Corrupt practices

Capital suggestion

Public-sector corruption is “the abuse of public office for personal economic gain.” To be certain, public-sector corruption and national output are related. At least two recent advances in the measurement of corruption – the Corruption Perception Index (CPI) by Transparency International (TI) and the Worldwide Governance Indicators (WGI) by the World Bank – have established a “strong negative correlation between perceived corruption and the level of output.” In English: as public-sector corruption rises, national output falls (and as corruption goes down national output rises).

What is the true, real cost of corruption to a society? Take the Nandipur Power Project, for instance. On December 3 2007, Dongfang Electric Corporation, the Chinese contractor, confirmed a price of $329 million. For the record, the project was completed (or nearly completed) at a cost of $847 million. The difference: $518 million. A portion of $518 million represents bribes and stolen state resources. And a portion of $518 million represents inefficiencies caused by corruption. But the real cost of corruption to the Pakistani society is actually more than $518 million – the costs associated with the misallocation of resources and distortions of incentives.

At $847 million the electricity generated by Nandipur would come out to be one of the most expensive on the face of the planet. And whatever is produced using the electricity produced by Nandipur – in our textile sector, for example – will not be competitive in the globalised marketplace.

Economic growth largely depends on five factors: ‘investment (both domestic and foreign), competition, entrepreneurship, government efficiency and human capital formation’ (human capital means education and health of the population).

Public-sector corruption has a direct impact on the composition of government expenditures. What that means is that corrupt governments tend to spend more on infrastructure where the potential for commissions and kickbacks is higher than spending on education and health. Over the medium to long-term, this under-investment on education and health means lower rates of economic growth.

Public-sector corruption also means lower tax revenues – and lower tax revenues mean the government being unable to provide public goods like education and health. Public-sector corruption leads to barriers to free trade (in order for the bureaucrats and their crony capitalists to extract higher profits). And this leads to inequity in income distribution whereby the poor are getting poorer, rich richer.

To be sure, corruption dwells in an enabling environment – an absence of punishment and readily available avenues for hiding ill-gotten wealth. There is definitive evidence that “corruption undermines public trust in the government. In extreme cases, it may entail de-legitimisation of the state, leading to severe political and economic instability. The resulting general uncertainty is detrimental to private business’ willingness and ability to commit to a longer-term development strategy, lack of which makes sustainable development hard to achieve.”

A World Bank estimate “puts the total amount of bribes paid in both developing and developed countries at around 3 percent of world GDP” per year. In Pakistan’s case the estimate suggests annual corrupt practices amounting to around $8 billion a year (slightly higher than the annual budgetary allocation for defence).

Note: The above essay is based on research published by the G20 Anti-Corruption Working Group.

The writer is a columnist based in Islamabad.

Email: farrukh15@hotmail.com  Twitter: @saleemfarrukh