TABLE OF CONTENTS Causes and consequences

of corruption

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Corruption: “oil” or “sand” in the system? Corruption as a problem of governance Some methodological considerations Corruption and political institutions Quality of regulation and economic competition Size of public sector and budgetary expenditure Corruption and economic development Corruption and cultural aspects

TABLE OF CONTENTS Causes and consequences

of corruption

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The negative judgement towards corruption derives primarily from two considerations: first, corruption heavily damages any community suffering from it and, second, corruption has consequences that we may define, broadly speaking, of a moral nature, partly connected with the sense of injustice that corruption generates among honest people and affecting the very fabric of society and political and economic mechanisms. Moral and economic aspects are inter-connected: in fact, while corruption contributes to create a climate of mistrust among citizens (a “moral” consequence of corruption), such mistrust also has a negative impact on the economy, acting as an obstacle to the development of commercial transactions. However, once considered what we have just undelined above, it is useful to consider the two issues separately. In the following, namely, we will focus primarily on the economic consequnces of corruption, while only a final paragraph will be devoted to other considerations.

TABLE OF CONTENTS Causes and consequences

of corruption

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The difficulties encountered in such a research can be attributed to the fact that causes and effects of corruption are rather complex and difficult to identify separately, not to mention a great number of other “noise” factors. For instance, one can think that a high level of corruption would certainly damage economic activities and would therefore naturally be associated with a modest level of income per capita. The opposite, however, can be true as well, as it is precisely the poorest countries, having less resources, that would have the smaller chance to be able to fight corruption effectively. Moreover, it is entirely possible that a third factor, such as a historically inefficient public administration system, causes both high corruption and low income per capita.

TABLE OF CONTENTS Corruption: “oil” or “sand” in the system?

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Nowadays consensus on defining corruption as harmful to society has been reached, but this is not always been the case. The view that cost-benefit analysis may not just be applied to corruption as to investments, and that, in any case, the balance cannot be but negative, has not been established until the 1970s. In fact, a different, and somehow sympathetic, vision had at that time a certain success. Stepping out from utilitarian assumptions, such a philosophy ignored “moral” aspects of corruption and maintained that, should the public governance system be inefficient, corruption can play the role of a “lubricant” and facilitate the movement of the “gears” of bureaucracy. Consider, for example, a country where any citizen, in order to start a new business, must wait for a long time, due to the inefficiency of the responsible public body. The long wait is an apparent obstacle to free economic activity and affects welfare. However, should there be corrupt civil servants that are willing to grant the necessary authorization in a short time, in exchange for a certain sum by the citizens awaiting, the most motivated entrepreneurs, i.e. the ones willing to spend most to obtain the authorization, may begin their business with no delay, thus reducing the social loss caused by the inefficiency of the system.

TABLE OF CONTENTS Corruption: “oil” or “sand” in the system?

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Moreover, the corrupt civil servant would benefit also of an illegal payment and his/her own utility would increase, too. To sum up, we can say that such a situation would have two positive consequences: corruption would enhance the administration efficiency, by introducing an extra incentive: the bribe. In addition, the State could take advantage of such a situation to keep the salaries of civil servants exceptionally low. The above reasoning, though at a first glance perfectly reasonable, is highly questionable. It implicitly assumes, in fact, that the actors in the system do not respond strategically to the situation they live in. This is not true. In more general terms, administrative inefficiency and corruption tend to co-cause each other: the first provides opportunities for the second, and the second offers good grounds for the first one. Moreover, the idea that individuals may pay a bribe to obtain a public service, as if the bribe was the price and such an exchange just another market exchange, is in most cases unrealistic. In fact, first of all, civil servants almost always enjoy a certain degree of discretion in their job and, in exchange for an illegal payment, may very well decide to grant a permit even when conditions for it are uncertain or do not exist at all. Hardly can this be said to enhance efficiency!

TABLE OF CONTENTS Corruption: “oil” or “sand” in the system?

