Bribery and corruption hindrance to economic development

By the Economist

There are many factors impeding Sri Lanka's economic growth which prevent the country from achieving a much higher level of economic performance. Among these is the rampant corruption by both politicians and government officers.

From time to time there have been reports in the press of suspected corruption or of a case being brought against an official that he or she has been corrupt.

What is currently evident to those who have to apply for some sort of permission from a state authority is that it is often impossible to get such permission without offering a bribe. It is not a situation of isolated instances of bribery but one where bribery is widespread.

Transparency International, a watchdog of international corruption, has assessed Sri Lanka as one of the most corrupt countries in the world.

One of the underlying reasons for many of the proposed highway constructions to have made little progress is that, with each change of government a fresh installment of bribes was needed. The powers that be were fattened by these bribes while the development of infrastructure remained in limbo.

There are similar cases in the power and energy sector. It has been admitted that alternate energy projects by private enterprises has been stalled owing to corrupt practices of CEB officers.

Another instance that illustrates how foreign investment could spoil economic development has come to our attention. A foreign entrepreneur invested in a tourist resort with BOI approval. However, its construction was halted as the Central Environmental Authority (CEA), refused permission unless a bribe was paid. Although the bribe was not much in comparison to the foreigner's large investment in the project- one hundred thousand rupees, a mere US$ 1000 to the foreigner, he was so disgusted with the practice that he refused the bribe and left the country. Not only has such action denied the country the investment and earnings from the project, but also the investor could relate this experience to other prospective foreign investors deterring those from investing in Sri Lanka.

Many foreigners have realised that you can't do business without bribes.

Some are willing to pay the bribe and invest in the country. Others may shun the country for better places to do business. Singapore is once again cited as a country with almost no bribery and corruption. No wonder foreign investors prefer a high wage economy like Singapore to a relatively low wage country like Sri Lanka. Transparency International rating and assessment is no doubt a deterrent to some large investors. Efforts at increasing foreign investment will have limited success unless bribery and corruption are contained.

There was a time when social scientists took the view that corruption makes the wheels of the economy run faster and were reconciled to it as inevitable in a developing economy. This theory has been thrown out. Economists now recognise that there is an inverse relationship between corruption and economic growth. It is partly so because of globalisation and competition between countries for foreign investment. Corrupt countries fail to attract big foreign investments both due to the difficulty that foreign investors have in dealing with the nuances of corruption and no doubt also owing to the higher costs that bribery entails.

Where public investments are concerned, bribery results in not merely direct higher costs but also poor quality of output. Corruption on a large scale is often associated with infrastructure projects as the sums involved are very large. We have witnessed this in some of the construction projects of the Mahaweli.

Another clear instance of incalculable harm has occurred due to corruption in the procurement of military consumables as well as military hardware. Much expenditure on military purchases has been not only a waste of public money but also a reason for the deaths of military personnel and inability to fight the LTTE.

There can be little doubt that the country cannot go forward unless extensive corruption is wiped out. The Central Bank Annual Report of 2005 makes this point in terms of what economists call rent seeking. It captures the multifaceted impacts of rent seeking well when it says, "Rent seeking imposes a significant cost on the economy and retards economic growth through altering the incentive system, misallocation of resources, and breeding inefficiency.

Firms may begin to spend resources on rent seeking rather than improving competitiveness through productivity enhancement and innovation. Further, the receipt of undue benefits by special interest groups may cause disappointment and frustration among others leading to lacklustre performance in the economy. Rent seeking results in a sub-optimal allocation of resources and may reduce efforts to enhance productivity.

Those with authority could favour their special interest groups who may campaign to elect them again. Under such circumstances, bureaucrats and politicians may not act in the best interest of society.

These actions distort the structure of economic and social incentives and lead to a misallocation of resources, resulting in welfare losses and hindering economic growth." Undoubtedly wiping out corruption is a Herculean task as those in authority are involved. At present nothing less than deep surgery is needed to make a dent in this problem.

It has to be recognised as one of the most serious issues in economic development. Developing an institutional framework that reduces the capacity to be corrupt as well as punitive actions are needed to wipe out this social menace that is a serious bottleneck to rapid growth of the economy.