This is the second part of the paper first published Monday 4th January, 2010.

According to Vito Tanzi, “The total economic and social effects of corrupt actions might be very costly and out of proportion to the bribes received by corrupt officials in terms of resources wasted, the opportunity cost of resources· misused, and the inefficiencies introduced in the system.”

To illustrate the economic impact of rent seeking and corruption with an example, imagine that a highway is to be built, a N500 million project. Ten companies take part in the tender. A modest suggestion is that five companies each pay N500,000 in various types of grease payments to win the contract, while the winner also pays 10% of the contract value, N50 million. The apparent effect is that $52,500,000 is wasted. Besides, the bribe paid by the contractor most probably inflates the highway price, or makes the company skimp on quality. The other four bribing companies also have to regain their sunk cost, for instance by increasing prices on other products offered by the company, contributing to higher domestic inflation. Macroeconomic effects are obvious if this example portrays e.g. ten percent of the public acquisitions in a country. This percentage is most likely higher in countries experiencing extensive corruption.

Corruption, “state capture” and transition economies

A different side of bureaucratic rent seeking is state capture, defined as the propensity of firms to shape the underlying rules of the game (Le. laws, decrees and regulations) through illicit and non-transparent private payments to public officials (Hellman et aI., 2000a). State capture evolves as a result of grand corruption. Key state institutions are “captured” by private interests to bias the policy-making process in favor of particular firms, leaving the operation of government non-transparent. The underlying threat to democracy is obvious when elected politicians and public officials make decisions on grounds deviating from the expected.

Impaired competition, abated international interest and firm behavior

“Systematic corruption can induce inefficiencies that reduce competitiveness. It may limit the number of bidders, favor those with inside connections rather than the most efficient candidates, limit the information available to participants and introduce added transaction costs” (UNDP, 1997). These distortions of market forces obstruct the ordinary benefits induced by competition, like the achievement of best value for money, a rational allocation of resources, and the pressure experienced by individuals and companies for general improvement. Usually, a public tender affected by corruption represents an inefficient investment of public assets. One reason is inflated prices; another is that a corrupt official who discriminates in favor of some bidders frequently selects an inefficient contractor (lien, 1990; Rose-Ackerman, 1978).

A pervasive level of corruption in the economy may also abate the international interest in both trade and foreign direct investment (Wei, 1997 and 1999), resulting in a GDP growth lower than it could have been and a reduction of qualified competitors in procurement projects. Corruption represents an increase of trade or investment expenditures to a foreign enterprise. When demands for bribes also appear unpredictable, counting on the necessary profit is difficult.

Predictable corruption, however, may not necessarily be less harmful than unpredictable corruption. Lambsdorff argues that confidence in corrupt deals enhances the further spread of corruption. “When business people have confidence that after paying a bribe a return will be provided as promised, there is less motivation to seek legal alternatives” (Lambsdorff, 2001). The uncertainty with regard to costs may thus cause the enterprise to turn the tender in question down. Besides, operating in a situation with informal rules is difficult as the company may not understand how to behave and react, who to bribe (and not to bribe), what contact to grease, etc., explaining a certain refusal to approach the economy. Companies may also decline tenders likely to be affected by corruption because of legal restrictions on bribery of foreign public officials.

The companies defying all these challenges, on the other hand, experiencing successful trade or investment in the economy despite high levels of corruption, often exhibit a more lenient attitude towards bribery. Furthermore, UNDP (1997) explains how the uncertainties introduced by corruption into the economic environment may affect the way private firms do business. The firm may take up a short-run orientation, fearing either that those in power may overthrow because of their corruption, or the imposition of arbitrary financial demands once investments are sunk. The consequence may be a reluctance to invest in stationary capital and a too hasty project completion ignoring quality demands.

Of course, these problems are not characterizing all companies. To some degree, however, the attitude towards bribery and the effect on firm behavior may cause an adverse selection of foreign companies operating in the economy, companies whose success rests on bribery. Such an adverse selection of companies would ensure a constant flow of illegal payments to public officials, and restrict the efficiency of anti-corruption measures.

GOOD PRACTICES IN PUBLIC PROCUREMENT

The fight against corruption must start with an explicit commitment by the prime leadership of the country. Ending the pettier forms of corruption in the bureaucracy is difficult if the grand political corruption persists. An honest intention has to be followed up by good behavior, expressing opposition against all forms of corruption, whether it involves family members and friends, political associates, or other members of government.

Policy Response

Policy makers can respond to risks of corruption in general by ensuring a good public procurement system. A good public procurement system that can effectively prevent corruption needs to be transparent and provide for accountability and integrity. The system should also confirm to and cover various procedures, laws and processes put in place for detecting and preventing corruption.

(To be Continued).

Seun Adebowale