particularly strong in countries having much ores, metals and fuels.
By Jesper Roine (with A. Boschini and J. Pettersson), proceedings from "Meeting Global Challenges in Research Cooperation", Uppsala.
Describe the meaning and definition of business environment and its role in business.
Describe the features of globalization and its process.
“Business Environment is a set of conditions of social, legal, economical, political or institutional that is uncontrollable in nature and affects the functioning of organization.”
Politics and Power in International Development - The potential role of Political Economy Analysis
Geert Laporte, Deputy Director, ECDPM
VIDC, Vienna, 30 January 2014
There is general agreement over the need to pay attention to the informal sector because of its importance to employment and poverty issues. There are also an increasing number of programmes aimed at supporting similar informal activities in highly diverse national contexts.
This consensus is backed through the adoption, at the highest level, of policy measures that are meeting with growing acceptance and, sometimes, the active support of social actors, in particular among entrepreneurial and trade union organizations. Such a stand is also based on evidence to the effect that policies to promote the informal sector are viable and profitable, even during economic downswings, and have international financial support. Nevertheless, to the extent that it fails to embrace a shared strategic vision, this is a limited consensus that hinders the eff ectiveness of policies implemented in this area.
While often adequate on an individual basis, they are insufficient and produce limited effects by failing to respond to a more comprehensive approach. The lack of a shared approach is related to the absence of a common definition of the informal sec-tor, which has grown increasingly complex since it was first described in a pioneering ILO report on Kenya in 1972.
Along with the heterogeneous nature of informal economic activities, different perceptions lead to different strategies. These are reviewed in the first section. Too great an emphasis on the regulatory perspective has identified informality with illegality and labour precariousness.
In spite of their ties to informality, however, the two categories are conceptually different. Th e second section is devoted to these subjects and, particularly, to the precariousness of the employment relationship. Lastly, the third section explores strategic options to regulate the informal sector, tracing the features of a different approach to formalizing informal activities, to facilitate their full integration in the modernization process.
For the purpose of this paper, the latter concept is defined as the most dynamic part of the economy operating under a common regulatory framework. Facts and concepts Interpretations and trends The notion of the informal sector was brought forward in a 1972 ILO report on Kenya (ILO, 1972), follow-ing a 1971 paper (Hart, 1973). They highlighted that the problem of employment in less-developed countries is not one of unemployment but rather of employed workers who do not earn enough money to make a living.
They are ‘working poor’. Th is conceptual interpretation was based on their opposition to formality and their lack of access to the market and productive resources. Th is was followed by several contributions (see Tokman, 1978).
Informal Sector, Productivity and Tax CollectionDr Lendy Spires
The informal sector is a prominent characteristic of many developing countries. In recent years, there has been a large body of empirical work that tries to understand what determines the size of the informal.1Nonetheless, we are still far from understanding the relationship between the informal sector and the stage of economic development (La Porta and Shleifer (2008)). Is the informal sector good or bad for development? Some authors have argued that firms operating in the informal sector are less regulated and less taxed than firms in the formal sector, which allows them to operate more efficiently.
This, represents a positive force for development (see Schneider and Enste (2002)). In contrast, other authors have highlighted distortions that might arise in the presence of a large informal sector. For example, Lewis (2004) argues that informality distorts the “natural” competitive process as informal firms enjoy of an “unfair” cost advantage through tax avoidance; Farrell (2004) reports that some informal firms reduce their scale of operation in order to remain undetected by the government, which makes them less efficient; and Levy (2008) states that informality is a drag on the development process because it subsidizes employment in low-productive activities.
In this paper, I study the connection between the informal sector and economic development. I am interested in quantifying the effects on output and productivity of distortions associated with informality. To do this, I develop a general equilibrium model of occupational choice and capital accumulation that includes a tax collection policy with limited enforcement. Individuals have heterogeneous entrepreneurial abilities (as in Lucas (1978)) and each faces a discrete occupational choice: whether to be a formal entrepreneur, an informal entrepreneur or an employee. If formal, the entrepreneur pays taxes, if informal, the entrepreneur faces a probability of being caught that depends positively on the amount of capital hired.
The novelty in this paper is to connect informal sector data for a typical developing country to a general equilibrium model where the consequences of informality can be studied. I calibrate the model using data for Mexico, an economy where 31% of the employees work in informal establishments...
Governance for economic and social development in Africa: A special reference...iosrjce
When we say Africa we say poverty, disease and war. We just have the wrong vision about it. Today,
this big forest continent has changed. We don't have the old disastrous rates about war, floods and corruption.
We have improvement in many sectors starting agriculture, natural resources and higher studies.
Africa’s economic prospects have never been brighter. But realizing this potential depends on governments
understanding the private sector and how to support it. This is an extremely important part of the work that the
Africa Governance Initiative does.
This is big evidence about Africa progress. In fact, most African countries have marked recent years, a
significant turning point. Thanks to the role that governance plays in achieving economic and social
performance. This has been achieved through the establishment of effective and accountable institutions,
whether political, economic or social, plays a key role in achieving social and economic performance especially
in the countries of the continent.
This paper will focus on the study of the relevance or otherwise of the implementation of the governance model
in terms of social and economic performance in Africa. This argument is supported by a governance assessment
carried out according to the Ibrahim Index of African Governance.
