Analysing the connectionbetween economic performance and corruption in SIDS

Conference on Economic Vulnerability Index, Foundation for International Studies, Malta. April 23-25, 2007

Philip D. OseiSir Arthur Lewis Institute of Social & Economic Studies,

University of the West Indies, Mona, Jamaica

Outline

Definitional issues Examination of the debate on the linkages

between corruption and economic growth Some evidence from SIDS, including the

Caribbean. Common Institutional Responses and

Outcomes Agenda for further research

Definitions of Corruption

Traditional political science definition: ‘The abuse of public office for private gain’ (preferred definition by institutional publishers: OECD, World Bank & TI, etc).

The abuse of public office for “private economic gain” (Rose-Ackerman, 1999: 75),

“The use of position whether formal office or otherwise, whether public or otherwise for illicit benefit, to secure advantage, whether personally or for ones connections (political, family, business etc.), by definition corruption therefore means a departure from rule governed behaviour” (Munroe 2002: 272-273).

Categories of corruption The political science literature identifies various types

of corruption:- political corruption- bureaucratic or administrative corruption- - petty corruption- systemic corruption

From a public choice perspective, ‘corruption tends to emerge when an organisation or public official has monopoly over a good or service that generates rent, or has discretionary power to decide who will receive it, and is not accountable (Akcay 2006; Klitgaard 1988: 75)

Causes

The causes of corruption are rooted in a country’s social and cultural history, political and economic development, bureaucratic traditions and law enforcement policies and practices.

There are direct and indirect factors that promote corruption: Direct factors include: regulations and authorizations, taxation, spending decisions, provision of goods and services at below market prices and financing of political parties (Tanzi 1998).

Corruption-economic development nexus The Indirect factors include: the quality of

bureaucracy, level of public sector wages, sanctions system, institutional controls, transparency of rules, laws and processes.

The activities listed above together form the political-economic milieu within which both public and private agencies operate in any country.

Traditionally, economic development was theorised as being predicated on capital accumulation and human ingenuity. In recent times, economic development is arguably, dependent on the quality of institutions. Deep institutional weaknesses and malfeasance in administration are said to lead to undesirable economic, social and political outcomes.

Two schools of thought

There are two opposing schools of thought regarding the impact of corruption: Efficiency enhancing and Efficiency reducing schools.

The Efficiency Enhancing School (has advocates such as – Arthur Lewis 1963; Leff 1964; Huntington 1968; Friedrich 1972; Nye 1967). They argue that corruption greases the wheels of business and commerce and facilitates economic growth and investment. Corruption therefore increases efficiency in an economy. All that a business leader has too do is to factor the amount to be paid into his/her investment decisions and is treated as a ‘cost passed through’ to customers.

Efficiency Reducing School

The Efficiency Reducing School (has advocates including McMullan 1961; Krueger 1974; Myrdal 1968; Shleifer and Vishny 1993; Mauro 1995; Tanzi and Davoodi 1997). The consensus seem to be that:

- Corruption tends to increase the size of public investment to the expense of private investment

- Corruption skews the composition of public expenditure away from needed operations maintenance towards expenditure on new equipment

- Corruption skews the composition of public expenditure away from human capital (health and education) relative to other public projects, especially those in which rents can be extracted with relative ease.

Schools cont’d

- Corruption may reduce tax revenues because it compromises government’s ability to collect taxes and tariffs, though the net effect depends on how the nominal tax and other regulatory burdens are chosen by corruption-prone officials.

However, Wei (2001: 16) cautions the reader against too much dependence on regression analysis, in that even though they show correlation, they may not necessarily explain causation.

Methods and measures

Economists have used various tools and are also interested in quantifying how corruption affects investment and economic growth. These methods include: dynamic and static equilibrium models; public choice analytical methods, new institutional theoretic perspectives, etc.

Political scientists have been interested in institutional issues and have also used quantitative and qualitative methods, e.g., surveys, interpretive policy analysis and historical-comparative analysis and constitutional/institutional public administration perspectives.

A critique of methodologies adopted in the study of corruption Quantitative methods (such as the CPI and

Good Governance Indicators) are useful in that they try to estimate the exact effects and levels of corruption. They have so far succeeded in giving snapshots of the incidence and effects of corruption.

