What are some factors that contribute to corruption

corruption

Dominik H. Enste

To person

is Head of the Competence Field Business Ethics and Behavioral Economics at the Institute of German Economics and Professor of Business Ethics and Institutional Economics at the TH Köln. [email protected]

According to many studies, the consequences of corruption for the economy, the state and society are dramatic. Corruption hinders (partly indirectly) economic development, ensures a poor health and education system, destroys social capital and thus stirs up distrust in the population towards politics and administration. [1]

For many years, Germany has been one of the top 10 countries in the world in which corruption is comparatively little widespread. But if you live in a country where degrees are for sale or given to minions of the university administration or in politics, do you trust the doctor with a university degree when your child is sick, or do you prefer to look for alternative healers? Do you trust the technician with a university degree or do you prefer to connect the electricity yourself? Do you trust the waterworks or do you prefer to dig your own well? When officials or managers in companies are promoted according to proportional representation or origin or through bribery: Do you then trust the companies that, for example, the food was produced correctly? And do you trust the government agencies that are supposed to check food for residues if they are closely associated with the companies? Or do you prefer to grow your own vegetables and keep a cow on the pasture? A few years ago I was able to experience just that during a research stay in Ukraine. This landed in 2020 in the Corruption Perception Index of Transparency International in 117th place out of 180 countries. [2]

The anecdotal outlines of the consequences of a loss of confidence in public institutions are only a result of corruption. In the following, further economic and social consequences of corruption will be shown based on facts. You have to be aware that the data are often based on estimates and surveys, as corruption usually takes place in secret. The causality cannot always be determined empirically either, since many causes and effects of corruption are related to one another in different ways. Nonetheless, science agrees on many things - including the fact that corruption is a very old phenomenon and is still very widespread. [3]

Corruption is widespread

Corruption has been around for at least 3,000 years. It can be found in different forms in the economy, the state, society and churches, and also in all economies and economic systems, regardless of the form of government or government. However, the form and extent of corruption do depend on cultural influences, historical developments, democratic or authoritarian institutions and material prosperity, to name just a few influencing factors. In this respect, there are also clear differences between the countries with regard to the occurrence and thus also the consequences of corruption for the economy, the state and society.

Corruption is also a very topical issue in almost all societies. This also applies to well-developed industrialized countries such as Germany, for example if there are deviations in the planned sequence of vaccinations against the corona virus and mayors or other groups of people are "accidentally" preferred. Corruption is widespread, especially with scarce goods such as the corona vaccine or protective masks at times, but also generally with regard to attractive positions in politics or business. In economics, one speaks of so-called position goods, which cannot be increased at will and for which it is particularly helpful to know someone who can influence the award or sale. The same applies to large orders or one-off transactions as well as to certain industries in general, such as the construction industry, where it is often a question of large order volumes and thus high profits from criminal behavior. In addition, those countries are particularly susceptible to corruption that are resource-rich and have a large resource-extracting economic sector.

Corruption has many faces

Corruption is a colorful term that encompasses a wide variety of forms and circumstances, ranging from immoral, illegitimate behavior to criminal offenses such as bribery, extortion and fraud. What all practices have in common is that a functionary abuses his position and power in order to gain personal advantages for himself or for his family and friends. Criminological research defines corruption as the abuse of a public office, a function in the economy or a political mandate in favor of another, at his own initiative or on his own initiative. The aim is to achieve an advantage for yourself or a third party to the detriment of the general public (in the case of an offender in an official or political position) or a company (in the case of an offender as a functionary in the economy). Corruption at the expense of a third party is possible because contracts are always incomplete and complete transparency is impossible for reasons of transaction costs. These are so-called principal-agent problems: The client (principal) cannot (completely) control the agent, and therefore there is a risk that the agent (e.g. a purchasing manager or the poorly paid officer for building permits) will benefit for himself Concludes deals or takes bribes. Corruption includes, for example, the acceptance of gifts that go beyond what is usually accepted. It is clearer when officials are bribed so that permits are granted faster or at all. Nepotism or the exploitation of relationships ("vitamin B") when filling important positions that are not filled according to qualifications also count as corruption. While the consequences may appear minor in individual cases because nobody seems to be harmed directly, the monetary direct and indirect damage to the entire economy adds up to many billions of euros - in Germany alone.

