Oby Ezekwesili: Corruption, national development, the Bar, and the Bench – Part 3

Being the text of a paper presented by Obiageli “Oby” Ezekwesili On August 28, 2012 @ the 2012 Nigeria Bar Association Conference, Abuja, Nigeria.

Part 1 of this Series

Part 2 of this Series

Corruption is found all over the world – in both rich and poor countries. However certain distinctions are empirically established in various studies by economists over the last two decades. Measures of corruption and poor governance are correlated with per capita income and with the United Nations Human Development Index (HDI). Richer countries, on average, have less reported corruption and better functioning governments. The same holds true for countries with high levels of the HDI.  But it particularly thrives where institutions are weak and national integrity systems are soft resulting in absence of transparency and accountability the propensity for corruption is higher. The global dimension of corruption is best exemplified by the Demand and Supply theory of corruption which shows that the malignant act takes two to close their illicit deal and often has a supplier from the more advanced economies seeking advantage in international trade and a public official from a poorer nation making the demand. We also know through research that certain sectors are more prone to corruption such as infrastructure, public and private procurement, construction and health care are often affected by corruption. We know as well that there are two types of corruption – Grande and Petty Corruption- and that they become intertwined in a vicious cycle of reinforcement until the entire fabric of a society becomes systemically infested with the disease of graft, pillage and all other manners of criminality.

There is always a tendency for anecdotes to trump empirical evidence in people’s assumptions on corruption. However, it is the wave of rigorous analysis on the malaise that has providedimportant findings to help shape global and national reforms and anti-corruption programs to tackle it more effectively. This is where I stop and hugely celebrate my very dear friend, Professor Johann Lambsdorff of the University of Passau who has devoted his academic career to the study of economics of corruption, (Johann was also the chief architect of our TI Corruption Perception Index). In one of his seminal research, he summarized a number of empirical evidence on the causes and consequences of corruption as follows and I quote him copiously:

“In a recent wave of empirical studies the causes and consequences of corruption have been investigated at large. It can be concluded that corruption clearly goes along with a low GDP, inequality of income, inflation, increased crime, policy distortions and lack of competition. The direction of causality for these indicators, however, is controversial. Corruption may cause these variables but is at the same time likely to be their consequence as well. This suggests that countries can be trapped in a vicious circle where corruption lowers income, increases inequality, inflation, crime, policy distortions and helps monopolies at the expense of competition. These developments in turn escalate corruption. There is a heavy burden placed on instrumental variable technique in trying to disentangle these mutual dependencies. There is strong evidence that corruption lowers a country’s attractiveness to international and domestic investors. This reduces capital accumulation and lowers capital inflows. Also the productivity of capital suffers from corruption. There is equally strong evidence that corruption distorts government expenditure and reduces the quality of a wide variety of government services, such as public investment, health care, tax revenue and environmental control. This corroborates that large welfare losses result from corruption.

With respect to the causes of corruption, not all empirical results were consistent with our expectations. For example, the disciplining and motivating effect of higher official wages was found to be rather limited. Also the impact of colonialism on corruption was ambiguous. Press freedom and the (de facto) independence of the judiciary and prosecutors appeared to be important elements in reducing corruption. Increased corruption also resulted from complicated regulation of market entry and tariffs. Corruption was found to increase with the abundance of natural resources and with the distance to the major trading centers. However, these two latter results provide no direction for reform. The same is largely true of cultural dimensions. In particular, a mentality of accepting hierarchies was found to increase corruption.

But it was observed that some variables are so highly intertwined with corruption that they might just as well be the cause, and not only the result. Just to name a few, GDP per head, inequality, inflation and crime were among those variables. It was also shown that levels of corruption had an impact on flows of bilateral trade and donor assistance. This gave rise to the argument that the large exporting countries and donors in question exhibit a different propensity to pay bribes, and to accept illegitimate payments. This, in turn, suggests that these international actors cause corruption. But, without doubt, there also exist a variety of domestic causes for corruption.”

Some of the economic data on corruption both globally and nationally can be staggering andoften these days become the trigger for credible and results driven action by wise governments orin other cases for forging of coalition of the outraged citizenry organized to demand for action.  In one study by my former institution, the World Bank, a data modeling revealed estimates thatannual worldwide losses due to corruption amount to between one and four thousand billion US dollars or twelve percent of the world’s gross economic output. The Global Financial Integrity estimated that between 1970 and 2008 Africa lost more than $854 billion in illicit financial outflows, an amount which is far in excess of official development inflows for the same period.Another report of TI put the amount of bribes companies paid politicians and other public officials in developing and transition economies annually at $40 billion in 2009 and consider that Africa would constitute a major part of since we know the continent’s ranking on Governance in the lower regions of the TI’s Corruption Perception Index. Imagine the amount of public good that may have been traded off by these officials as they made choices that compromised the aggregate social outcome by subordinating the good of the larger number to their extremely narrow personal gain. We also know through studies that corruption is considered equivalent to a 20% in tax rate by foreign direct investors.

