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Slide 1 - WORLD ETHICS & TRANSPARENCY FORUM 12-13 February 2007 Kuala Lumpur Session 2“Combating Corruption – Impact of Corruption on Developed and Developing Countries” Speaker : Dato Mohamed Dahan Abdul Latiff (dahanlatiff@gmail.com) Executive Director, GABEM (Gagasan Badan Ekonomi Melayu/Confederation of Malay Economic Associations)
Slide 2 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 2 What is corruption? “Corruption is defined by Transparency International as the abuse of entrusted power for private gain (Transparency International 2004). “Some define it as covering only public positions (for example, Kasper 2006), but it is generally recognised that those with private power can also be guilty of corruption.
Slide 3 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 3 Corruption, simply put, is the misuse of power for private gain. Corruption is an issue in both developing and developed countries. Incentives and opportunities for corruption differ depending on a society’s economic and political institutions. This partly explains why corruption manifests itself differently around the world and why its pervasiveness varies. Corruption has a distinct and direct impact on the development prospects of a nation. From the economic point of view, corruption can lead to poor public choices and the allocation of scarce public resources to uneconomic high profile projects. But the cost of corruption extends well beyond the economic. It touches upon both political and social factors. Impacts of Corruption (UNDP)
Slide 4 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 4 On the political front, corruption fosters an anti-democratic environment characterized by uncertainty, unpredictability and declining moral values and disrespect for constitutional institutions and the law. Socially, the impact of corruption can tear apart the fabric of society. Increased mistrust in the leadership and the regime can lead to instability. Corruption reflects a deficit of democracy, human rights and governance that undermines efforts to achieve the Millennium Development Goals (MDGs) and negatively impacts social and political stability. Impacts of Corruption (UNDP)
Slide 5 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 5 "Corruption hurts the poor disproportionately by diverting funds intended for development, undermining a government's ability to provide basic services, feeding inequality and injustice, and discouraging foreign investment and aid".Kofi Annan, United Nations Secretary-General Impacts of Corruption (UNDP)
Slide 6 - Make Poverty History, Australia and Micah Challenge Australia
Slide 7 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 7 “ Corruption can vary from local officials seeking bribes to provide services (what is generally called petty corruption) right up to the grand corruption of heads of state or corporations diverting large amounts of other countries’ and people’s money into Swiss bank accounts and other private investments. What is corruption?
Slide 8 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 8 What is corruption? “Corruption can be isolated or part of an extensive culture and can occur in rich or poor countries or in the interactions between rich and poor countries. “Examples of corruption include: peacekeepers and aid workers seeking sexual favours to provide protection and services, the payment of bribes to leaders of authoritarian regimes to obtain commercial contracts, the provision of drivers’ licences for a private fee paid to examiners, the diversion of aid funds or other revenue by senior members of government, and secret deals between private interests and government leaders for mutual favours.
Slide 9 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 9 What is corruption? “The specifics of what constitutes corruption vary from country to country – for instance, certain political funding and gift practices may be seen as corrupt in one country but not in another. In recent years, several international agreements have been developed which have served to codify definitions of corruption.
Slide 10 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 10 What are the effects of corruption? “An extensive body of literature describes the negative effects of corruption and seeks to quantify its impact (for example Mauro, 1996, Rose-Ackerman, 1999, Lambsdorff, 2002). “Corruption has been found to: reduce the level of both domestic and foreign investment – due to increased costs and uncertainty of return reduce social cohesion and co-operation and undermine the legitimacy of government increase inequality and result in a transfer of resources from the poor to the rich
Slide 11 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 11 What are the effects of corruption? /cont… result in inappropriate allocation of government finances – to support cronies and to finance areas of higher corrupt return, e.g. capital intensive investments such as large infrastructure and defence expenditure rather than basic social services such as education and health increase the risk and effects of disasters caused by faulty planning and construction and inadequately resourced services reduce the value of infrastructure investments through poor construction and materials
Slide 12 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 12 reduce government effectiveness through patronage increase the costs of goods and services – largely through the payments of bribes divert public funds to powerful individuals increase investment in inappropriate or inefficient technologies and strategies increase the export of scarce capital What are the effects of corruption? /cont…
Slide 13 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 13 reduce the level of external aid support reduce the effectiveness of regulations and standards most hurt the poor and least powerful – who are often powerless to respond and who have to spend a larger proportion of their incomes on extra payments. What are the effects of corruption? /cont…
Slide 14 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 14 “In summary, corruption hurts people, especially the poor, in a host of direct and indirect ways.” What are the effects of corruption? /cont…
Slide 15 - The LebaneseTransparency AssociationThe Impact of Corruption on HumanDevelopment in theArab World A Concept PaperDr. Paul SalemThe Lebanese Transparency AssociationThe Fares FoundationApril 2003
Slide 16 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 16 The Impact of Corruption on HumanDevelopment in the Arab World Human Development is a composite concept developed mainly by the UNDP in a number of reports in the early 1990s. It presented itself as a measure of development of more breadth and relevance to the lives of real people than the pure economic indicators of GDP growth, or GDP per capita growth. The Human Development Index developed as an expression of the new concept and added measures of life expectancy, adult literacy, and educational enrolment ratios, to the traditional measure of GDP per capita (or the similar Purchasing Power Parity, PPP). The new concept emphasized that sustainable development depended on a combination of advances in health, literacy, and education, as well as material economic progress, and it served to guide policy debates in the post-cold war world. Corruption, of course, has been around as a phenomenon—and as a concept—for centuries. It can be loosely defined as the abuse of public office for private gain.