Qualitative methods attempt to understand institutions and political culture. Methods such as case studies are valuable in providing in-depth characteristics of governance as a whole.

A critique of methodologies adopted in the study of corruption My argument is that any worthwhile research

enterprise would have to be multi-disciplinary, adopting both qualitative and quantitative methods, in order that it may provide better understanding of levels of corruption and the institutional wherewithal to combat it. Mono-cultural approaches are insufficient.

Small Island States CPI*

www.transparency.org

Country 2002 2003 2004 2005 2006

  Rank Score Rank Score Rank Score Rank Score Rank Score

Barbados no data no data 21 7.3 24 6.9 24 6.7

Cuba no data 43 4.6 62 3.7 59 3.8 66 3.5

Cyprus no data 27 6.1 36 5.4 37 5.7 37 5.6

Dominican Republic no data 70 3.3 87 2.9 85 3.0 99 2.8

Fiji no data no data no data 55 4.0 no data

Grenada no data no data no data no data 66 3.5

Haiti 89 2.2 131 1.5 145 1.5 155 1.8 163 1.8

Indonesia 96 1.9 122 1.9 133 2.0 137 2.2 130 2.4

Jamaica no data 57 3.8 74 3.3 64 3.6 61 3.7

Madagascar 98 1.7 88 2.6 82 3.1 97 2.8 84 3.1

Malta no data no data 25 6.8 25 6.6 28 6.4

Mauritius no data 48 4.4 54 4.1 51 4.2 42 5.1

Papau New Guinea no data 118 2.1 102 2.6 130 2.3 130 2.4

Philippines 77 2.6 92 2.5 102 2.6 117 2.5 121 2.5

Seychelles no data no data 48 4.4 55 4.0 63 3.6

Singapore 5 9.3 5 9.4 5 9.3 5 9.4 5 9.4

Sri Lanka no data 66 3.4 67 3.5 78 3.2 84 3.1

Taiwan 29 5.6 30 5.7 35 5.6 32 5.9 34 5.9

Timor-Leste no data no data no data no data 111 2.6

Trinidad and Tobago 33 4.9 43 4.6 51 4.2 59 3.8 79 3.2

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Economic Growth Rate of Small Island States*

