Economic Development and Corruption - Essay Example

?Running Header: Economic Development and Corruption: Economic Development and Corruption Semester Module Economic development is a broad concept. It includes the concerted actions of policy makers to improve the overall standards of a society in important fields such as standard of living, education, health, infrastructure and meeting the important economic aims and targets. These targets include price stability, controlling unemployment, achieving high levels of economic growth and making sure that the economy is in the state of balance in terms of international trade and balance of payment. If an economy grows in the all of the above said facets, that one can assume that the economy is developing. In a developing economy there is improvement in the standard of living of people and focus on environmental stability also increases. Economic stability can sometime also give rise to materialism. People strive hard to make more money and they often use unethical means to achieve their materialistic targets. One such unethical method is corruption. Different people hold different views about the impact of corruption on the economic development. Many people view it as a barrier to economic development while others believe that it does not impact the society and economic development much (Easterly 2006). This paper is going to discuss various anecdotal evidence and view that people have about corruption in relation to economic development. Economies in the transition face often have large number of lobbying efforts going on. These economies are aiming for economic development and hence they do not care much about lobbying efforts and governments of these economies are more susceptible to lobbying pressures than a government of a more developed nation. The evidence and research shows that these lobbies often pay huge sum of money to the government pressures to accept their demand. The corrupt political system in these countries makes it possible for people to form lobbies and put pressure on political leaders. These leaders often get directions from these lobbies if they pay them well. Since many lobbying groups are fighting for what is good for their own business, they end up doing well for the society also. The theory of invisible hand comes into play here. The theory states that any action done for one’s own self motive or profit will eventually translate into good for the society. Hence, corruption in all cases is not bad and research on 4000 firms in developing countries shows that corruption has played a role in the economic development of a nation. (Campos & Giovannoni 2007) In another paper, it was argued that corruption is essentially bad for a growing economy. First of all, corruption reduces the value of shareholders. In growing economies where corruption is extremely high, the expected profit that the shareholders expect to make does not materialize. Much of the profit is lost in the corrupt red-lines of bureaucracy and hence shareholder value goes down in the corrupt economies. Many foreign companies therefore try not to invest in corrupt nations fearing that returns on investment in these economies would be far less than if the investment is made in the local setting. This reduces foreign direct investment flows into the corrupt economies and poses a big problem for the economic development. This argument shows us that corruption can be a big barrier in the economic development of a nation. (Weitzel & Berns 2006) In a recent paper written by a well known economist, it was argued that corruption is actually good for the economies. It increases the flow of wealth in the economy from one hand to another and promotes economic activity which leads to economic development. It was argued that corruption becomes bad when the corruption money goes out from the system. Evidence shows that many political and rich figures in the developing economies put their money in bank accounts in the foreign countries. This is an example of money flowing out of the system and this money does not promote any economic activity. This is an example of “bad” corruption and leads to lack of economic development. (Cohen 2004) Another study on the issue shows that corruption is more of a moral problem than an economic problem. Money spent in the economy in any form will lead to economic activity and economic development. However, in the long it may be damaging for the society and may lead to serious economic problems because people will be more inclined to make money using corrupt methods rather than setting up businesses or earning money the right way. This will lead to a problem in the economic activity of a developing nation and it may be trapped in the vicious circle of moral hazards. The way to correct this problem is to make some types of corruption legal. For example, a good example of this would be to tell people to pay office clerks a small amount of money for checking their file. This would lead to less money being drained in corruption and people would know that they need to keep their job to earn money and they cannot rely on it alone if they do not have any job. This will make people work hard to retain their job which will promote economic activity and will reduce the levels of corruption in the bureaucratic setup that is common in most of the developing nations around the world. (Argandona 2003) Another important study finds that corruption is a highly predictable phenomenon. It can be traced using Hofstede’s four factor theory. Anecdotal evidence suggests that corruption is extremely high in countries and economies where there is high power distance, individualism, male dominance and uncertainty avoidance. It is common in countries like Mexico, Ecuador, Colombia, Pakistan and Bangladesh. All of these countries share Hofstede’s four factors. Many MNCs in these national also promote corruption and bribery by paying more attention to reduce uncertainty than focusing on the unethical aspects of corruption on the society. Many MNCs pay bribes to obtain licenses to operate in these countries. Since there is high power distance, there is corruption at each level of the hierarch. Similarly, individualism leads to more corruption because these nations do not think themselves as one people and try to play a zero-sum games with other citizens. This leads to more corruption as everybody in the society thinks himself above his fellow countrymen. One suggestion given in the paper to reduce the level of corruption in these national is to withhold IMF and World Bank’s development programmes in these countries. This would lead to slowdown of economic activity in these national and become a barrier to their economic development. Hence we can say that people are thinking about putting a ban on the countries with high levels of corruption and hence in future there are chances that these countries will experience slowdown in the process of economic development. (Davis & Ruhe 2003) A study used in this paper attempts to use empirical evidence to uncover the impact of corruption on the economic development. The results in that study showed that the impact of corruption on economic growth is negative. In other words, economists of the past were right were right into declaring corruption as something that is bad for the development of an economy. However, the paper also clears the fact that the results may vary if we take into account the different scenarios in which the corruption is done. Hence, there is further scope of research in the topic and one cannot completely come to the fact that corruption is always bad for an economy. (Drury, Krieckhaus & Lusztig 2006) Conclusion: We can clearly conclude from the paper that corruption is not entirely bad. In some instances it has boosted economic growth while in the others it has been a barrier to economic growth. But still it Is unclear as to whether the corruption is bad in its absolute sense or whether it is the context or scenario in which it is done makes it good or bad. However, from ethical point of view there is no place for corruption in the system, but from an economic point of view we are still not sure whether it should be allowed or banned completely from the system. 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