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In addition, in such a way, the bribe becomes not only an illegal tax, but also a way to receive a benefit from an office abuse and, therefore, makes corrupt civil servants try to expand their sphere of discretion and certainly does not contribute to make bureaucracy simpler and more rationally organized. Also such illegal trades take place typically as a one-to-one relationship between the corrupt and the corrupter, taking the form of repeated meetings and mutual exchange of favours. This is very far from market exchange and efficiency. Moreover, as beiong a member of such networks becomes resourceful, “position rents” intervene to worsen the situation. They are, in fact, costly and nourish private interests that are highly conflicting with public ones. He/she should not waste time in cultivating relationships, be it with civil servants or politicians, with the goal of obtaining a favorable treatment when needed! Similarly, it is desirable that the energies of civil servants and politicians are devoted solely to the performance of institutional duties and not to the creation and expansion of a network of relationships that will, ultimately, ensure them illegal gains.

TABLE OF CONTENTS Corruption: “oil” or “sand” in the system?

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Nowadays, economic literature tends to focus first on the individual dimension of corruption, to highlight then its systemic impact. According to this approach, public administrators and politicians decide to be corrupt or not on the basis of the additional utility they may derive from it. This means comparing a definite advantage with uncertain costs, the benefit being the bribe and the costs a very subjective assessment of the conseuqnces of being discovered and convicted. To compare benefits and costs, the concept of “expected value” is often used. The expected value of the cost of corruption is a subjective assessment of the conviction costs(years in prison, loss of job, fine, social disapproval, etc..) multiplied by the probability of actually being convicted, which is a function of the (perceived or actual) quality of the institutions responsible for fighting corruption-related phenomena. This reasoning is questionable, because it is obvious that people are not exactly the same and do not act exactly the same.

TABLE OF CONTENTS Corruption: “oil” or “sand” in the system?

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The reasonment we have been discussing above, however, has a conceptual advantage: it highlights the undeniable significance of the individual interest. More generally, in fact, it is true that the incentive system is of vital importance in the interpretation of and the fight against corruption. In fact, it is possible that an individual inserted in a context where the costs of behaving dishonestly are high chooses not to be corrupt, but may very well decide otherwise in a situation where costs are significantly lower. However, after having acknowledged the explicative power of such a reasonment, we should also underline that adopting such an utilitarian point of view always means to lose sight of a basic fact: that people, in addition to considering their own personal interest, do decide in accordance with their moral values.

TABLE OF CONTENTS Corruption as a problem of governance

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Corruption is always linked to many social, economic and legal factors that we define as governance, i.e. the whole government system, the set of its institutions and their reciprocal relations and actions. Corruption is, then, an element affecting the relations between the different components of governance and anti-corruption policies strictu sensu, having the sole aim to eliminate corrupt practices without investigating governance relationships, are doomed to failure.

TABLE OF CONTENTS Some methodological considerations

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The identification and study of corruption-related phenomena is typically carried out on the basis of international data comparisons. These data relates about different phenomena and different countries, observed in a given year. First of all, there are measures of corruption. Typically, a measure of perceived corruption, as the Corruption Perceived Index, published annually since 1995 by Transparency International (TI-CPI) The nature of the measure itself provides reasons for exerting caution in the interpretation: the link between the perception of the phenomenon and the phenomenon itself, is, in fact, at best indirect. There are a group of variables used as indicators of corruption-related phenomena: pwt_rgdpch real GDP per capita at constant prices. Years pwt_grgdpch growth rate of real GDP per capita at constant prices. undp_gini Gini coefficient on income distribution. ea_tge total government expenditure (% of GDP). ea_gee total government expenditure on education, (% of GDP). ea_fdi foreign direct investments (% of GDP). eiu_iod democracy index. fh_press freedom of the press index. It is the result of the sum of three different measures (laws and regulations, pressure and political control, economic influences). ipu_w_lower percentage of women in parliament (lower house epi_epi environmental performance index. A composite index that depends on 25 different variables an effort has been done and is still needed to translate complex phenomena, such as freedom of the press or the level of “democracy”, into easily readable summary statistics. Simplification is, in this case, the price to be paid to perform a quantitative analysis.