Running head CORRUPTION 5CorruptionAuthor’s Na.docxtodd271
Running head: CORRUPTION 5
Corruption
Author’s Name
Institutional Affiliation
Corruption
Introduction
Corruption is a significant crisis that kills the power of the constitution. Corruption diminishes the power of the society, economy, and social welfare of the nation. There are minimal chances of growth when corruption prevails. Thus, corruption is one of the biggest challenges facing the USA and is clearly shown by the form of administration. Factors that influence corruption is more, and the effect varies depending on the affected individuals. Typical corruption forms have taken way to inform of mishandling of policies, public funds misuse, and failure to submit to public growth projects. Current reports show that corruption is prevalent in many public sectors including but not limited to bribing of civil servants, misuse of political power, and bureaucrats using public power in the United States for a personal end.
Solution
s
Fighting corruption is a challenging task because individuals involved have either political or economic power this providing ways to manipulate the will of the weak. Regardless the report highlights possible ways to solve the issue of corruption while giving recommendations for implementation. First, it is possible to address corruption by engaging the public. Teaching the public about the effect of corruption would help combat the problem. That is, each person should be encouraged to follow the norms of the society and laws of the land (Olaguer, 2006). Following stands of morality would ensure that each person is watchful of individuals’ behaviors. Also, the public should learn how to spot instances of corruption and take necessary action when necessary. When the public is knowledgeable about the consequences of corruption, it is easier to engage in public participation in fighting the epidemic.
Next, corruption can be eradicated by employing a legal strategy. The process involves engaging the law, the judiciary, press, the police, and the media. By creating certainty and involving the bodies mention, it would be easier to discriminate corruption through justice. The legislature should be encouraged to review the laws and make clear the aspect of corrupt and corruption. Although the process might require more time, it would help understand when an individual is convicted of corruption (Heimann et al., 2008). Furthermore, the public should have the power to report against corrupt individuals in society without fear. While the legislature revises the laws, judicial civil servants would have the ability to sentence people from various social classes irrespective of their impact on society.
Third, decentralization of power is an essential step towards fighting corruption in the USA. This would give way for more transparency in the public sectors, procurement process, and budget process should be passed through mass media.
Best solution
Based on the time required to implement solutions, public participat.
Chapter 2 Theories about Business Government .docxwalterl4
Chapter 2: Theories about Business Government Relations
*
AgendaThree models of government-business relationsThe shareholder modelThe strategic modelThe stakeholder modelCrony Capitalism
*
Why Study Theories?Helpful in understanding complex social realitiesSimplify and organize knowledge by describing patterns and regularitiesOffer different perspectives regarding the interactions between business and government.In practice they define the strategies, operations, and outcomes of businesses
*
Three Models of Business and SocietyBusiness centered approachesShareholder modelStrategic business modelStakeholder modelNote that there are other important “players” in society, in particular, religion
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The Shareholder ModelEmphasizes economic principlesViews business in isolationEmphasizes economic analysis and profit-making for direct or indirect ownersEmphasizes the invisible hand at the micro levelStresses the importance of dynamic marketPromotes non-intervention by government Contends the principle duty of government is to ensure that markets function properly, and to correct market failures
*
Examples of shareholder modelEconomic freedom Index (Heritage Foundation)Rule of lawLimited governmentRegulatory efficiencyOpen markets(Top in 2015: Hong Kong, Singapore, NZ, Australia, Switzerland, Canada, Chile, Estonia, Ireland, and Mauritius)Domestic example: Investment banks
Various critiques of the Shareholder ModelDownplays market imperfections Ignores the need for government vigilance and intervention to protect market failureIn practice, tends to ignore the reality of business’ demands on government and the advantages frequently provided by governmentToo much emphasis on monetary and material gains
*
The Strategic Business ModelEmphasizes the practice of business and successOne element: being highly competitiveMost efficient and effective use of resources; Competing to win through hard work and clevernessPlaying the game wellThe model also emphasizes collaborationJoining other strong competitors, networking, creating goodwill, focusing on comparative strengthsPragmatically, it wants: Moderate taxes and moderate regulations, stable policies, and protections in global competitionTo pragmatically use/exploit governmental resources
*
ExamplesCouncil on Competitiveness
Where America Needs to Be
To drive US productivity, buttress our leadership in world markets, and raise the standard of living for all Americans, the United States must:
• Immediately work to:
– Ensure lower cost, easy access to high quality education and training for all Americans
– Maintain long-term federal investments in science and technology leadership
– Reform and simplify the tax code to stimulate investment and attract global capital to the United States
• Over the next ten years:
– Create at least 21 million jobs
– Reduce unemployment to 5 percent
– Reduce government debt by $4 trillion to ensure America’s long term solvency
.
1 10The Real Economy in the Long RunECO372The.docxhoney725342
1
10
The Real Economy in the Long RunECO/372
The Real Economy in the Long Run
Team "D" has been given the task of determining where outside the United States our company should open a new manufacturing facility. The organization has developed a strategic plan for growth over the next five years, which requires the investment in facilities and equipment as well as labor. The team has been asked to include certain criteria in our efforts in finding the right offshore location for the new facility. The company is concerned with current and projected unemployment over the next five years. As well as what factors aid in determining the country's productivity. There is also concern about how the country's policies influence and regulate behavior concerning productivity growth. An analysis of how the country's financial system adheres to key macroeconomic variables has been asked for. The team was also asked how the organization can reduce risks that they may face in the relocation process. All the following concerns have been researched and explained in the following report.
