Analysing the connection between economic performance and corruption in SIDS

1. 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. Osei Sir Arthur Lewis Institute of Social & Economic Studies, University of the West Indies, Mona, Jamaica

2. 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

3. 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).

4. 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)

5. 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).

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

14. CPI Score for Small Island States

18. Caribbean- Comparative Growth, CPI score & Good Governance

19. 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.

20. Table: Some corruption scandals in Jamaica

21. 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.

22. Common preventive methods tried

24. 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.