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Report No. 179

(d) Effects of corruption

It is an established fact that corruption or corrupt practices have detrimental or corrosive effects especially in developing countries. However, a debate on the effect of corruption on economic development went on for long. One view is that corruption may not be incompatible with development and at times may even encourage it by serving as an effective method of cutting the red tape and clearing projects for development. A bribe can be regarded as a market payment to ensure that resources are allocated to those persons who are most likely to use them efficiently.

The other view maintains that corruption detracts from development because of its undermining competitive processes, focusing on short term profits in place of sustainable and broad based development. Further, as Gunnar Myrdal pleaded, corruption creates incentives for officials to erect 16 additional bureaucratic obstacles with a view to increasing opportunities for more bribes. 1

1. Gunnar Myrdal Asain Drama: An Inquiry into the Poverty of Nations, Vol. 11 , New York Pantheon, 1969

In the opinion of the World Bank, the arguments favouring corruption fail to account for any objective other than short term efficiency. Gunnar Myrdal also said :

"In the long run, expectations of bribery may distort the number and types of contracts placed for bidding, the method used to award contracts, and the speed or efficiency with which public officials do their work in the absence of bribes. It may also delay macroeconomic policy reform. In addition, the gains from such bribery may be inequitably distributed (accessible only to certain firms and public officials).1

1. World Bank: Helping Countries Combat Corruption, 1997, p.14

In the view of World Bank, the effect of bribery in the system as a whole is negative. It can delay reform by diffusing pressure and lead to detrimental evasion of good regulations. Secondly, small firms and poor segments of the society may disproportionately bear the burden of a dysfunctional system having the undesired effect of pushing business into the informal economy.

Moreover, corruption may lead to the divergence of funds from their intended targets and to the financing of unproductive public expenditure. It may result in loss of tax revenue in the form of tax evasion or improper use of discretionary tax exemption. It may also affect allocation of public procurement contracts leading to inferior public infrastructure and services.

The composition of Government expenditure may also be affected by corruption in that corrupt officials may favour expenditures on goods and projects tantamount to maximizing opportunity for their personal benefits.

Thus, it is clear that corruption exacts heavy economic costs, distorts the operation of free markets and slows down economic development.

Besides economic consequences, the rampant corruption tends to undermine the legitimacy of state institutions and governments. When a public official pursues his own interest without regard to the interest attached to his public function, the balance of authority both among government entities and between the State and the civil society is effectively damaged. If the general population assumes that public officials are not bound by the restraints of their public functions, it will be less likely to obey the laws of the society. In such a situation, there is a need to combat corruption effectively because it is one of the root causes of destabilizing the rule of law.

Corruption also casts a negative influence on the efforts to deal with the incidence of poverty. It has become a mechanism by which a neo-nich class has been developed in many developing countries. It can affect morals 18 by the `perversion' or `destruction' of integrity in the discharge of public duties by bribery or favour or the use or existence of corrupt practices. Thus it destroys the ability of institutions and bureaucracies to deliver services that society may expect thereby posing a serious threat to the democratic institutions and the very existence of social order. Corruption in defence purchase and contracts tends to undermine the very security of the State.

Late Mehbub-ul-Haq, the famous economist spoke of two dimensions of corruption. One is the exploitative corruption where the public servant exploits the helpless poor citizen. The other is collusive corruption where the citizen corrupts the public servant by a bribe because he gets financially and beneficially, better benefits. Collusive corruption depends on black money. He pointed out four key characteristics that make corruption more damaging in South Asian countries than in any other parts of the world:

"First, corruption in South Asia occurs up-stream, not down-stream. Corruption at the top distorts fundamental decisions about development priorities, policies and projects. In industrial countries, these core decisions are taken through transparent competition and on merit, even though petty corruption may occur down-stream.

Second, corruption money in South Asia has wings, not wheels. Most of the corrupt gains made in the region are immediately smuggled out 19 to safe havens abroad. Whereas there is some capital flight in other countries as well, a greater proportion goes into investment. In other words, it is more likely that corruption money in the North Asia is used to finance business than to fill foreign accounts.

Third, corruption in South Asia often leads to promotion, not prison. The big fis.- unless they belong to the oppositio.- rarely fry. In contrast, industrialized countries often have a process of accountability where even top leaders are investigated and prosecuted. For instance, former Italian Prime Minister Bettino Craxi forced to live in exile in Tunisia to escape extradition on corruption charges in Rome. The most frustrating aspect of corruption in South Asia is that the corrupt are often too powerful to go through such an honest process of accountability.

Fourth, corruption in South Asia occurs with 515 million people in poverty, not with per capita incomes above twenty thousand dollars. While corruption in rich rapidly growing Countries may be tolerable, though responsible, in poverty stricken South Asia, it is political dynamite when the majority of the population cannot, but to massive human deprivation and even more extreme income meet their basic needs while a few make fortunes through corruption.

Thus corruption 20 in South Asia does not lead to simply Cabinet portfolio shifts or newspaper headlines inequalities. Combating corruption in the region is not just about punishing corrupt politicians and bureaucrats but about saving human lives. There are two dimensions of corruption. One is the exploitative corruption where the public servant exploits the helpless poor citizen. The other is collusive corruption where the citizen corrupts the public servant by a bribe because he gets financially better benefits. Collusive corruption depends on black money."

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