The factors that determine the productivity for Mexico
Toro Company is known for its strategic plan that calls for an establishment a growth plan that is very aggressive. The plan should always be focused on making investments in the equipment and facilities, labor and rampant growth in the productivity in a span of five years. The best area for the firm's expansion is the fast-growing Mexican market. The growth of economies today depends on how well the inputs are being utilized to the increase recorded in the productivity’s total factor. This statement can always be summarized in the growth equation below (from www.banxico.org.mx).
ΔY = w ΔL + ρΔK + R
Where ‘Y’ is the real gross output, ‘K’ is the actual capital stock, ‘L’ is the labor force that is employed, ‘w’ is the average of the actual wage and ‘ρ’ is the average of the actual gross return rate concerning capital. When talking about the Mexican economy, then one should be aware of the great relationship that exists between the Total Factor Productivity (TFP) and the growth of output within the Mexican economy. It should also be noted that almost half of the cross-country variances in the per capita income and the subsequent growth are also determined by the variations found in the Total Factor Productivity. The following are the sets of KLEMS data provided by the INEGI, a compilation of the factors influencing growth in Mexico between 1991 and 2011.
From the Table A, it can be noted that, during the time when TFP had the highest growth (1.11% between 1996 and 2000), the average growth output that was recorded was also the highest (at 7.1%). On the other hand, when the growth of TFP was at its lowest (-0.93% between 1991 and 2011), the average increase output was interestingly at its lowest point (at 2.09%). Clearly, this shows that the Mexican market also tends to have deep attachment between the output growth ...
Arrangements by which politically connected firms receive economic favors are a common feature around the world, but little is known of the form or effects of influence in business-government relationships. We argue that influence not only brings significant privileges for selected firms, but requires firms to relinquish certain control rights in exchange for subsidies and protection. We show that, under these conditions, political influence can actually harm firm performance. Enterprise surveys from approximately 8,000 firms in 40 developing countries indicate that influential firms benefit from lower administrative and regulatory barriers (including bribe taxes), greater pricing power, and easier access to credit. But these firms also provide politically valuable benefits to incumbents through bloated payrolls and greater tax payments. These firms are also less likely to invest and innovate, and suffer from lower productivity than their non-influential counterparts. Our results highlight a potential channel by which cronyism leads to persistent underdevelopment.
This work tests the robustness of the relationship between human capital and control of corruption
with four econometric methods. We will show in detail the importance of state intervention in its power to
reduce this phenomenon (corruption)
GDG Cloud Southlake #33: Boule & Rebala: Effective AppSec in SDLC using Deplo...James Anderson
Effective Application Security in Software Delivery lifecycle using Deployment Firewall and DBOM
The modern software delivery process (or the CI/CD process) includes many tools, distributed teams, open-source code, and cloud platforms. Constant focus on speed to release software to market, along with the traditional slow and manual security checks has caused gaps in continuous security as an important piece in the software supply chain. Today organizations feel more susceptible to external and internal cyber threats due to the vast attack surface in their applications supply chain and the lack of end-to-end governance and risk management.
The software team must secure its software delivery process to avoid vulnerability and security breaches. This needs to be achieved with existing tool chains and without extensive rework of the delivery processes. This talk will present strategies and techniques for providing visibility into the true risk of the existing vulnerabilities, preventing the introduction of security issues in the software, resolving vulnerabilities in production environments quickly, and capturing the deployment bill of materials (DBOM).
Speakers:
Bob Boule
Robert Boule is a technology enthusiast with PASSION for technology and making things work along with a knack for helping others understand how things work. He comes with around 20 years of solution engineering experience in application security, software continuous delivery, and SaaS platforms. He is known for his dynamic presentations in CI/CD and application security integrated in software delivery lifecycle.
Gopinath Rebala
Gopinath Rebala is the CTO of OpsMx, where he has overall responsibility for the machine learning and data processing architectures for Secure Software Delivery. Gopi also has a strong connection with our customers, leading design and architecture for strategic implementations. Gopi is a frequent speaker and well-known leader in continuous delivery and integrating security into software delivery.
Securing your Kubernetes cluster_ a step-by-step guide to success !KatiaHIMEUR1
Today, after several years of existence, an extremely active community and an ultra-dynamic ecosystem, Kubernetes has established itself as the de facto standard in container orchestration. Thanks to a wide range of managed services, it has never been so easy to set up a ready-to-use Kubernetes cluster.
However, this ease of use means that the subject of security in Kubernetes is often left for later, or even neglected. This exposes companies to significant risks.
In this talk, I'll show you step-by-step how to secure your Kubernetes cluster for greater peace of mind and reliability.
State of ICS and IoT Cyber Threat Landscape Report 2024 previewPrayukth K V
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A theorical analysis of corruption and business
1. A theoretical analysis of corruption and business
By
Rafael Salvador Espinosa Ramírez
Departamento de Economía, Universidad de Guadalajara, CUCEA Periférico Norte 799,
Modulo K3032, Los Belenes, 45100 Zapopan, Jal. Mexico. (rafaelsa@cucea.udg.mx)
and
Raúl Francisco Montalvo Corzo
Escuela de Graduados en Administración y Dirección de Empresas, ITESM, Campus
Guadalajara. Av. General Ramón Corona No. 2514. Col. Nuevo México, CP 45201.