So what kind of data do we have on Nigeria and how do they explain the monumental scale of our missed opportunity to drive the vision of our long hoped for greatness since our independence? Could it be that our lack of any discernible economic progress after many barrels and billions of dollars for can easily be explained for by the study of the World Bank (in 2000)which asserts that corruption is the single greatest impediment to economic growth in developing countries. A study by a team of two Nigerian economists Shehu Usman Rano Aliyu and Akanni Oludele Elijah titled “Corruption and Economic Growth in Nigeria: 1986-2007” empirically captures the link between corruption that has bedeviled the country unleashing the mediocreeconomic performance. They did so by building on the study by Mauro (1995) which examined the effect of corruption on growth rates of per capital GDP of sixteen countries from 1960-1985 and revealed that one-standard deviation decline in the corruption index leads to an increase in annual growth rates of GDP per capital by 0.8 percent. His other study revealed that the size and composition of government expenditure is significantly affected by corruption and that corruption tends to make public expenditure neglects education and health in favor of sectors where corruption might not be perceived easily.

They similarly quoted the influential economics of corruption work of Rose-Ackerman (1997) which found that corruption aggravates the problem of poverty through the following channels.

a. The poor will receive a lower level of social services.

b. Infrastructure investment will be biased against projects that will aid the poor.

c. The poor may face higher tax or fewer services.

d. The poor are disadvantaged in selling their agricultural produce.

e. Their ability to escape poverty using indigenous small-scale enterprise is diminished. Also their study picked up on Gupta et al (1998) found that corruption increases income inequality and poverty by lowering economic growth, promoting a biased tax system in favor of the rich few, lowering social spending, reducing access to education and reducing the effectiveness of targeting social programs.

So how did their economic analysis of Nigeria’s own systemic corruption challenge bearing in mind all of these other relevant findings? Oh yes, it did! In the words of the authors “In fact our results reveal that as much as 20 percent of the entire capital expenditure may end up in private pockets” annually. Summing up, the paper discovers that corruption exerts both direct and indirect negative effects on economic growth in Nigeria. The negative effects of corruption is starkly demonstrated by the fact that based on current track record, Nigeria will miss all the MDG targets set in 2000 despite the richness in its natural and human resource endowments.

There is no doubt that at the heart of any progress towards meeting these Goals is the quality of governance at all levels of government and yet the general perception since validated by the revealed large scale corruption in the petroleum sector (especially but not limited to the management of the subsidy scheme by all the relevant agencies of government) is that poor governance of public resources and assets in Nigeria is worsening at every level of government, across our institutions of state, the private sector and fast engulfing the wider society. It is not unusual these days to be inundated with public denunciation of what some now call “Nigeria’s corruption crisis”.  In an embarrassing special report on Nigeria in 2010, the National Public Radio (NPR) of the United States declared as follows; “But the other and perhaps more significant way corruption hurts is its impact on the government’s bottom line — and those teacher-less, desk-less schools only hint at the extent of the problem in Nigeria. An estimated $400 billion of the country’s oil revenue has been stolen or misspent since the country’s independence in 1960. That’s a sum approaching all the aid the West has pumped into the whole of Sub-Saharan Africa during the same period. And while oil accounts for about 90 percent of the value of Nigeria’s exports, 80 percent of that money ends up in the hands of one percent of the population, according to the World Bank.”

A society that rewards corruption has perverted its incentives system and structure and deforms the bedrock of effort and hard work that helped economies we envy to grow rapidly.. You get rewarded but for the wrong kind of conduct. It is no wonder that since the cost of corrupt behavior is extremely low and the profit or benefit is visibly and extremely high, many have chosen to join the fast accelerating express train of corruption.  For such that join, they rationalize that a society which punishes those who seek to do the right with hardship while incentivizing the corrupt left them with little choice. Regrettably, that ignoble choice having been made by too many who have ,  had or will have the opportunity to lead in our public space has robbed us all of the greatness . What Nigeria is today – a giant embarrassingly trapped in dwarfish heights that are symbolized by pitiful economic, political and social outcomes; ails the heart of even eternal optimists.

 

This is a 4-part series. Part 1 was published yesterday, Parts 2 and 3, today. Part 4 will run tomorrow.

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