The cost of corruption and how to tackle it
Corruption is a constant in society and occurs in all civilizations; however, it has only been in the past 20 years that this phenomenon has begun being seriously explored. It has many different shapes as well as many various effects, both on the economy and society at large. Among the most common causes of corruption are the political and economic environment, professional ethics and morality, and, of course, habits, customs, traditions, and demography. Its effects on the economy (and also on the wider society) are well researched, yet still not completely. Corruption thus inhibits economic growth and affects business operations, employment and investments. It also reduces tax revenue and the effectiveness of various financial assistance programs. The wider society is influenced by a high degree of corruption in terms of lowering trust in the law and the rule of law, education, and consequently the quality of life (access to infrastructure, and health care). There also does not exist an unambiguous answer as to how to deal with corruption. Something that works in one country or in one region will not necessarily be successful in another.
Thus, although corruption has been occurring in society ever since, it has only been given more attention in the recent period—the research on the phenomenon and its negative impacts have become more common after 1995 when countries and international institutions began to be aware of this problem. The attitude of the public toward corruption was, until then, neutral. In 1998, Kaufmann and Gray found that:
Bribery is widespread, especially in developing and transition countries; there are, however, significant differences between and within regions.
Bribery increases transaction costs and creates insecurity in the economy.
Bribery usually leads to ineffective economic results, in the long term impedes foreign and domestic investments, reallocates talents due to income, and distorts sectorial priorities and technology choices (for example, it creates incentives for contracting major defense projects or unnecessary infrastructure projects, but does not encourage investments in rural specialist health clinics or in preventive health care). This pushes companies into the “underground” (outside the formal sector), weaken the state’s ability to increase revenue, and leads to ever-increasing tax rates (as too little tax is taken), which is levied on fewer and fewer taxpayers, consequently diminishing the state’s ability to provide enough public goods, including the rule of law.
Bribery is unfair, as it imposes a regressive tax, which heavily burdens, in particular, commercial and service activities performed by small businesses.
Corruption destroys the legitimacy of the state.
Many other researchers and institutions (the World Bank Institute—WBI, the European Commission, the United Nations, and the EBRD) have investigated corruption and its impact on macroeconomic and microeconomic indicators through various forms of corruption, as well as its connection with local customs and habits, and how it affects the everyday lives of people. Most studies are therefore mainly analyses of the effects of corruption on various economic indicators, such as GDP growth, investments, employment, tax revenues, and foreign investments, or the study of various forms of corruption in relation to politics and the economic environment, the research of its social condition and various manifestations. Dobovšek agrees with the negative effects, i.e. high economic, political and social costs, and adds that corruption is not a weakness of people but of institutions (supervisory and others), as they should be the ones to obstruct the greed and temptation of individuals within them.
When approaching anticorruption at the country level, it is important to put in place institutional systems and incentives to prevent corruption from occurring in the first place. Prevention also calls for credible deterrence, relying on accountability and enforcement mechanisms sufficiently strong to send a message to potential wrongdoers of the potential cost of their misconduct. At the same time, we must recognize that the local political and social context influences both the level of corruption and the reform approaches likely to meet with success or failure. The COVID-19 pandemic has resulted in large-scale emergency spending by governments, sometimes without adhering to regular checks and balances. While speed is understandable, without proper controls it exposes governments to a variety of corruption risks that may undermine the effectiveness of their responses. The strains placed on the public sector in responding to that situation present enormous opportunities for corruption to flourish. Corruption can lead to theft, wastage, and misuse of scarce resources. It can also entrench elite privilege and inequality, undermining institutions of accountability with lasting consequences.
As countries embark on a road to a more resilient and inclusive economy, policymakers face the challenge of reactivating the economy in the context of huge fiscal stress compounded by the accumulation of large amounts of debt. Prudent use of scarce resources in a transparent manner is critical. This presents an opportunity to build a clean, accountable and transparent government by introducing the highest standards of integrity by plugging entry points that allow corruption to flourish. In the context of tight fiscal space over the coming years, it is even more important than before to spend the billions of dollars lost to corruption on reviving the economy and ensuring that the poor and vulnerable groups who suffer disproportionately due to corruption are protected.