ECONOMIC CONSEQUENCES OF CORRUPTION Wanakiti Wanasilp Faculty of Economics Rangsit University, Fall, 2014

CORRUPTION AND MARKET FAILURES MARKET FAILURES -MONOPOLY CORRUPTION-EXTERNALITIESINEFFICIENT -PUBLIC GOODSRESOURCE -IMPERFECT INFORMATIONALLOCATION - Figure 1: Conceptual Framework; Effects of Corruption on Resource Allocation

CORRUPTION AND EFFICIENCY LOSS  In this paper, we claim that the damages in term of economic efficiency loss caused by corruption is much larger and more severe than monetary loss generally focused in related literature.  Economic efficiency loss means the loss incurred when the economy is unable to perform at its potentiality due to market failures that are in large part caused by corruptions.

EFFICIENCY OF ECONOMIC SYSTEM  In modern (capitalist) economic theory, it is postulated that the economic system will perform at its best (efficient) when it is run by private sector, with minimal intervention by the government.  The incentives that drive private sector to work include those concerned with self-interest (profit maximization, private ownership, wealth accumulation, etc.). Free competition, supported by democratic political system, will be the rule of the game.

MARKET FAILURES  Unfortunately, while the system driven predominantly by private sector is operating onward, it will encounter the situations called “Market Failures”, which is sure to occur (unavoidable) under capitalist system.  Examples of these market failures are: monopoly, public goods, externalities, imperfect information, moral deficiency, etc.

MARKET FAILURES  When these market failures occur, the economic system will perform at lower than its potential (i.e., at sub-optimal level), incurring efficiency loss.  When the market failures occur, it will become legitimate for the government to intervene in order to correct market failures.

CORRUPTION AND MARKET FAILURES  However, if the government is corrupt, then an attempt to correct market failures will be fruitless. As a matter of fact, it is the corruption itself that aggravate the conditions of market failures.  The evidence to support the above claim is obvious. Countries with high level of corruption will have high level of monopoly (in business, information and politics), vast destruction of environment, low level (and low quality) of public services, etc. Consequently, these countries cannot develop the economy to advanced level.

CORRUPTION AND EFFICIENCY LOSS  Let’s take a look at the Corruption Perception Index (CPI) constructed by Transparency International (TI), an institution devoted to fighting corruption around the world.  From tables below, it can be seen that countries with successful economic development are associated with low corruption (high CPI score), while countries with slow economic progress are associated with high corruption (low CPI score).

Table 1: Top twenty countries with high CPI score (i.e., low corruption) RankCountry CPI Score GDP per capita (US$ per year) GDP growth (%) 1New Zealand9136, Finland8946, Sweden8956, Norway8698, Singapore8647, Switzerland8580, Netherland8348, Australia8159, Canada8151, Luxembourg8071, Germany7845, Iceland7838, United Kingdom7638, Barbados7515, Belgium7544, Hong Kong7536, Japan7447, United States7352, Uruguay7313,5803.9

Table 2: Bottom twenty countries with low CPI score (high corruption) RankCountry CPI)* score GDP per capita** (US$ per year) GDP growth ** (%) 150Kyrgyztan Guinea Paraguay243, Angola234, Congo Republic222, Tajikistan Burundi Zimbabwe Cambodia Eritrea Venezuela20 12, Chad Guinea- Bissau Haiti Yemen181, Turkmenistan175, Iraq166, Libya15 12, Sudan111, Afghanistan

Table 3: Comparison among ASEAN countries. RankCountry CPI)* score GDP per capita** (current US$) GDP growth ** (%) 5Singapore8647, Brunei6031, Malaysia50 9, Philippines36 2, Thailand35 5, Indonesia32 3, Vietnam31 1, Laos26 1, Myanmar21 NA 160Cambodia

THANK YOU.