Company: Monetary damage in Germany

The Federal Criminal Police Office estimates the monetary damage of the uncovered cases from 2015 to 2019 at an annual average of 161 million euros, with monetary damage only being able to be determined in around a fifth of the cases. [5] However, based on a company survey from 2018, the dark field - i.e. undiscovered corruption - is much larger, even if the fight against corruption has improved in recent years. According to their own statements, around a third of companies in Germany have no problems with bribing their competitors. Almost half of the companies fear a loss of turnover of one to ten percent due to corruption. Another 15 percent of the companies put their loss of turnover due to unauthorized gifts or agreements at up to 30 percent. Compared to other areas of white-collar crime, corruption leads - according to estimates by the companies themselves - to an average loss of sales of 6.2 percent. Cartels and unauthorized agreements reduce sales by an estimated 7.1 percent, undeclared work "only" by 4.7 percent. [6]

All 3.3 million companies in Germany achieved a turnover of 6.65 trillion euros in 2017. The loss of sales due to corruption of 6.2 percent then corresponds to a loss of sales of around 412 billion euros. These losses are not synonymous with losses for the entire German economy, as some of the proceeds are still achieved - only with prohibited means or by circumventing tendering rules, for example. These figures make it clear that corruption is a threat even in highly developed industrialized economies. The damage in emerging and developing countries, which are often much more affected by corruption, is correspondingly higher.

Other estimates and analyzes of corruption are based, among other things, on surveys of experts or the population. There, too, it becomes evident that corruption is a threat to economic prosperity and social cohesion. For Germany, auditing companies generally report a positive trend in reducing the number of people affected by corruption, partly because of the stricter compliance regulations. According to this, every fifth company lost business due to corruption in 2015. In 2017, this was only the case for one in ten. At the same time, a good 36 percent of companies stated in 2020 that they were affected by corruption allegations, i.e. that they were accused of corruption. Overall, corruption is one of the five most costly types of white-collar crime. [7]

Less wealth, growth and wellbeing

Numerous empirical studies since the 1990s have shown that countries in which a lot of corruption is measured have lower material prosperity as measured by official GDP. [8] The thesis that corruption is helpful because it can circumvent ineffective regulations is hardly supported today. Their correctness could only be empirically confirmed for a few countries in which corruption was used to circumvent an exceptionally inefficient public administration. [9] The latest study on the connection between corruption and growth, on the other hand, impressively confirms the negative prosperity effect based on data for 175 countries for the years 2012 to 2018. The growth-inhibiting effect of corruption is particularly pronounced in autocracies. [10]

One of the reasons for this effect is that in corrupt societies there is less private and public investment, which in turn lowers GDP. Foreign investors are disadvantaged compared to domestic investors because they are ignorant of the informal rules applicable to corruption in the country. Corruption in tax collection, the issuing of licenses for public infrastructure or the control of environmental regulations also create unpredictable risks and costs that deter foreign investors. Once investments are made, entrepreneurs in a corrupt country may lose their property rights due to a lack of constitutional institutions, because their company is nationalized or they are forced to sell it to a resident. Investors therefore prefer corruption-free countries, as the negative correlation between corruption and direct investment based on the 175 countries shows.

