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Economic and Social Costs of Corruption

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What is corruption?

Amongst many definitions, one simple way to define corruption is the abuse of entrusted power for private gains by political leaders, or public officials. It is a form of dishonesty or criminal activity undertaken by a person or organization to acquire illicit benefits. Forms of corruption vary, but include bribery, extortion, cronyism, nepotism, parochialism, patronage, influence peddling, graft, and embezzlement. Corruption occurs in both the public and private sectors and media personnel and civil society actors can also be involved in corruption. Actors can be individuals, companies, or organisations such as a political party.

Sometimes the ‘advantage’ gained through corruption may not be ‘undue’ or clear-cut, but is nonetheless an advantage. For example, in some highly corrupt societies people can only secure access to public health or education if they pay bribes. In this example, the bribe-giver’s ‘benefit’ is merely his or her rightful due but without the bribe the public can’t exercise that right.  The brib-takers receive an advantage for carrying out functions that are anyway their duty.  School admission is a clear example in Sri Lankan context where, those who can afford to pay have an advantage over others to get admissions in few popular schools in the country. Here the bribe takers actions prevent the rightful students admitting to the nearest schools.

Types of Corruption

There are many different types of corruption. One useful way to classify corruption is to consider ‘grand’ and ‘petty’ or ‘administrative’ corruption. Grand corruption typically takes place at the public sphere’s top tiers, and within the highest levels in private businesses. The well- known central Bank Bond Scam is an example of grand corruption. Grand corruptions are the acts by elite persons in the society who either make laws or responsible for implementing rules, policies and executive decisions. It often involves large sums of money. Grand corruption is also often called political corruption, highlighting the direct or indirect involvement of political leaders in such corruption.  Grand corruption can also be acts of large private corporations. One good example is Volkswagen’s violation of emission reductions rules.

Petty or administrative corruption aresmall-scale, everyday corruption at the interface between public institutes and citizens. The petty corruption is the bribery linked to the implementation of existing laws, rules and regulations. For example, public servants deliver services, only if they receive a private payment that is in addition to the institutionalized official price for this service. There are many examples of petty corruption In Sri Lanka.  Bribery paid to get the house construction plans approved, obtain the timber transport permits, get school admissions, get route permit for private bus, get the driver’s license, avoid the delays in pension payments initiation are only few examples of a widespread petty corruption. Usually, modest sums of money change hands in each case. However, when petty corruption is widespread, it can create many inefficiencies, public nuisance and even discourage foreign investments in a country. Even if the payments are modest in perry corruption, poor can be disproportionately affected by petty corruption.

Impact of Corruption on the Economy

Apart from the ethical and moral considerations, why should one be worried about corruption? Generally, ccorruption undermines economic development and threatens state security. It also undermines democratic values. UN member states acknowledged the threat of  corruption to the development process and have included Goal 16 into the 2030 Agenda for Sustainable Development – calling on states to ‘substantially reduce corruption in all their forms.’ While this signifies the importance of reducing corruption, one may still argue that if the corrupt gains are being circulated within the economy, it may not affect economic growth in a country and it will only have distributional implications. Most often the corrupt gains may be circulating within the economy in petty corruption but in grand corruption, very often, ill gained money flows out of the economy. There are proven cases such as Ferdinand Marcos in Philippines and many claim about Sri Lankan politicians syphoning ill gained money to Dubai, Seashells and Uganda. Following are some economic and social impacts of corruption.

Public Spending on Wrong Projects

Priority in allocation of government or borrowed funds should be given to high development impact and quick return projects. Politicians distort the order of public spending, disregarding economic principles applied to prioritize projects and allocate budgets for activities that lead to larger bribes. Corrupt politicians’ love for some large infrastructure developments, such as roads, power plants, harbors, etc. are because of opportunities for larger bribes or personal political gains. The Lotus Tower, The Magam Ruhunupura International Convention Centre, the Mattala Rajapaksa International Airport, the Hambantota International Port, the Mahinda Rajapaksa International Cricket Stadium and the myriad of wide highways in the Southern Province are live examples of such worthless projects.