Zapopan, Jal. México. (rmontalvo@itesm.mx)
Contac author: Rafael Salvador Espinosa Ramírez, Departamento de Economía, Centro
Universitario de Ciencias Económico Administrativas, Universidad de Guadalajara,
Periférico Norte 799, Modulo K302, Los Belenes, 45100 Zapopan, Jalisco, México. TEL:
+523‐37703300 ext. 5579, e‐mail: rafaelsa@cucea.udg.mx
2. Abstract
Despite the claimed benefit argued by the implementation of institutional reforms in many
economies, this benefit is not clear as there are some structural inefficiencies that hamper
the benefit of such reforms. We develop a political‐economic model in which a government
in a country try to set the optimal institutional level taking into account the cost of this
policy on FDI and on the benefit of two kind of people: honest and dishonest. We analyze
the policy decision taking into account a political contribution made by a corrupted lobby
group in order to benefit themselves from a lower institutional level. Our results suggest
that the optimal institutional level will depend on the degree of efficiency of the legal
structures against illegal structures.
Keywords: Institutional Reforms, Corruption, Structural Efficiency, Business, Foreign
Direct Investment, Lobby.
3. Rafael Salvador Espinosa Ramirez
BA in Economics Universidad de Guadalajara, Guadalajara, México; MA in Economics
Center for Research and Teaching in Economics (CIDE in spanish) Mexico city, México.
Ph.D. in Economics, University of Essex, United Kingdom. The author was Senior
Research at the Governability International Institute, Barcelona, Spain, and Currently is
Professor and Director of the Center for Social and Economic Research (CISE in spanish)
at the Department of Economics, Universidad de Guadalajara, México. Member of the
National Research System (SNI in spanish) level II.
Raul Francisco Montalvo Corzo
4. 1. Introduction
In the last decade the growing of the institutional economics literature has been rather
amazing.1 It is an interdisciplinary enterprise covering a wide range of issues such that
economics, sociology, law, political science, organization theory, etc. Coase (1937),
Williamson (1975) and North (1990) are the best‐known representatives of this branch in
economics where its goal is to explain what institutions are, how they arise, what propose
they serve, how they change and how ‐if at all‐ they should be reformed (Klein (1999)).
This impressive development has produced many refined opinions of many scholars and
policy makers on the need to set and implement institutional reforms as a way to get a more
substantial and solid economic growth and development. Numerous papers have been
written on the topic.2
All of these studies make a deep analysis and lead to solid findings. However, the problem
why these policies in developing countries just failed or simply are cancelled out, to our
knowledge, has not been investigated well. Moreover, the theoretical studies of this issue is
almost null.
The literature relating institutional reforms and economic performance has been huge.
However, this literature as been focus on developed countries (Klein 1999). The evidence
in Europe and some asian countries present a positive assessment for institutional reforms
not only in economic growth but also in welfare. Supported in the last evidence, many
1
A good survey can be found in Klein (1999).
2
Some examples are the impressive and accurate articles written by Rodrik (2000),
Williamson (1996), Bardhan (1989) and others.
5. scholars provide burning recommendations for institutional reforms in developing
countries.
Despite all, many developing countries seem to delay (or even ignore) the necessary
institutional reforms. Unclear legal framework to run the process, structural inefficiencies
and poor results of the reforms are part of the reasons why developing countries neglect
institutional reforms (Espinosa, 2001).
Based on this fact we develop a partial equilibrium model in which a good is produced by
Foreign Direct Investment (FDI) and consumed in a country in which two kinds of people
live in: honest and dishonest people. FDI is crucial in terms of considering the relevance of
foreign investment on developing economies. Even when literature on FDI is huge, in this
paper I do not intend to analyze FDI but to consider it to model a stylized fact 3. On the
other hand, honest and dishonest people offer a suitable parameter to consider corruption in
our model.
The aim of this theoretical model is to offer an institutional explanation about how
corruption and FDI coexist to determine a proper institutional policy. In this model, the
foreign firms have two production costs: the traditional technical and market cost and the
Fiscal Cost (FC) which is a cost levied by the government in the form of tax. However,
when a firm tries to pay the tax, he faces a corrupted civil service that intends to bribe the
firm in order to get an extra income. We assume that bribe is a common practice that the
firms should consider in its production decision. This bribe comes together with the legal
3
A good surveys can be considered in Caves (1982) and Cantwell (1994).
6. payment of taxes and moreover it is a compensatory option. That is, the firm has to pay its
FC through two structures: an illegal and a legal one.4
It is assumed in his paper that honest people work for the private sector and dishonest work
for the government as civil servants. It is a very strong but convenient assumption for
developing countries where the social perception about the civil service is the one in which,
independently of the existence of honest elements, the corruption is considered a
generalized fact. The opposite perception about the private sector holds5. In other words,
we are considering the "net" perceptions about the honestly of the workers in the private
and public sector.
Honest people working for the private sector receive a transfer from the government
equivalent to the amount of taxes paid by the firm through the legal structure. Dishonest
people receive an income from the bribe paid by the firm6. The government can set an
institutional policy in order to control this flows affecting the corruption of the civil service.
However, the dishonest lobby the government to influence negatively in the setting of a
strict institutional policy. This lobby would depend on the corruption of the political
process (the government’s willingness to accept contributions). Lobbying in this paper
4
It is well known that bribe is widely used in developing countries in order to simplify or
avoid any legal and administrative procedure that can be significantly costly by the legal
way.