Country 2002 2003 2004 2005 2006

Barbados -1.0 -0.6 2.3 2.5 4.0

Cuba 0.0 1.3 3.0 5.5 7.5

Cyprus 1.7 no data 3.2 3.7 3.7

Dominican Republic 4.2 no data 1.7 6.5 7.2

Fiji 4.1 4.8 3.6 2.0 2.7

Grenada 2.5 2.5 2.5 0.9 no data

Haiti -1.5 no data -3.5 1.5 1.8

Indonesia 3.5 no data 4.9 5.4 5.4

Jamaica 0.4 1.9 1.9 1.5 2.7

Madagascar -11.9 no data 5.5 6.0 5.5

Malta 2.2 0.8 1.0 1.5 1.3

Mauritius 3.8 no data 4.7 3.1 4.3

Papau New Guinea -3.3 0.7 0.9 1.1 3.2

Philippines 4.6 no data 5.9 4.6 5.3

Seychelles 1.5 no data 1.5 -3.0 -1.0

Singapore 2.2 no data 8.1 5.7 7.4

Sri Lanka 3.2 no data 5.2 5.0 6.3

Taiwan 3.5 3.2 6.0 3.8 4.4

Timor-Leste no data -3.0 1.0 1.0 no data

Trinidad and Tobago 2.8 4.5 5.7 no data 12.6

Good Governance Indicators of Small Island States*

www.worldbank.org

Country 2002 2003 2004 2005 2006

Barbados 84.6 84.9 85.9 85.2 no data

Cuba 30 24.8 25.3 21.9 no data

Cyprus 75.4 78.1 76.7 65.4 no data

Dominican Republic 43.9 45.1 42.5 41.9 no data

Fiji 50.5 49.8 47.1 47.5 no data

Grenada 64.5 65.8 68.7 64.9 no data

Haiti 8.4 7.9 4.8 5.7 no data

Indonesia 20.7 22 26.4 27.5 no data

Jamaica 48.9 46.6 49.9 47.8 no data

Madagascar 47.5 49.3 48.1 50.2 no data

Malta 84.8 88.9 87.8 86.6 no data

Mauritius 72.9 72.7 73.5 71 no data

Papau New Guinea 27.1 25.7 26.3 22.8 no data

Philippines 42 40.7 37.6 41.5 no data

Seychelles 58 53.1 50.6 57.3 no data

Singapore 90.7 85.6 87.7 85.9 no data

Sri Lanka 48.4 46.8 43.6 40.4 no data

Taiwan 76.5 75.6 76.6 74.4 no data

Timor-Leste 24.2 25.7 32.8 28.3 no data

Trinidad and Tobago 60.4 60.2 78 57.6 no data

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2002 2003 2004 2005 2006

Barbados

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Grenada

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Trinidad and Tobago

Caribbean- Comparative Growth, CPI score & Good Governance

Are there any conclusions to be drawn? From the literature, there seem to be no

consistency in the perception that corruption negatively affect economic growth.

However, the literature seems to suggest that it is the combination of poor governance, high levels of corruption and high levels of public poverty that could lead to poor economic performance. In-depth case studies of various countries would tend to support this claim, e.g., Haiti shows provides substantial evidence in this regard.

Table: Some corruption scandals in Jamaica

1989The zinc scandal A sum of JA $500 million of hurricane relief from overseas, which

was destined for poor people, was diverted to political favourites. Some relief was sold.

1991 Shell Waiver Scandal The sum of JA $29.5 million was waived on duties to the Shell Company in 1991 and subsequently led to the resignation of then Finance Minister, P. J. Patterson from the Cabinet (Daley, 2002).

1995 The Programme for Resettlement and Integrated Development Enterprise (PRIDE)

Sum of $1.6 billion squandered, project run like a ‘brotherhood (Angus report)

1998 Public Sector Salaries Scandal Some JA $60 million was lost when a number of top government executives were paid allowances above stated guidelines (Daley, 2002).

1990 The Furniture Scandal More than JA $10 million was spent to furnish, among other places, a town house for the then Minister of Foreign Affairs and Foreign Trade (Daley, 2002).

2001 The NetServ/Intech Fund Scandal

Development finance of US$ 380,000 misused with little result. Feeble sanctions response

2003 North Coast Highway Set up to provide a highway from St. Ann to Hanover in 2003. The project was reported to have exceeded its budget by JA $ 3 billion and is still uncompleted.

2001 Kingston Public Hospital Renovations exceeded budget by JA $ 250 million, for which insufficient explanation was given.

2005 National Solid Waste Management scandal

Involved a loss of over J$1billion.

The mother of all corruption? The Trafigura Scandal in Jamaica in 2006. It involved a ‘gift’ of

US $31 million dollars offered to ruling the People’s National Party in October 2006 by Trafigura Baheer, a Dutch oil trading company that had been contracted by the Government of Jamaica to sell crude oil on the open market on behalf of Jamaica and remit the proceeds to the GoJ.

This was an oil deal negotiated in 1978 by the Govts of Nigeria and Jamaica under a Cooperation Agreement). The Jamaican refinery was not established for the qualities of Nigerian crude, hence the decision by GoJ to sell and make use of the proceed for development. In 2006, Jamaica was entitled to 30,000 barrels a day depending on availability. While the PNP officials claim that the money was a gift, Trafigura claimed that the transaction was of a commercial nature. The scandal resulted in the resignation of a Minister. The PM of Jamaica ordered the party to return the money to Trafigura. However, the Opposition Jamaica Labour Party is still pressing for proof of repayment.

Measures

Code of conduct for MinistersMinistry Paper 19/02

The Parliament (Integrity of Members) Act.

The Parliament (Integrity of Members) Act, Amendments Act

Corruption Prevention Act and Commission for the Prevention of Corruption

The Public Bodies Management and Accountability (PBMA) Act

Common preventive methods tried

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Jamaica

The reasons for the ineffectiveness of anti-corruption measures include

the symbolic nature of most policies and institutional responses, which seem to suggest that policies are framed without the politician’s ultimate resolve of making them work successfully and effectively

there has been a lack of adequate financing and resourcing of essential anti-corruption initiatives

institutional dualism and confusion of roles have been prevalent;

the justice administration system is not able to cope with the consequences of successful anti-corruption associated workload;

historically, there has been a general weakness of law enforcement.