Slide 17 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 17 The Impact of Corruption on HumanDevelopment in the Arab World One might identify three broad categories of corruption: grand corruption, petty corruption, and a more extreme category of outright looting of a country’s resources by high-placed officials. As a major priority of development policy, however, corruption became a central issue only in the 1990s, after the end of the Cold War. Perhaps because the economic argument between centrally-managed economies and market economies seemed to have been settled in favor of the latter model by the collapse of the socialist bloc, attention then shifted to issues relating to governance. Alongside the growing global consensus that emerged in the 1990s in favor of democracy as the preferred form of political management, corruption came more into focus as a serious global problem affecting economic and human development, particularly in the developing world.
Slide 18 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 18 The Impact of Corruption on HumanDevelopment in the Arab World The UNDP, World Bank, IMF, OECD, EU, WTO, USAID and many other international aid agencies identified corruption as a principal hindrance of development and established the objective to reduce corruption as a primary aim of their aid programs. International Civil Society, led by Transparency International and a global network of national anticorruption NGOs, also adopted anti-corruption as one of the main rallying cries of the post-Cold War world. The model that relates human development to corruption has causal arrows pointing in both directions.
Slide 19 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 19 The Impact of Corruption on HumanDevelopment in the Arab World High levels of corruption have a number of effects on slow human development: corruption raises transaction costs and uncertainty in the economy. it skews the policy-making process and results in inefficient and irrational outcomes. it is regressive in that it lays a larger burden on small and medium enterprises who need to set aside a larger share of their time and income to deal with it. it undermines state legitimacy and the rule of law. it leads to wider income disparities because those with influence gain more advantages; and those without, lose out.
Slide 20 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 20 The Impact of Corruption on HumanDevelopment in the Arab World But low levels of human development also have a causal effect on levels of corruption: in poor and developing countries, institutions of oversight, control, and punishment of individuals in power are likely to be weak. High levels of government control, economic monopolies, and arcane regulations render the opportunities and incentives for corruption high. Among middle and low level public servants, very low pay structures provides its own motivation for corruption.
Slide 21 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 21 Weak insurance and social security environments, and inefficient labor markets, provide additional motivation for civil servants to make the most of their current posts. General inefficiency of the public sector creates incentive for citizens to use corruption as a mean to speed up their transactions with the public sector. Populations with primary food, housing, health and educational concerns have pressing immediate concerns and are more likely to develop clientelistic relations with politicians rather than hold them broadly accountable to principles of integrity and transparency. From the above, it is clear that human development and corruption are in a mutually dependent relationship to each other and that work in one area affects the other, and that any general strategy must target both at the same time. The Impact of Corruption on HumanDevelopment in the Arab World
Slide 22 - ASIAN DEVELOPMENT BANK THE COSTS OF CORRUPTION
Slide 23 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 23 ADB REPORT: THE COSTS OF CORRUPTION “Many studies of the cost of corruption in individual cases paint a disturbing picture of resources lost, squandered, or devoted to suboptimal uses: Some estimates calculate that as much as $30 billion in aid for Africa has ended up in foreign bank accounts. This amount is twice the annual gross domestic product (GDP) of Ghana, Kenya, and Uganda combined.11 Over the last 20 years, one East Asian country is estimated to have lost $48 billion due to corruption, surpassing its entire foreign debt of $40.6 billion.12 An internal report of another Asian government found that over the past decade, state assets have fallen by more than $50 billion, primarily because corrupt officials have deliberately undervalued them in trading off big property stakes to private interests or to international investors in return for payoffs.13 In one South Asian country, recent government reports indicate that $50 million daily is misappropriated due to mismanagement and corruption. The Prime Minister stated publicly recently that the majority of bureaucrats and the administrative machinery from top to bottom are corrupt. 14
