Economic Costs of Corruption

by Andres Brant

Corruption is nothing new; it has been present since the dawn of civilization to directly and indirectly subjugate people for personal profit. The most obvious effect of misappropriation of public funds is the lost benefit to society, which leads to inefficient public services or exuberantly expensive services. Until very recently, there was little research on the overarching economic effects of corruption, and people were only familiar with the direct effect of misappropriation of funds. However, the economic costs are far greater than the direct costs, including the opportunity cost of using the funds, loss of investors’ trust in the country, and the loss of faith in the government. I will focus on the Dominican Republic and Latin America as a way to describe all the economics costs of government corruption.

The Dominican Republic’s reputation, like that of most Latin American nations, is marred by the country’s infamous corruption. Most of the men of state have held office with the promise that they have the country’s best intentions in mind, while their true intentions are personal gain. Government positions are filled because of nepotism and favoritism. This is such an abused practice that the government creates new jobs to keep family and friends under the public payroll. For example, the Dominican Republic, a country with a population of 10 million people, currently has about 300 military generals under the government payroll. To understand the absurdity of this number of generals we must view the largest military power, the United States, and see that the United States has only had 224 generals, historically. The appropriation of government funds is also a widespread epidemic in the Dominican Republic, with the most popular method of stealing funds being the over budgeting of public works and keeping the difference. This method of appropriating funds is not exclusive to the Dominican Republic. In Brazil, the state and Odebrecht initially budgeted a train tunnel at $410 million, but once completed the total budget for the public work was $520 million. Despite being prevalent for centuries, corruption has not been attacked until just recently. Corruption has prevailed unopposed because of the permissive nature of the Latin American countries, which is very closely tied to low educational levels (in most cases an effect of corruption).

The masses allow the tie-wearing bandits to steal their country from them, because the same corrupt politicians use the state funds to give away food baskets and rum during Christmas time. They give away the scraps and take advantage of the masses’ ignorance to get away with living undeserved lives of luxury, while the people will give them their liberty for a bottle of rum. In some cases, this technique can be so effective that many of the politicians construct a paternal character for the general public to perceive.

A major ally of the corrupt politicians is the widespread lack of education. This is only perpetuated by their actions, by taking away funds that would be help thousands of young people. In 2010 there was a large public outcry in the Dominican Republic when the media unveiled that the government’s budget for education was not being designated to education. The senate stated that 4% of the state’s budget was going to be allocated to education (4% is still incredibly low), however in 2010 only 2.2% was actually reaching its destination. Even a 4% of the state’s budget is unbelievably low for public education; just imagine the deplorable conditions that students had to endure when only a 2.2% of the state budget was being used for their education.

Their actions also prompt widespread public distrust, which undermine the legitimacy of the law and the state. Corruption then “normalizes” the bribery, crime, and murky business practices. For example, PetroBras, Brazil’s public oil company had to write off about $2 billion in bribery related costs. The practice of bribery is also widespread throughout the region, in most cases public works is often awarded to the highest briber. The practice of demanding bribery to bid for public projects such as roads, bridges, energy plants, etc. deters legitimate investors from even attempting to venture into working with the corrupt country. Two years ago the Dominican government was auctioning off a large plot of land with the purpose that the winning bidder constructs and maintains an electric generating plant. The winning proposal and bid came from Odebrecht, a Brazilian construction company infamous for their bribery and corrupt practices that include money laundering. The widespread corruption hinders the growth of the private economic sector, which can also be seen because of the distrust of government officials and high barriers to enter, which in some cases forms an unnatural monopoly. Again, Odebrecht is the only foreign firm that invests in the development of large-scale public works in the Dominican Republic. Since 2002, Odebrecht has been awarded over 15 public works projects, more than any other foreign company in the Dominican Republic. The lack of diversity of foreign investment creates an opportunity cost of a more balanced economic competition. The lack of economic competition leads to a social loss, because competition leads to lower prices for the goods provided, more transparency, and better goods and services. These social costs go beyond the initial theft of public funds, because the country is missing out on better foreign investment, more competitive markets, and steady economic growth.

To further support the evidence presented that shows that corruption has a wider effect than the direct effect of misappropriating funds, the World Economic Forum estimates that the total cost of corruption amounts to more than 5% of the world’s GDP. The Center for Strategic and International studies conducted a study on 105 developing countries and in 2012 it discovered that corruption cost over $500 billion to these countries annually. This is almost four times the amount developing nations receive in aid from the Official Development Assistance. The IMF also revealed that countries that are perceived to be corrupt receive 5% fewer investments than other countries.

It is quite clear that corruption creates a negative externality on the nations affected by it. It is nothing new, but it is definitely getting old, as more revolts and peaceful protests become more frequent. Perhaps the best way to deal with corruption is to take away the incentive of stealing state funds, since the threat of prison and dirty reputations doesn’t stop corrupt officials. The creation of performance-based bonuses could be a great incentive to start cleaning up the government. This proposed method of “de-incentivizing” corruption also has positive benefits. The program would attract a better-qualified group of people that are not willing to get dirt in their hands. The best way to fight the costs of corruption would be to create a greater incentive for an honest government than a corrupt one. These incentives should also be targeted to improve education, public participation, and transparent press. According to Transparency International, the top ranking nations (Sweden, New Zealand, and Denmark) all have high education levels and high public participation. Once the corrupt countries achieve high levels of education and public participation they would not need an incentive base because an educated and politically active people would keep corruption at bay.

8337ColombiaAME8836PeruAME8836SurinameAME9535MexicoAME9934BoliviaAME10333Dominican RepublicAME10732ArgentinaAME10732EcuadorAME11231HondurasAME11929GuyanaAME12328GuatemalaAME13027NicaraguaAME13027ParaguayAME15817HaitiAME15817VenezuelaAME

This list is from Transparency.org and it ranks the countries by corruption. The higher the number the more corrupt it is. As you can see most of the Latin American Countries are well above the 100 ranking, meaning that the region is plagued by corruption.

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Sources & Additional Reading:

http://www.comprasestatales.org/index.php/inicio/item/1275-odebrecht-la-constructora-brasilena-especializada-en-obras-sobrevaloradas.html

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