5
For more details see Global Corruption Report 2003 in
http://www.globalcorrutionreport.org (october 2003).
6
In the case of the honest income received for working in the private sector we consider
that in the background there is a second commodity in a competitive market produced
under constant returns. This is taken as numeraire. Both goods require only a single factor
of production, let say labour, which is fixed supply under a perfect competitive market and
full employment. On the other hand the income of dishonest people working for the
government it can be considered as a lump‐sum transfer from the government which for
simplicity can be ignored
7. takes place in a country which determines the institutional level. We model lobbying by
following the political contribution approach. That is, the lobbyists make political
contributions to the political party in power, and the amount they contribute is contingent
upon the policy that the government adopts. The political contributions approach, derived
from the common agency problem analysed by Bernheim and Whinston (1986), was first
introduced by Grossman and Helpman (1994) in modeling the political economy of trade
protection with quasi‐linear preferences.7 Dixit, Grossman and Helpman (1997) have
recently generalised the Bernheim‐Whinston framework to allow for general preferences
and therefore variability in marginal utilities of income. Given that our framework is a
partial equilibrium one, we shall follow the original Grossman‐Helpman (1994) approach.
Our aim is to construct a model in which the reasons for a particular institutional level is
found not only in the moral considerations, but also in the way the domestic political
equilibrium is determined taking into account we have two corrupted scenarios highly
related: Corruption of the political process of the government which is exogenous, and
corruption in the civil service which can be affected by the policy decision. Both scenarios
can coexist perfectly8. We shall focus on the determination of the optimal institutional
level.
7
The importance of political process in economic decision making in general and
international policy issues in particular is well recognised (see Dixit (1996)). The particular
aspect of lobbying by interest group has derived a lot of attention from international
economists. The alternative approaches in modeling political equilibrium include the
tariff‐formation approach (Findlay and Wellisz (1982)), the political support function
approach (Hilman (1989)), median voter approach (Mayer (1984)), the campaign
contribution approach (Magee et al (1989)), and the political contribution approach
(Grossman and Helpman, (1994)).
8
If we consider a link between both scenarios or if we assume the corruption of political
process as endogenous, we will obtain similar results as obtained in this paper.
8. The optimal institutional level depend mainly on the cost between the legal and illegal
structures to pay the FC. In this sense, we have two cases of analysis: in the first case we
consider that the fiscal cost for using the illegal structure is larger than the fiscal cost for
using the legal structure. The second case is the opposite.
The model is spelled out in detail in the next section. In section we will set the optimal
institutional level taking into account the level of government political corruption,
efficiency of the structures and the market size. In section we conclude.
2. The Model
Our focus is on a country which hosts identical foreign firms competing in a oligopolistic
industry. These firms produce a homogeneous good which is consumed entirely in the
host country where there are not a domestic producers.9 The marginal cost of each firm is
which is taken to be constant, and therefore equal the average variable cost.10
In order to make the analysis at a tractable level, we assume a linear demand function of the
form
9
The assumption that there are only foreign firms is made for two reasons: first, it models
better a developing feature, and second it is made for simplification. In the case of domestic
production the results are similar to those found in this paper.
10
As we mention before there is a numeraire good in the background which is produced
under competitive conditions and a factor of production whose price is determined in the
competitive sector.
9. where and are positive parameters, is the total demand and is the price of the
good .11 The profit function of each foreign firm is
(1)
Each firm has a Cournot perception: it takes the output of other firms as given while
maximising its profits. Under Cournot‐Nash assumptions from (1) profit maximisation
yields the following result
(2)
where the benefit of each oligpolistic firm is given by (2) in (1) as
(3)
To produce, firms incurs two kinds of costs: the usual technological and market conditions
cost and the legal fiscal cost. That is,
(4)
where is the technological and market conditions cost (which is constant), and is the
Fiscal Cost (FC) which is a levied tax firm should pay to the government for fiscal reasons.
It will be characterized as being a per‐output tax that allows the firm continuing operations
regularly.
11
The utility can be approximated from where is the good under
consideration and is the expenditure on the numeraire good. The use of this
approximation removes a number of theoretical difficulties, including income effects.
10. The FC tax have two components: a legal and an illegal one. The legal component of this
tax will be paid through the government’s legal structure (legal option) and the illegal
component will be paid through an alternative illegal structure (illegal option).
The amount of tax paid through the legal and illegal options would depend on the
efficiency of the government institutional framework. The institutional framework is
understood as the legal environment set by the government in order to regulate the political
and economical activities properly. In this sense, an efficient institutional framework
strengthens the control against illegal activities. An inefficient institutional frameworks
means a weak control over illegal activities12.
The institutional framework is set by the government through a credible political reform of
the legal system. For simplicity we consider that this reform is the result of a political‐legal
process where no direct ex‐ante economic cost is attached to this reform. This process will
produce a parameter which measure the efficiency of the institutional framework and it
will be determined by the government. This parameter will be set between and and will
be called institutional level.
Therefore the two parts of the FC can be written as
(5)
where is the illegal component and is the legal one. and are the per‐unit
structural illegal and legal costs respectively. These two per‐unit costs can be defined as the
degree of efficiency in both structures. Therefore, gets smaller as the institutional
12
Institutions is understood as the rules of the game which all the economic agents agree to
play.
11. level increases while becomes larger. When the institutional level , the policy
instrument of the government, is close to one the institutional framework is more efficient,
when is closer to zero the institutional framework is more inefficient13.