Slide 24 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 24 ADB REPORT :THE COSTS OF CORRUPTION In one North American city, businesses were able to cut $330 million from an annual waste disposal bill of $1.5 billion by ridding the garbage industry of Mafia domination. A particular problem was the permeation of regulatory bodies by organized crime.15 Studies of the impact of corruption upon government procurement policies in several Asian countries reveal that these governments have paid from 20% to 100% more for goods and services than they would have otherwise.16 Corruption can cost many governments as much as 50% of their tax revenues. When customs officials in a Latin American country were allowed to receive a percentage of what they collected, there was a 60% increase in customs revenues within 1 year.17 Some estimates of the role of corruption in a European country concluded that it has inflated this country's total outstanding government debt by as much as 15% or $200 billion. In one city, anticorruption initiatives have reduced the cost of infrastructure outlays by 35-40%, allowing the city to significantly increase its outlays for the maintenance of schools, roads, street lamps, and social services.18
Slide 25 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 25 Although almost impossible to value accurately, the indirect costs of corruption can often dwarf its direct costs. Scarce resources are squandered on uneconomical projects because of their potential to generate lucrative payoffs, and priority sectors such as education or health suffer disproportionately. Legitimate entrepreneurial activity is hindered or suppressed. Public safety is endangered by substandard products and construction. Capital is redirected toward more transparent and predictable investment sites. Individuals who would not otherwise engage in illicit behavior decide they have no alternative, and intellectual energy is diverted from more productive pursuits to figuring out ways to “get around the system.” In extreme cases, the legitimacy of the public sector itself is called into question, and governments may be confronted with political instability or collapse. ADB REPORT :THE COSTS OF CORRUPTION
Slide 26 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 26 Although corruption is costly, its impact upon development is not uniform. Some countries can tolerate relatively high levels of bribery and graft and continue to maintain respectable rates of economic growth, whereas others cannot. Several factors influence the extent to which corruption serves as a brake upon the process of development. At the most basic level, a state’s natural resource base and the sources of its comparative advantage play a critical role in its ability to attract investment.19 ADB REPORT :THE COSTS OF CORRUPTION
Slide 27 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 27 A second factor is the form in which corruption is practiced. In some countries, corruption is highly routinized. Payoffs are generally known in advance and concentrated at the top in a “one-stop” fashion. Such an approach may reduce transaction costs and add a measure of predictability to investment decisions, making the country inherently more attractive than others where many different officials can demand unspecified and unanticipated payments. Finally, the extent to which money remains in the country and is invested in productive economic activity, or flows abroad into foreign bank accounts, will also have an impact upon a nation’s ability to tolerate relatively high levels of corruption and still enjoy decent rates of economic growth. ADB REPORT :THE COSTS OF CORRUPTION
Slide 28 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 28 In spite of these caveats, the most recent and innovative empirical research demonstrates that—even correcting for variables such as bureaucratic efficiency—countries that tolerate relatively high levels of corruption are unlikely to perform as well economically as they would have otherwise. In a study of over 70 countries during the late 1970s and early 1980s, IMF economist Paolo Mauro found that corruption “is strongly negatively associated with the investment rate, regardless of the amount of red tape.” Mauro’s model indicates that a one standard deviation improvement in the “corruption index” will translate into an increase of 2.9%t of GDP in the investment rate and a 1.3% increase in the annual per capita rate of GDP growth.20 ADB REPORT :THE COSTS OF CORRUPTION
Slide 29 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 29 This analysis is supported by other recent studies. Using data from 39 industrial and developing countries that controlled for income, education, and policy distortion, two World Bank researchers found that countries that were perceived to have relatively low levels of corruption were always able to attract significantly more investment than those perceived to be more prone to corrupt or illicit activity. This result held true for both countries where corruption was highly syndicated and predictable, and countries where it was not.21 Another recent study, which utilized econometric analysis to examine the impact of corruption upon foreign direct investment in East Asia, found that perceptions of corruption had a strong and negative impact upon the flow of foreign investment. According to the study’s findings, East Asia is no different from any other region in this regard.22 ADB REPORT :THE COSTS OF CORRUPTION
Slide 30 - WORLD ETHICS & TRANSPARENCY FORUM 12 & 13 FEB 2007 KUALA LUMPUR 30 Sources UNDP Transparency International Make Poverty History Australia and Micah Challenge Australia Dr. Paul Salem, The Lebanese Transparency Association The Fares Foundation Asian Development Bank – Corruption Report Google: 1.3 million entries on “Impact of Corruption on Countries”