TABLE OF CONTENTS Some methodological considerations

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An effort has been done and is still needed to translate complex phenomena, such as freedom of the press or the level of “democracy”, into easily readable summary statistics. Simplification is, in this case, the price to be paid to perform a quantitative analysis.

TABLE OF CONTENTS Corruption and political institutions

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Several researchers have studied the relationship between corruption and characteristics of political institutions. A democratic system, for example, is expected to offer to its citizens a greater chance to control their politicians and, should these be corrupt, to punish them by mean of people’s favor withdrawal. A free press should also promote transparency and make corrupt practices harder to maintain and esaier to detect. At the same time, very corrupt regimes do have an interest in limiting freedom and transparency, in order to maintain their position rents. We now consider data from a large group of countries. As a measure of the level of corruption, we will always use the TI-CPI.

TABLE OF CONTENTS Corruption and political institutions

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We begin by examining the link that exists between the degree of democratic development and the level of corruption. In general, we can observe that more political rights are associated with lower levels of corruption.

TABLE OF CONTENTS Corruption and political institutions

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In general, we can observe that more political rights are associated with lower levels of corruption. Figure on the left side shows a strong correlation between the level of perceived corruption and a measure of the quality of democracy (Source: Economist Intelligence Unit’s). Figure on the right side shows the index of political rights, a composite index computed by Freedom House, taking values between 1 (high political rights) to 7 (few political rights). Correlation persists and, in both cases, the position of Singapore stands out: the country is not very democratic under the proposed measures, but enjoys a low level of corruption. The perception of corruption seems to be significantly correlated to the measure of political rights by Freedom House. The correlation apperas to be non-linear: the transition from autocratic to moderate democratic regimes, implying a lower level of political control, could be accompanied by an increase in corruption, while from moderate to full democracy a decline is more probable.

TABLE OF CONTENTS Corruption and political institutions

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However, no consensus has been reached yet beacuse there is little doubt about the beneficial effect of a vigorous media system.

TABLE OF CONTENTS Corruption and political institutions

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Corruption seems to be linked also to other, less obvious, institutional features : parliamentary governments that are characterized by a lower level of corruption than presidential ones, due to better control.

The relationship between corruption and the characteristics of the electoral system I srather more complex. In principle, we would expect that, in democratic systems, voters have the actual opportunity to get rid of corrupt politicians by not re-electing them. In reality, however, political competition takes place on many different cultural and social levels, so that voters may rationally choose a corrupt candidate rather than an honest one, based on their distorted perceptions. Moreover, it is often tha case that corrupt politicians are able to devote more resources to their election campaigns than honest ones, so that corrupt candidates end up entertaining customer relationships with their voters. Corruption, in the end, “corrupts” the political process

TABLE OF CONTENTS Corruption and political institutions

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An aspect upon which scholars have bestowed much attention regards the effect of time spent “in charge” by politicians over the level of corruption. It may be assumed that politicians’ ability in government increases as they gain experience but, at the same time, one can say that long-running politicians have had the time to build one-to-one relationships with economic agents that could become a natural basis for corruption Another theme that has been the subject of massive study concerns the relationship between corruption and administrative decentralization. On the one hand, the traditional argument in favour of decentralization maintain that the more we “go local”, the less corruption we should suffer from. A government closest to citizens should be able to better understand their problems and provide appropriate responses; moreover, the physical proximity of the governing body may facilitate the control by the electorate. On the other hand, decentralization may result in particularly severe forms of “capture” of the political process by local elites, who, at the expense of the public welfare, may be able to control the available resources, distributing favours and organizing coalitions to fully exploit position rents. Of course, no one can exclude that these problems occur also at a national level. However, it is at the local level that state control is looser and the risk greater. For example, the media system is typically characterized by a lower degree of competition at the local level and therefore offers a greater chance of capture by local elites

TABLE OF CONTENTS Corruption and political institutions

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Also, when decentralization leads to duplication of functions, it must be considered that talented people are available in a finite number and will be most probably working at a higher, central level, leaving local bodies somehow at a disadvantage. The available empirical works show an unclear relationship between corruption and decentralization. Other aspects that have attracted the attention of researchers regard the role of natural resources. Contrary to our expectations, most of the countries rich in natural resources have a very unequal distribution of income. Often, in fact, the presence of substantial natural resources creates more attribution conflicts than economic benefits. Corruption emerges naturally within the fight where judiciary and political institutions abdicate to their role.

