Ethiopia: The Economics of Corruption

By Eidmon Tesfaye

corruptionCorruption is both a moral problem, in cultural and individual sense, and an important problem in economic and political life. In this sense, corruption is a sociological fact. It is also an economic fact due to its effects on social welfare and development.

Corruption can take place in any transaction that involves a public official. I can be seen as a special case of the principal-agent equation, with the general public as the principal and the public officials as agents.

The World Bank notes that the poor suffer the most from the petty corruption for the provision of public service. A study by the International Monetary Fund (IMF) also shows that an increase of just 0.78pc in corruption reduces the income growth of the poorest 20pc of the people in a country by 7.8pc a year.

In the 2013 Corruption Perception Index (CPI), Ethiopia ranks 111th out of 177 countries. Additionally, in 2011/12, the late Prime Minister Melese Zenawi’s reference about “government thieves” not only shows how corruption roots in the government system, but how the nation is suffering from it.

Economists generally see corruption as part of the problem of rent-seeking approach. It slows economic growth because it distorts incentives and market signals, leading to misallocation of resources, especially human talent, into rent-seeking activities.

Corruption is also seen as an inefficient tax on those who are forced to pay it hence it raises the cost of production. Because corrupt practices are conducted in secrecy and contracts emanating from them are not legally enforceable, corruption increases transactions cost. It may also lead bureaucrats to channel government expenditures into unproductive sectors.

Corruption also reduces the productivity of resources because it degrades the quality of such resources. For example, it can lead to reductions in the quality of education and health care and hence decreases human capital. Corruption increases not only the cost of production but also uncertainty, decreasing investment in both physical and human capital.

In November 2013, the World Economic Forum released its ‘Outlook on the Global Agenda 2014′, in which it ranked widening income disparities as the second greatest worldwide risk in the coming 12 to 18 months. Based on those surveyed, inequality is impacting social stability in many countries and threatening security on a global scale.

Some economic inequality is essential to drive growth and progress, rewarding those with talent, hard-earned skills, and the ambition to innovate and take entrepreneurial risks. However, the extreme levels of wealth concentration occurring today threaten to exclude hundreds of millions of people from realising the benefits of their talents and hard work.

Regarding the impact of corruption on income inequality, several economists argue that corruption increases income inequality through several channels. To the extent that corruption decreases economic growth, which is more likely to increase the income share of the poor than the rich, it increases income inequality and poverty. It also leads to a bias of the tax system in favor of the rich and powerful, thus making the effective tax system regressive, which implies that the burden of the tax system falls disproportionately on the poor.

In African countries, the notional tax system is not regressive. However, corruption allows the rich and powerful to escape their tax obligations, hence the tax burden falls almost exclusively on the poor.

Corruption leads to the concentration of assets among a few wealthy elite. Because earning power depends, to some extent, on resource endowment, the rich are able to use their wealth to further consolidate their economic and political power.

Education in Least Developing Countries (LDCs) is a way out of poverty and the poor also benefit from government social programs, such as healthcare. Corruption decreases the quantity and effectiveness of social programs that benefit the poor and divert these resources to programs that benefit the rich or provide opportunities for rent extraction, such as defense spending.

Even when social programs are not reduced, corruption changes the composition of social spending in such a way as to benefit the rich at the expense of the poor. For example, healthcare expenditures may be tilted toward building the most “modern” hospital that caters only to the rich at the expense of preventive healthcare that benefit the poor. In the same way, education spending could be skewed towards higher education that benefit the rich rather than towards primary and secondary education that benefit the poor.

Some researchers argue that the choice of development strategy influence income inequality as labour intensive development strategy leads to equitable distribution of income while the opposite is true for a capital intensive development strategy. Large subsidies on capital result in a capital intensive development strategy, which increases income inequality.

In African countries, production decisions are highly influenced by an elaborate system of taxes and subsidies. While capital is heavily subsidised, labour is taxed at a high rate with the result that businesses choose capital intensive technologies over labor intensive ones. This policy of subsidising capital is exacerbated by high level of corruption in most African countries. This strategy leads to low demand for labour and low wages, which eventually redistributes income from the poor to the rich since the subsidies are paid with taxes paid by the poor.

Inflation, which is described as continuous increase in the general level of prices, is an important term which we face in the context of the elements that cause corruption and the effects of corruption.

Because of its characteristics, such as reducing the level of real wages and minimizing the purchasing power of money, inflation might entail the income loss of individuals and groups and distortion of income distribution. These people who experience the income loss can appeal to different methods to generate revenue so as to sustain their economic life conditions. In this direction, inflation might cause an increase in corrupt acts, such as bribery.

Besides, continuous and sudden raises in the general level of prices might also result in the increase in the ambiguity of economic life. The ambiguities in economic process are the most important factors in the appearance and spread of corruption.

Conversely, a reduction in public revenues comes into discussion in economies in which corruption is experienced intensively and this guides the governments to use items of income, such as coining money, often. The negative situation that is caused by coining money becomes the experience of living an inflationary process.

Furthermore, coining money will be resorted again for the necessary public incomes as the public incomes are not used effectively in economies in which corrupt acts, such as lobbying and rent-seeking, are seen commonly. Moreover, bribe payments can cause an increase in the general level of prices as an additional cost factor in economies in which corruption is seen.

The most effective method in struggling with corruption is to remove the recipes for it. An action that does not aim at removing the reasons might result in new problems rather than providing solution methods.

Eidmon Tesfaye Has a Master’s Degree in Agricultural Economics & Rural Development. He Can Be Contacted At Eidmondrdae@gmail.com.

Source- .addisfortune

– See more at: http://www.zehabesha.com/ethiopia-economics-corruption/#sthash.cDngfuiX.dpuf

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