Amongst the many impacts of this practice, countries will experience debt traps such as the one we experience in Sri Lanka now due to inefficient allocation of borrowed funds prioritizing bribes and other political considerations, not the timeliness and the magnitude of the benefits. Such projects do not generate benefits or generate benefit at a slow rate. Thus, the tax revenue attributed to these projects is not sufficient to repay the loans.  Moreover, borrowing from more expensive commercial sources to avoid checks and balances of conventional donors like World Bank and Asian Development Bank exacerbate the debt crises. The current debt crisis which eventually led Sri Lanka to suspend the debt repayment is mainly due to borrowing from more expensive commercial sources and corrupt practice of allocation of borrowed resources for slow return or no return projects

Excessive Costs of Infrastructure

Grand corruption leads to higher cost for infrastructure development. It seems that escalated cost of a project allows collusion between contracting companies and politician and top bureaucrats (P&TB) so that contractors gain excess profits even after paying bribes. This is win-win situation for contractors and the P&TB. The Central Highway segment between Rambukkana to Galagedara will illustrate the gravity of corruption and its economic implications. Based on the publicly available data on the per km costs of highways of ADB funded project in 15 countries, average  of the cost of 33 projects was $1.63 million per km with the range of $0.94- 6.96 million.  Some of the low values in the ADB project sample are because of two lane roads. The highest cost was recorded from a Sri Lankan Southern Highway Project (STDP) and my comparisons is based on the cost of STDP. Based on the contract value of $1870[1] million, the proposed highway segment will cost $93.5 million per Km. Compared to the STDP’s cost of 6,96 per Km. This road segment costs about 13.4 times.  Even with the lower bid of $1050 million, which was apparently rejected, per km cost is $52.5 per Km. This difference cannot be explained by using higher resettlement cost or any technical reason like elevated highway and tunnels. Only logical reason is corruption.

Poor Quality Infrastructure

Higher costs of infrastructure can also be manifested in terms of poor-quality infrastructures. P&TB   influence competitive bidding process, and contracts are awarded to less qualified companies to receive bribes. Poor quality infrastructure, with huge maintenance cost and frequent repairs is the end result.

Long Delays of Projects

Bidding process is sometimes delayed for years until the P&TB cut a lucrative deal from the contractor. There are reasonable suspicions that the delay in awarding contract for proposed gas fired power plant in Sri Lanka during the Yahapalanaya regime is due to the two topmost politicians favoring two different companies, no one having enough power to override the other. The end result is the delay in constructing the power plant and purchase of power with excessive costs. Sri Lanka was the only country in South Asia which got rid of power cuts.  Now the power cuts are back. The current power cuts are due to this delay plus dollar shortage to import fuel. Power cuts affect every sector in the economy and ramification of this, in terms of Sri Lanka’s appeal for much needed foreign direct investments, tourism, industry and agriculture is enormous.

Good Project May Never Get Implemented

Some development projects with good development impacts are never implemented because of failure to agree on the bribe. Often, this happens when the P&TB request a bribe that is too big given the project costs. Imagine a fish processing project that costs about $ 100 million and requested bribe $50 million for approving it. With this 50% cost escalation, the investing company cannot compete in the international market. The private investor who already spent couple of millions of dollars for feasibility studies had no option other than giving up the project. The country loses the opportunity to implement a good investment project that would have generated sizable employment.

Discourage Foreign Investments

Grand corruption discourages or even prevents foreign direct investments (FDI). Simply when the imposed bribes are so large, private companies cannot make a reasonable profit.  Therefore, private investors avoid highly corrupt countries. In this era of global integration together with advanced information technology stories about corruption spread amongst potential investors very fast. Corruption indices of international development agencies such as World Bank conforms such high level of corruption in Sri Lanka.  It is worthwhile to undertake a detail study as to why Sri Lanka failed to attract FDI despite comprehensive incentive package of Board of Investment. One of the obvious reasons for low FDI in Sri Lanka may be that larger bribes unaffordable to investors. Even the conventional donors hesitate to work in highly corrupt countries. Once there was an attempt by JICA to finance a segment of the central highway. JICA wanted to have clause in the loan agreement to the effect that if there are accusations of attempt of corruption in this project, it has the write to suspend or cancel the project. The government didn’t agree on this clause citing that it violate the sovereign rights of the country. The sovereign rights to play out public money !!!