In order to pay this tax, the firms should face a civil service body in charge of collecting
taxes. This civil service is formed by dishonest individuals (labeled ) who benefit from and
support the illegal structure through which the firm pay taxes. On the other hand, there are
honest people (labeled ) working for the private sector. They are homogeneous within
their own type.
Dishonest people work and obtain an income from illegal activities, specifically through the
bribe they charge from the producer once the latter faces tax obligation. On the other hand,
the honest people receive an income through the (legal) tax levied on the producer. It can
be seen as a transfer from the government to the honest people.
Taking into account the considerations mentioned above, we shall specify the utility
function of the honest people, dishonest people and the government: we will use these
functions to determine the optimal institutional level. Assuming quasi‐linear preferences the
utility of the honest people can be defined as
(6)
In expression (6), the first term is the legal payment of tax obligations made by the firm.
This payment, which will be the income of the honest people, is transferred in a lump‐sum
fashion from the government. The second term is the consumers surplus which satisfies:
13
Although the FC depend on , and , when get the extreme values and the
institutional framework will be clearly inefficient and efficient independently of the values
of and .
12. where is the total consumption of , and is its price.
The income of the dishonest people is given by
(7)
Clearly, the source of the income is the bribes taken from the firm14.
The institutional parameter is a policy instrument for the government and is determined
by a political equilibrium. We shall follow closely Dixit et al (1997) in specifying this
equilibrium. The honest people do not lobby the government, but the dishonest make
political contributions to influence the government’s decisions. The political contribution
schedule for the dishonest is denoted by . The host government’s objective function is
given by
(8)
where is a constant parameter. Equation (8) states that the government considers the
total welfare of its nationals (the terms in parenthesis), as well as the total amount of
political contribution that it receives (the first term on the right hand side of (8)).
The political equilibrium is the outcome of a two‐stage game. In stage one of the game, the
dishonest people choose their contribution schedule. The government then sets its
institutional policy in the second stage. A political equilibrium is given by ( ) a political
14
This is not the only income the dishonest could have received. We can consider that the
dishonest people receive a fix wage as a lump‐sum transfer from a lump‐sum tax levied
on the monopolist. In this case, given the lump‐sum characteristic of this income, it does
not affect the result of the model and, for simplicity, we can ignore it.
13. contribution function , such that it maximizes the welfare of all the dishonest people
given the anticipated political optimisation by the government, and ( ) a policy variable,
, that maximises the government’s objective function given by (8), taking the contribution
schedule as given.
Dixit et al (1997) develop a refinement known as truthful equilibria that implement Pareto
efficient outcomes. Stated formally, let be a truthful equilibrium in which
is the equilibrium per‐capita utility level of the dishonest people. Then
is characterised by
(9)
(10)
(11)
where is defined in
(12)
and
(13)
Equation (9) (together with (12)) state that the truthful contribution schedule is set to the
level of compensating variation relative to the equilibrium utility level of the dishonest. The
definition of is the basic concept of the compensating variations. Under a truthful
equilibrium payment function, for any change in , the change in the contribution received
by the government will exactly equal the change in the dishonest welfare, provided that the
14. payment both before and after the change is strictly positive. Equation (10) is self
explanatory: the government takes the utility level of the dishonest as given and chooses the
institutional level so as to maximize its objective function. Equation (11) (together with
(13)) complete the characterization of the truthful equilibrium and tie down the equilibrium
utility level of the dishonest people, which is derived from the premise that the dishonest
would pay the lowest possible contribution to induce the government to pursue the
equilibrium policy given in (10). For this to be the case, the government must be indifferent
between ( ) implementing the equilibrium policy and receiving contributions from the
dishonest, and ( ) implementing a policy by accepting no contribution. Equation (11) states
precisely that.15
According to Grossman and Helpman (1994, pp. 845‐846), in the case of one lobby group
there is no opposition from competing interests, and the lobby group captures all of the
surplus from its political relationship with the government. In this political equilibrium, the
government derive exactly the same utility as they would have achieved by allowing no
contribution. An interesting example with one lobby group can be found in Rama and
Tabellini (1998, p. 1311).
Finally, the government can affect the number of foreign firms by changing the fiscal
policy. It is assumed that the host country is small in the market for FDI. Foreign firm
moves into (out of) the host country if the profit it makes in the host country, , is larger
(smaller) than the reservation profit, , it can make in the rest of the world. Therefore, the
FDI equilibrium provides
15
See Dixit, Grossman and Helpman (1997), pp. 756‐759.
15. (2.9)
From (3), (4), (5) y (14), we have the defined solutions
(15)
(16)
Now we have established the backbone of our analysis.
3. Optimal Institutional Level
Having described the properties of the political equilibrium, in this section we shall analyse
the optimal institutional level and its effect on welfare. From (2) we have
(17)
An increase in the institutional level will increase the number of foreign firms if the
per‐unit structural illegal cost is larger than the per‐unit structural legal cost. In other words,
when the illegal option is more inefficient than the legal one, an increase in the institutional
level, , will reduce the cost of the firms because the tax payment is made in a cheaper way
inside the legal structure. In the opposite way when is larger than , the illegal option is
cheaper and an increase in will reduce the number of incoming foreign firms. The
increase in the institutional control will increase the firm’s costs.