Corruption also creates inefficiencies, which means that services and products are produced more expensively than necessary or in poorer quality. In addition, not only the quantity but also the quality of public investment suffers because, among other things, spending in the social sector and infrastructure is falling. This hinders the sustainable development of a country and the ability of a government to carry out necessary reforms, for example for better regulation or faster bureaucracy. Basic needs of the population, such as access to education or health services, cannot be met as expected. A functioning infrastructure is missing, which in turn is a breeding ground for corruption in order to still obtain these necessary goods - a vicious circle. [11] The dampening effect of corruption can also be seen in alternative welfare indicators, such as general well-being and life satisfaction. Both are significantly less pronounced in countries affected by corruption than in comparatively corruption-free countries. [12]

Lower labor and capital productivity

Corruption also has a negative impact on labor and capital productivity. The scarce resources are diverted into inefficient areas, i.e. less productive activities, through corruption. Orders that promise high bribery fees are preferred to those that are more important to the company or society. It is no longer the most qualified entrepreneur or the one with the best price-performance ratio that receives the contract, but the greediest, boldest or most corrupt. The same applies to applicants who get a job or a managerial position: Those who pay the highest bribes or have the best connections come into play. Public investment suffers from the fact that quality assurance controls are undermined through bribery. Corrupt officials may also slow down their normal working pace in order to make the payment of "acceleration fees" all the more necessary. [13]

Less freedom, less reliability

Not only do people suffer from corruption economically, they also have to accept more restrictions on freedom. [14] Countries with a high degree of economic freedom are significantly less susceptible to bribery. At the same time, these countries are more closely linked with other countries in terms of the movement of goods and services and benefit from globalization. This increases competitive pressure, but at the same time reduces the susceptibility to corruption. In addition, the better the quality of the official regulations and rules, the less corruption can be observed. The improvement of state institutions and regulations is therefore a key measure in the context of development cooperation, so that the aid funds do not disappear in dark channels. Because in countries with high levels of corruption, many economic activities take place in the shadow economy.

More shadow economy
The shadow economy is the area of ​​an economy in which economic activities take place without state control, without tax payments, without compliance with formal laws and regulations. These include, for example, undeclared work or illegal employment of employees or undeclared domestic help. The size of this shadow economy correlates strongly with the level of corruption. The causality is not clear. Some studies show that corrupt authorities and inefficient government structures encourage migration to the underground. If high taxes are added to the bribes without the state providing anything in return in the form of reliable jurisdiction or good infrastructure, the shadow economy with its set of informal rules becomes even more attractive. [15] Corruption thus reduces the activities in the official sector, which are taxed there. The relocation creates a negative cycle of lower tax revenues and poor state services, with the consequence of a further increase in the shadow economy. These relationships can be shown very clearly empirically, even if the causality cannot be clearly proven. On the other hand, the recommendations for economic policy measures are clear: In order to fight corruption and make the official economy more attractive, public institutions must be improved and stabilized ("better regulation").

More inequality
The same applies to the also empirically proven negative relationship between the extent of corruption and the degree of distribution inequality: the greater the corruption, the greater the income differences in a state. A reverse causality is also plausible, according to which inequality promotes corruption. Both point to a vicious circle in poor countries: Poverty, inequality and corruption reinforce each other in the form of a poverty-corruption spiral. [16] The multiple causes for this can be found empirically in low growth due to corruption, unjust tax systems, inefficient social policy, lower equity and a poor supply of public goods. The direct measurement of inequality with the Gini coefficient also correlates with the level of corruption: the more corruption, the greater the inequality. A main reason for this is that the wealthy classes have more opportunities to bribe.

The other negative economic consequences of corruption include its negative impact on the composition and efficiency of government spending, the level of government revenues and the quality of numerous public services such as health care, environmental quality assurance and the quality of the publicly provided infrastructure. With regard to the composition of public expenditure, it has been shown that corruption distorts public expenditure at the expense of education and health expenditure and, at the same time, systematically in favor of military and armaments expenditure. There is also empirical evidence of a negative relationship between corruption and the quality of the public road network and public electricity supply. [17]

Loss of confidence in democracy
The longer people live in a democracy, the more satisfied they are usually with the system.At the same time, their preference for the market economy is also increasing. This connection was also valid for a long time in Eastern Europe: After the fall of the Wall, states like Poland, Romania and Hungary built stable democracies, introduced market-economy reforms and integrated themselves into the EU. But the picture has been changing for a few years. The democracies in some Central Eastern European countries are under pressure, fewer and fewer citizens support the system, and populists are rising. One of the reasons for this is likely to be increasing corruption. Democracies only work if citizens trust the system and its institutions. Corruption destroys this trust. Above all, experiences of corruption in everyday visits to authorities have an impact on approval.