Life Risks

When people cannot get access to healthcare, clean water, and safe places to live without paying bribes, their lives are at risk. Corruption in approving buildings eventually resulted in collapse of them killing many workers, for example in Bangladesh. In Nepal many buildings which had construction permits that certify as earthquake proofed, collapsed during the earthquake in 2015. These are good example as to how the corruption put people’s lives at risk.

Non-financial costs

Corruption has more than just financial and economic costs. It reduces public trust and citizens’ willingness to participate in society. For example, citizens who perceive politicians as corrupt may not bother to vote in elections, get engaged in politics, or pay taxes. Revelation on corruption by the telephone records released by a former member of parliament had a highly significant impact amongst the public in Sri Lanka.  At this extremely difficult time where foreign remittance have been depleted, expatriate workers refuse to send money through official channels, initially due to lucrative black market and after floating the Rupee due to perception on corruption.

Perpetuates Inequality

As found in many countries, poor people suffer disproportionately from corruption. In middle income households, petty bribes to access a government service can cut deep into a family’s disposable income. When access to good quality education is only limited to non-poor, poor peoples’ only chance to improve their lives will be lost.  In countries where corruption is widespread in getting access to health, education and other basic services can have long term negative impacts for economic growth.

Nurture Organized Crimes

Corruption is often linked to organised crimes. It thrives in conflict and war. High levels of corruption can make prolonged conflict more likely, and push post-conflict societies back into war. Wide-spread drug problem continue all over the world mainly because of collusion of law enforcement agency officials and political leaderships with organized crime syndicates.

Promote Environmental Degradation

Corruption can also undermine climate change and other environmental management initiatives, as powerful actors bribe their way out of environmental responsibilities in pursuit of profits. Moreover, corruption undermines the responsible management of natural resource. Depletion of forest resources despite heavy regulatory measures in Sri Lanka is a good example.

The Way Forward

Corruption, which could derail entire development process, is a major challenge for Sri Lanka. In a broader sense, corruption is a characteristic of underdevelopment and many types of corruption disappear when countries develop. Unfortunately, corruption can also be a major constraint for development. Corruption, among other factors, have contributed significantly to the current economic crisis in the country. Sri Lanka faces the urgent need to undertake reforms to curb corruption to put the country to a sustainable path of economic growth.  While there is a need to take vast array of measures to reduce corruption which is well entrenched across all the layers in the Sri Lankan society, some quick and less cumbersome measures can be taken immediately. First, the electoral reforms to conduct presidential, parliament and provincial council elections in one day can reduce demand for grand corruption by politicians substantially. Second, the old, irrelevant and corruption enabling permit systems and regulations can be removed. Third, incentive structure of the SOEs should be studied and performance based incentives should be initially provided to the management. In the long run all the public servants and politicians should be provided with reasonable salaries to ensure decent living. In order to achieve that an efficient public sector with reasonable number of employees, commensurate to the size of the economy, should be maintained. The current practice of producing unemployable graduates from the public universities and dumping them in the public services with low salaries should be stopped. Forth, the positive steps of providing right incentives should be complemented with better law enforcement. Ending the impunity enjoyed by the political leaders is the urgent and immediate need towards this end. Fifth, use of the information technology, which provides many more co-benefits should be given priority to curb corruption particularly in tax collection.

[1] Based on an article in Sunday Times

Prof. Herath Gunatilake
Prof. Herath Gunatilake
Former Director, Environment and Safeguards Division, Asian Development Bank. Philippines. Professor at University of Peradeniya, Senior Economist. Writer


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