On the other hand, the effect of a change in the institutional level on the optimal output is
null because the FDI adjusts to any output modification. From (15) we have
(18)
16. The first step to determine the optimal is to obtain the first order condition for the
optimisation problem given in (10). From (6), (7), (8), (17) and (18) we obtain implicitly
the following result
(19)
where from this equation we get
(20)
where . On the other hand the second order condition is given by
where concavity holds under the following conditions to consider in the analysis
(21)
Under this conditions we can conclude that .
From (20) we can see that the value of is pretty ambiguous. This value will depend on
the corruption parameter, the efficiency of the legal and illegal options and the market size.
In order to get cut clear results we consider two possible scenarios: first, we assume that the
illegal option is more expensive than the legal option. Second, the illegal option is cheaper
than the legal option.
17. In the first case, the firms face a efficient legal structure to pay taxes. It probably means
legal and technical facilities implemented by the government to all tax payers. Simplicity in
the fiscal structure is argued by most economist in emerging economies in order to solve
the fiscal evasion and corruption. I this case we consider that the illegal structure is
economically and legally more expensive.
In the second case, the firms face a inefficient government structure to pay taxes and the
illegal option becomes a better option to pay taxes. Probably a complicated fiscal system
and/or technical barriers are some of the main reasons why firms may prefer the illegal
way.
3.1 Case 1: illegal cost option larger than the legal cost option ( )
When the illegal option is more expensive than the legal one, by ( ) can see that ( ).
The optimal is ambiguous and would depend on the corruption level and market size
which is defined as and, without loss of generality, it could be measured by
according to (15) and (16).16
In the case in which the cost of bribe is larger than the cost of using the legal structure, an
increase in the institutional level will increase the cost of the illegal option since the firms
will be averse to use a costly and risky option. Under these conditions, there are two
specific effects on government objective function: an indirect effect on FDI given by an
increase in the number of entry firms, and a direct effect given by the change in the
institutional level itself.
16
See Martin (1983, p. 15)
18. In the first one, an increase in the institutional level will increase the income of honest and
dishonest people, the consumer surplus, the producer surplus and the contribution offered
by the dishonest people due to the increase in the number of incoming firms. This is an
indirect effect produced by the positive externality of new firms in the market. However,
there is a direct effect produced by the increase in the institutional level which reduces the
income of dishonest people and consequently the bribe paid by them to the civil service.
This reduction in the bribe is produced by the reduction in the income of the dishonest
people.
The net effect is going to depend on the weight attached to the dishonest payment on the
government objective function. From (20) we can see that the level of corruption and the
market size are the determinant variables. Despite the illegal option is more expensive than
the legal one, a large corruption and market size parameters may produce the lowest
institutional level. When the corruption parameter is small, the government may choose the
highest institutional level. Formally we can say
Intuitively the weight attached to the political contribution made by the dishonest people is
determined by two parameters: the corruption parameter, , which measures the
government´s sensibility of the contribution in the political process17; and the market size
17
This sensibility may change according to many factors like election times and political
scandals.
19. which determines the magnitude of the contribution taking into account the amount of
production.
With a large corruption level, the contribution is a valuable objective for the government.
There are incentives to set a lower institutional level in order to receive a increasing flows
of contributions from the dishonest people. However it may not be enough because the
amount of the contribution is going to depend on the amount of income received by the
dishonest people. When the market size is large enough, the income from bribes is large
too. Therefore, with a large corruption parameter and market size, the government will be
willing to set the lowest institutional level despite the efficient legal structure18.
On the other hand, when the level of corruption is small (or the market is reduced), the
weight of the political contribution is limited and the government is willing to maximize
the benefit of the society in terms of consumer and producer surplus promoting the entry of
firms and the benefit of the honest people. The government consider significantly the
benefit of setting a high institutional level in order to increase the number of incoming
firms. The efficiency of the legal structure will promote the foreign investment and the
government is willing to eradicate any corruption in the civil service. The government will
be more efficient as less corrupted civil service he has, and the way in which he eliminates
the corrupted civil service is setting the highest institutional level.
3.2 Case 2: illegal cost option shorter than the legal cost option ( )
18
In this case the government magnifies the benefit of the political contribution. According
to Magee et. al. (1989) this fact can be presented at the end of the political cycles, at
election or re‐election times, or under any political event which requires economic
contributions.
20. When the illegal option is cheaper than the legal one, from (21) we can see that . The
optimum will be again ambiguous. The value of the institutional level would depend
again not on corruption level and market size.
The fact that the illegal structure is more efficient (or cheaper) than the legal structure is the
more common case in developing economies. Actually the existence of these illegal
structures depend on their ability of being a better option to overcome efficiently
administrative and legal process rather than the legal option which is sometimes a pain in
the way.
The firms take the illegal way in order to avoid all the administrative stuff. They prefer an
efficient bribe rather than an inefficient administrative procedure. According to Klein
(1999), with a social acceptance the illegal structure becomes an institution. The bribe is
then a valuable institution which reduces the social uncertainty produced by an inefficient
legal administrative structure.
Implicitly we are here considering that the origin of the illegal structure comes from the
inefficiency of the legal one. In the previous case, in which the illegal structure was more
inefficient than the legal one, it is implicitly assumed that the origin of the illegal structure
is independent of the legal one. The former is seen as externally imposed19.