TABLE OF CONTENTS Quality of regulation and economic

competition

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It is undeniable that economic regulation and the level of competition influence the level of corruption. Ill-designed or excessively complex policies may offer opportunities for corruption. Take a sharp increase in traffic tickets, conceived to reduce the number of car accidents. Furthermore, complex rules increase the degree of discretion that can be exercised by those entitled to apply them and therefore facilitate corruption. Again, causal relationships work in both directions, since corruption tend to nourish inefficiencies. Empirically, it has been found that the number of procedures and the time necessary to start an economic activity, not to mention the costs, are positively correlated with the level of corruption In addition, there are reasons to suspect that low levels of economic competition are accompanied by higher levels of corruption. If markets are not contestable, in fact, obtaining a privileged position in them is of some importance and includes creating networks and exploiting relationships. Again, however, reverse causality is not to be excluded. Very corrupt regimes have an interest to keep markets opaque, to get hold of a part of the monopoly profits associated with a reduced level of competition.

TABLE OF CONTENTS Size of public sector and budgetary

expenditure

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Corruption is connected with the allocation of public resources. It has been argued that the lower the weight of the public sector in the economy, the lower the chance to extract position rents and, in particular, income from corruption. The presence of a small public sector, in short, should imply fewer opportunities for corruption. Is not this point of view too simplistic?

TABLE OF CONTENTS Size of public sector and budgetary

expenditure

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TABLE OF CONTENTS Size of public sector and budgetary

expenditure

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The experience of privatizations carried out in the early ’90s in the former Soviet Union is instructive. Furthermore, once privatized, companies are still exposed to various kinds of interference and possible requests for bribes Moreover, data analysis shows that high levels of corruption can be accompanied by relatively small public sectors as well and it can be imagined that countries with more developed public sectors are precisely those with a greater ability of “institution building” and, in general, with a better quality of public governance. Finally, no consensus has been reached on the sign of correlation between size of the public sector and level of corruption. After that, data show irrefutable relationship between level of corruption and military expenditure. Finally, high levels of corruption are accompanied by relatively low expenditure on education. Unlike the military sector, the education sector has relatively few opportunities for corruption, since most of its expenditure is devoted to salaries. These results confirm how corruption distorts priorities in public expenditure with the aim of facilitating the extraction of bribes.

TABLE OF CONTENTS Corruption and economic development

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The relationship between corruption and the level of economic development is particularly strong.

While reasons for arguing that corruption is an impediment to economic development are obvious, it may also be the case that poorer countries have fewer resources to fight against corruption. However, countries that have a more developed economy are not necessarily those whose economy is growing faster and the distinction is of some consequance when analyzing corruption-related phenomena . The data show that, in practice, corruption has a negative impact not only on the level of income but also on its growth. Not all studies, however, are unanimous in this conclusion.

TABLE OF CONTENTS Corruption and cultural aspects

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Though economics tend to focus on individual incentives, other aspects, which we may definel “cultural”, are rather important as well. There is indeed a positive link between certain cultural aspects, such as favor to hierarchy, and the level of corruption. For instance, Protestant countries tend to have a smaller “average level of perceived corruption” than Catholic one, the latter being far more hyerarchical , but some studies do not confirm this result. In addition, “familism” can encourage corruption: strong loyalty to the family/ group prevails on concern for common good . Moreover, countries where women hold positions of power have on average a lower level of corruption In this case, however, it is not easy to draw conclusions. It is possible that women are inherently less inclined to corrupt and be corrupted and it is equally possible that the resultdepends on the presence of a third non-observed factor

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Thank You for your kindly attention

TABLE OF CONTENTS Causes and consequences

of corruption