ECONOMIC CONSEQUENCES
OF CORRUPTION
Wanakiti Wanasilp
Email: wanakiti@rsu.ac.th
Faculty of Economics
Rangsit University, Fall, 2014
CORRUPTION AND MARKET FAILURES
MARKET FAILURES
CORRUPTION
-MONOPOLY
-EXTERNALITIES
-PUBLIC GOODS
-IMPERFECT INFORMATION
INEFFICIENT
RESOURCE
ALLOCATION
-
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)
Rank Country
1
3
3
5
5
7
8
9
9
11
12
12
14
15
15
15
18
19
19
New Zealand
Finland
Sweden
Norway
Singapore
Switzerland
Netherland
Australia
Canada
Luxembourg
Germany
Iceland
United Kingdom
Barbados
Belgium
Hong Kong
Japan
United States
Uruguay
CPI
Score
91
89
89
86
86
85
83
81
81
80
78
78
76
75
75
75
74
73
73
GDP per capita
(US$ per year)
36,900
46,490
56,120
98,790
47,210
80,970
48,000
59,260
51,570
71,640
45,070
38,270
38,500
15,080
44,720
36,560
47,870
52,340
13,580
GDP growth
(%)
3.2
-0.8
0.9
2.9
1.3
1.0
-1.2
3.4
1.7
-0.2
0.7
1.4
0.3
0.0
-0.1
1.5
2.0
2.8
3.9
Table 2: Bottom twenty countries with
low CPI score (high corruption)
Rank
Country
150
150
150
153
154
154
157
157
160
160
160
163
163
163
167
168
171
172
174
175
Kyrgyztan
Guinea
Paraguay
Angola
Congo Republic
Tajikistan
Burundi
Zimbabwe
Cambodia
Eritrea
Venezuela
Chad
Guinea- Bissau
Haiti
Yemen
Turkmenistan
Iraq
Libya
Sudan
Afghanistan
CPI)*
score
24
24
24
23
22
22
21
21
20
20
20
19
19
19
18
17
16
15
11
8
GDP per capita**
(US$ per year)
990
440
3,400
4,580
2,550
880
240
650
880
450
12,460
770
510
760
1,270
5,410
6,130
12,930
1,500
680
GDP growth **
(%)
-0.9
3.9
-1.2
6.8
3.8
7.5
4.0
4.4
7.3
7.0
5.6
8.9
-6.7
2.8
0.1
11.1
9.3
2.1
-10.1
14.4
Table 3: Comparison among ASEAN
countries.
Rank Country
5
38
53
94
102
114
116
140
157
160
Singapore
Brunei
Malaysia
Philippines
Thailand
Indonesia
Vietnam
Laos
Myanmar
Cambodia
CPI)*
score
86
60
50
36
35
32
31
26
21
20
GDP per capita**
(current US$)
47,210
31,590
9,820
2,500
5,210
3,420
1,550
1,270
NA
880
GDP growth **
(%)
1.3
2.2
5.6
6.8
6.5
6.2
5.2
8.2
NA
7.3
THANK YOU.