From (20) when the level of corruption is relatively large, the institutional level set by the
government will be the lowest possible. However, when the level of corruption is relatively
small, and the market size is sufficiently large, the government will adopt the strictest
institutional level. Formally we can say
19
Some cases like terrorism and drug trafficking can be considered here.
21. Intuitively we suspect that a cheaper illegal option may incentive to the firms to play
against the legal way. In this sense a reduction in the institutional level will reduce the cost
of the firms promoting the increase in the incoming number of firms. A reduction in the
institutional level will produce again two effects on welfare: a direct effect given by the
reduction in the income of the honest people (and the increase in he income of dishonest
people); and an indirect effect given by the increase in FDI and its effect on the income of
honest, dishonest, consumer and producer surplus.
When the corruption parameter, , is sufficiently large, the incentives of the firms to play
the illegal way is magnified. A large corruption level and the efficient illegal structure
produce an institutional policy oriented to the most corrupted environment. The
government is willing to set the lowest institutional level because the value attached to the
political contribution and the benefit of the foreign firms is significantly larger than any
reduction in the income of the honest people. In this case, the optimal policy will maximize
the income of the government, the dishonest people and the benefit of the incoming firms.
A lax institutional policy incentives the entry on new firms and the increase in consumer
surplus.
In this sense, the government consider that the loss produced by the inefficiency of the legal
structure could be widely compensated with the use of the illegal structure in benefit of
FDI, consumer surplus and the political contribution.
22. On the other hand, when the corruption level is relatively small, the effect of the political
contribution on welfare is rather limited. In this case the optimal decision of the
government will depend on the market size. An increase in the institutional level will
reduce FDI and consequently the contribution given by the dishonest people.
However, since the weight of the political contribution is relatively small, the government
consider significantly the benefit of the honest people through a direct effect of an increase
in the institutional level. In this sense, when the market size is sufficiently large, the benefit
of the honest people is larger than the loss in contribution offered by the dishonest people.
The government set a positive institutional policy, despite the inefficiency of the
legal option.
4. Future Research
An interesting way in which this paper is going further is considering that the corruption
level should be endogeneized as here we just assume as a fix variable. Indeed it is a very
interesting problem as the corruption is influenced by the contribution itself. More
contribution imply more corruption level without any other incentive to reduce it.
On the other hand, the process in which the government may interact with the dishonest
people is not defined as much as desired. The interaction between a central government and
a corrupt bureaucracy is a central problem in defining public policy. Unequivocally this
interaction will define a different equilibriums subject not only to benefit of corruption and
contribution, but to loyal filters (attending to George Akerlof definition) inside the
government body.
23. Another huge possible extension is testing empirically this model. Of course, the main
problem working with corruption and underground economy is a trustable data. Even when
the main motivation of this paper is modeling an stylized fact generally in developing
economies, it is rather difficult to produce some interesting result from a data that is limited
mainly by institutional restrictions. Suitable approximations are always welcome but they
lack of "first hand" properties of data.
5. Conclusions
In spite of the effort to set a proper institutional reform, the result has been disappointing.
Misunderstanding the action of the corrupted civil service, political corruption and the
inefficiency of the legal structures on the society’s interests may lead to unsuccessful
institutional policies. The illegal structures may substitute inefficiencies in the legal
structures and the producers can take advantage of that. In terms of economic efficiency the
illegal way can be more profitable and suitable than the legal options.
On the other hand, corruption is more complicated. Historically in many developing
countries bribery for example has not only been a way to compensate the low wage rates,
but also has been inherent to their culture, idiosyncrasies and sometimes religion.
Nowadays corruption is a survival strategy which represent a source of income for people
and government of these countries. For the government it may seem easier to help the
people through maintaining this illegal structures.
On the other hand, the same government may have a political interest in supporting the
illegal structures since these structures provide monetary resources. The political
competition between political parties imply the need to get contributions to secure the
24. continuity in the power. These contributions come from corrupted lobbies and dishonest
people who try to influence the political decision.
This paper attempted to explain why some institutional reforms have failed and why some
others simply have been just cancelled despite the apparent economic and social benefit.
The corruption in the government and the benefit obtained by dishonest people can inhibit
any action led by the honest governors to set a clear and healthy institutional environment.
Bribes are the origin and the result of corruption, the dishonest people make payments to
the party in the power to guarantee the institutional level according to their needs. Likewise
the governments have to consider the benefits of its citizens and a part of the benefits come
from bribes in the illegal structures. The dishonest people lobby the government taking into
account their interests, and the government takes into account both the interest of the honest
and dishonest nationals.
We model lobbying following the common agency problem as developed by Grossman and
Helpman (1994). In this framework the government accepts political contributions from the
lobbyists and the level of contribution depends on the policy that the government pursues.
We analyze two cases: in the first case, the cost for using the legal structure to pay taxes is
smaller than the cost for using the illegal structure. In this case the government will set a
positive institutional level when the level of corruption is sufficiently small. However,
when the level of corruption and the market size are sufficiently large, the government will
overweight the contribution paid by the dishonest people and will set the minimum possible
institutional level.
25. In the second case, when the cost for using the legal structure is larger than the cost of
using the illegal one, the government will tend to set the lowest institutional level. This
effect is reinforced when the corruption level is large. However, when the corruption level
is small, and we have a relatively large market size, the government will consider very
valuable the benefit obtained by the honest people and even above the level of the
contribution paid by the dishonest one. The government will choose a positive institutional
level in order to magnified the benefit of the honest people.
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