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Feature Article of Monday, 18 April 2011

Columnist: Boham & Asamoah

10 Ways In Which Corruption Hampers Economic Development

Corruption is undoubtedly the current hot-button topic in Ghana because of the Anas investigative work on Tema Harbour and “Enemies of the Nation.” Admittedly, the aftermath of this saga has exposed the modus operandi of typical bureaucratic fraudsters, but beyond that it has also shown the insidious nature of corruption by the very people who are supposed to protect the country and more importantly illustrated the evil effects of corruption on Ghana.

As an organization dedicated to the prevention, detection and deterrence of fraud, CAFAC Ghana Ltd must by necessity wade into the ongoing discourse and therefore intends to present a series of articles in the coming days starting with today’s article.

The aim of this article is to describe in very simple terms the evil effects of corruption on a nation such as Ghana. This is not an academic exercise along the lines of a college term paper or a PHD thesis. Neither is it an intellectual effort to impress readers. Instead, our aim is to present a simple easy to understand exposition of how corruption can hamper the economic development of a nation.

As Directors of this new organization our aim is to educate Ghanaians on the damage being done by corruption and gain common ground with strategic partners and well-meaning Ghanaians in our resolve to curb its excesses or eradicate it.

The following are ten simple ways in which corruption negatively impacts Ghana’s economic growth:
1) High prices to consumers
When entrepreneurs and businessmen are required to pay bribes before necessary permits are issued, they tend to view it as a cost of doing business and therefore pass that cost onto consumers (that is you and me) who suffer from high prices. Thus for example when a Ghanaian businessman goes to Tema Harbour to take delivery of goods, all the bribes that are paid may be tacked onto the final price they would charge consumers.

In those instances where businesses refuse to pay “speed money” or grease the palms of bureaucrats, they are subjected to delays and frustration. Again, these frustrations increase the cost of doing business and are passed onto the consumer in the form of higher prices.

2) Reduced investment leads to reduced goods and services and inflation
In extreme cases, the extortion of bribes from entrepreneurs can be seen as a tax which can reduce the incentive to invest. Foreign entrepreneurs for example will shy away from corrupt countries because they claim the cost of doing business is too high when one factors in the bribes. Reduced investment leads to reduced goods and services, a concomitant reduction in gross domestic product and inflation.

Imports is one way to deal with shortfalls in local production but that unfortunately puts pressure on Ghana’s foreign exchange reserves and balance of payments.

3) Reduced commitments from donor agencies
Corruption reduces the effectiveness of aid flows through the diversion of funds from their intended projects. Like many other developing countries Ghana benefits tremendously from aid inflows from donor agencies such as UNICEF, UNESCO, USAID etc. but increasingly these agencies are now concerned that their aid fosters sustainable development and not end up in the pockets of corrupt government officials or finance unproductive public expenditure. The agencies are therefore focused increasingly on issues of good governance and in those cases of poor governance; some donors have scaled back their assistance. Recently The US State Department has indicated that corruption in Ghana is on the ascendency and no serious efforts are being made to stop this danger for society.

4) Reduced foreign direct investment
According to World Bank Development (1997), FDI may still flow to countries in which corruption is systemic but only if bribery is affordable and results are predictable. Corruption can have a negative effect on foreign investment because for most foreign firms corruption is a cost of doing business to be recouped from revenues. Consequently if the costs become too high or unpredictable, they disengage or shun the country altogether. High levels of corruption add to the risk of Ghana being marginalized in the international economy.

5) Reduced tax revenues
Corruption also brings about loss of tax revenue when it takes the form of tax evasion or the improper use of discretionary tax exemptions. The centerpiece of Anas work was to show how the corruption was depriving the Ghana government of much needed tax revenue. There are the familiar stories of tax officers receiving bribes and looking the other way as tax evasion runs rampant.

6) Government’s inability to finance budget expenditures - Deficit Financing
By affecting tax collection, corruption has adverse budgetary consequences. Tax revenue is used to finance budget expenditures, therefore with reduced tax revenues; the revenue section of the national budget is reduced, resulting in adverse budgetary consequences.

Revenue shortfalls lead to budget deficits which have the following deleterious economic effects:
A) Savings that could be productively invested is absorbed by the deficit
B) Borrowings to meet the deficits leaves higher interest obligation for future generations
C) Government’s ability to respond to legitimate economic concerns with social and economic programs becomes hampered leading to reductions in standard of living

7) Inferior public infrastructure
The allocation of public procurement contracts through a corrupt system leads to inferior public infrastructure and services. For example corrupt bureaucrats might allow the use of cheap sub-standard materials in the construction of buildings or bridges.

When corrupt politicians influence the approval of an investment project, the rate of return as calculated by cost benefit analysis ceases to be the criterion for project selection. Consequently, the selected projects are not selected on merit but because of cronyism and patronage. These projects are sometimes never completed because of exorbitant upfront bribes eroding the operating capital. In other instances these projects are completed but never used because they are so poorly built that they will need continuous repairs and their output will be disappointing. In these circumstances, capital spending fails to generate economic growth.

8) Poor maintenance of public infrastructure
Because of corruption, maintenance and repairs always takes a back seat to new projects. For fear of being exposed, corrupt officials prefer to approve new projects rather than spend to revamp the old corrupt projects they approved in the first place. The result is that new projects are constantly being undertaken whilst existing infrastructure is left to deteriorate.

9) Corruption leads to uncertainty in economic transactions
The prevalence of corruption arguably influences the economic environment through the creation of significantly higher levels of risks and uncertainty in economic transactions. Uncertainty is present both in the context of individual economic transactions and in terms of heightened fears about future developments in the broader economic environment. This fear and uncertainty translates to reduced business growth and reduced gross domestic product.

10) Corruption reduces Investment and Economic Growth
Finally empirical research and regression analysis indicates that the amount of corruption is negatively linked to the level of investment and economic growth, that is to say, the more corruption, the less investment and the less economic growth. Analysis further shows that if the corruption index improves by one standard deviation (equal to 2.38 in this case--a standard deviation measures variation from the "normal" index), the investment rate increases by more than 4 percentage points and the annual growth rate of per capita GDP increases by over a half percentage point. In effect, a country that improves its standing on the corruption index from, say, 6 to 8 (recall that 0 is most corrupt, 10 least), will enjoy the benefits of an increase of 4 percentage points of investment, with consequent improvement in employment and economic growth.

From the cumulative force of the above points, it is clear that corruption has a strong potential to steal the wealth of a nation and impoverish its people. The more corrupt a country is the lower its economic growth rate. Whereas the above discussion is not exhaustive it is a powerful enough sample of the salient factors. Our objective is to sensitize the Ghanaian population to the cancer of corruption and in that regard baby steps are enough for now.
Our next article will examine the social impact of corruption.

Hector O. Boham & Sam Rockson Asamoah
Co-founders & Directors
Corruption & Fraud Audit Consortium, Ghana Ltd (CAFAC)

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