For example, around one in four Romanians regularly pays bribes to government offices and authorities. In Bulgaria it is around 15 percent of the population. Hungary is around 13 percent, Poland 8 percent. For comparison: in Germany less than one percent of citizens have such experiences. So it is not surprising that support for democracy in the Middle Eastern EU countries has been falling continuously for years, by around half a percentage point annually. While around 95 percent of German citizens still support democracy and its institutions, only 60 percent of Hungarians and Lithuanians are still convinced of the democratic system. In Poland and Romania it is only around every second citizen. In Bulgaria and Slovakia the values ​​are even lower. Populists make political capital out of it. [18]

Erosion of social capital
But democracy is not the only thing that suffers. Another consequence of corruption is the erosion of social and trust capital. [19] Trust, ties and norms together form the social capital of a society.

A distinction must be made between three forms of social capital: "Bonding social capital" is more inward-looking and simplifies the coexistence and interactions of people from homogeneous groups. Examples are the family, the circle of friends, interest groups (including the mafia) or ethnic organizations. There is great trust within these groups; However, trust in other groups in the network can suffer from the high level of internal trust and then even promote corruption. "Bridging social capital" describes the connections between heterogeneous groups of people. Bridges are built between the groups, so to speak. This brings people from different social classes together who otherwise would never have come into contact with each other. In this way, social divisions can be avoided or overcome. Finally, "Linking Social Capital" represents the connections between individuals or groups and people in positions of political or financial influence, such as the way in which citizens of a state come into contact with its institutions in order to formulate their interests. This facet of social capital is seen as the strongest indicator of social cohesion. A growth-promoting and corruption-reducing function is therefore ascribed to "bridging", but above all to "linking social capital". With the help of these forms of social capital, on the one hand, control costs can be reduced without causing more corruption. On the other hand, more transactions take place on this generalized basis of trust, so that economic growth and prosperity increase. [20] The causality can also run in the other direction: A lot of trust in fellow human beings and a high level of social capital lead to less corruption. Politically, this means that social capital must be strengthened and corruption must be fought in order to create prosperity - otherwise corruption will lead to flight.

Corruption as a cause of flight

If the material and immaterial needs of the citizens are not met, the acceptance of the institutions and the government decreases. Corruption triggers anger, unrest and ultimately flight. Although the reasons for flight and displacement are diverse, corruption often also plays a central role. Many people flee from countries in which there is no war, but unstable structures shape everyday life and worsen the future prospects of their residents. Weak state structures and corrupt institutions are often the starting point for unrest. The stability of a country certainly depends on numerous factors, such as reliable framework conditions, nonviolence or the rule of law. The connection between flight and corruption can, however, be shown empirically and illustrated with a look at flight statistics: If one compares the number of displaced people with the data of the corruption indices, a clear connection can be seen. The more pronounced the corruption, the more people are fleeing these countries.

Examples of this are those countries from which most people fled in 2020: Syria (6.6 million refugees; 178th place in the corruption ranking of 180 countries), Venezuela (3.7 million; 176th place), South Sudan (2.3 million; 180th place). [21] Although the causes of flight are linked, corruption is one of the central causes. The fight against corruption must therefore be a priority of the international community when it comes to stabilizing countries and avoiding displacement.

To do this, all parties must recognize their role in the process and act accordingly. Developing countries often lack the knowledge to reform their structures, and so the developed countries have a duty to support them in the fight against corruption, for example by focusing development cooperation more specifically on improving state structures. So far, the disbursement of aid payments has often not been linked to conditions such as the fight against corruption. Finally, multinational companies also have an important role to play. By observing international guidelines, they can prevent the spread of corruption and thus help stabilize the local economy. For so far, corruption has not harmed the elites: Corrupt countries are just as well involved in global trade as less corrupt countries. [22]