Transcript Slide 1

Corruption: Definition,
Quantification and Measurement
Shrabani Saha
Lecturer
Department of Economics and Finance
Massey University
Introduction
Research Background
• Transparency International corruption report finds that of the158
countries evaluated for its 2005 Corruption Perception Index (CPI)
“Seven out of ten countries score less than 5 out of a clean score of
10….Nine out of ten developing countries score less than 5 against a
clean score of 10…”
– New Zealand scores 9.6 and is tied for the second place with Finland in 2005
– Brown, (2000, September 16). Corruption is alive and well in ‘honest’ NZ. New Zealand
Herald. URL is available at:
http://www.nzherald.co.nz/search/story.cfm?storyid=9260297C-39D9-11DA-8E1B-A.
• Corruption undermines development by weakening the institutional
foundation on which economic growth depends (Klitgaard,1988;
Bardhan,1997).
• Mauro (1995, 1997, 1998) finds that corruption reduces investment share
of GDP, expenditures on health and education which, in turn, has a
damaging impact on the country’s economic growth.
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What is corruption?
In spite of corruption’s universal existence,
there is no common definition of it.
 Rose-Ackerman 1978 and Jain 2001, broadly
identifies three types of corruption in a
democratic society based on the relationship
between the general public and government,
Which are:
 Political corruption
 Bureaucratic corruption
 Legislative corruption
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What is corruption?

The existing literature also classifies
corruption as:
◦ Grand corruption and
◦ Petty corruption
• Bardhan (1997) argues that even if we
confine ourselves only to the economic
context, there are alternative divisions
drawn between different forms of economic
corruption.
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What is corruption?

For example,
◦ Centralised and decentralised corruption
◦ Well-organised and chaotic corruption
• Like different forms of corruption,
different levels or, structures of
corruption exist as well, e.g.
• bottom-up corruption and
• top-down corruption
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What is corruption?
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Finally, in recent years there is a growing
concern over corruption in the private sector,
especially in the developed countries.
 However, the conventional view regards
corruption as the misuse of public offices only.
 Public officials are expected to act in the
interest of the public while a different set of
expectations are assigned to the members of the
private sector.
 The rationale behind a private agent is to
maximise profit for private enrichment.
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Definition

Corruption is a multifaceted concept such as
fraud, appropriation of public assets and
embezzlement of public funds for personal use
by politicians.
 Gray and Kaufmann (1998) said that fraud and
embezzlement have clear and direct negative
impact on a country’s economy so that their
costs do not need any detailed and sophisticated
discussion.
 In contrast, the analysis of bribery and its
impact on economic development is more
complex, which requires thorough research.
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Definition

The literature on corruption mainly emphasises corrupt
activities such as sale of public goods and bribery in
several forms.
 Thus, corruption can be defined as the illegal
profiteering from illegitimate transactions such that a
position of entrusted power is used for private
enrichment.
 This definition of corruption comprises one or more of
the following elements:
1. There must be at least two parties to an act of
corruption, namely the person who offers the
reward or inducement and the party accepting it.
2. There must be misuse of office or position of
authority for private gain.
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Definition
3. There is either an offer and /or acceptance of
inducements.
4. An act through which public or entity property
is dishonestly misappropriated.
5. Corruption involves breach of trust.
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Measurements of Corruption
Not only is corruption difficult to define, it is also
hard to measure or quantify corruption because of
its various forms.
 In the existing literature either per unit bribe or
total revenue collected from bribes appears as a
measure of corruption.
 If per unit bribe stands as a measure of corruption,
then an increase in the per unit bribe increases the
level of corruption.
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Measurements of Corruption
If total revenue collected from bribes measures
corruption, then an increase in total revenue from
bribes enhances corruption, even when the per
unit bribe is less.
 Shleifer and Vishny, (1993) illustrates centralised
and decentralised corruption by measuring both
per unit bribe and total revenue collected from
bribes.
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Measurements of Corruption
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In centralised corruption, bribe per unit is less,
even though the total amount of bribe paid may be
higher due to the larger supply of public goods.
 In decentralised corruption, per unit bribe is
higher than in centralised corruption, but total
revenue collected from bribe income is less.
 If bribe per unit is used as a measurement
criterion for corruption, then the level of
corruption increases in a decentralised economy.
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Measurements of Corruption

The total amount of bribes collected from corrupt
transactions as a measure of corruption creates
problems when it is used to compare the level of
corruption between countries due to different
income levels.
 For example, an African country and an East
Asian Country.
 Bardhan (2006, p. 342) argues that the actual
amount of money that is transacted in the corrupt
deals may be much more in the East Asian
country than that in the African country.
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Measurements of Corruption
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In many developing countries the occurrence of petty
corruption transpires in day-to-day life.
For example, in India, it can be seen in any city, that
traffic police officers often collect money from
passing vehicles.
If all the money collected by these police officers in a
year is added up, it may not substantially exceed the
money that was collected in one single corrupt
transaction in a developed country when it buys a
fighter aircraft.
For example, in 1976, Lockheed officials had paid
$22 million in bribes to foreign officials in the
process of negotiating the sale of aircraft including
the F-104 Starfighter, the so-called "Deal of the
Century".
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Measurements of Corruption
Since the number of corrupt transactions is large,
even if the amount of money collected from
corrupt transactions is not so large, the developing
countries may have come to be regarded as more
corrupt.
 The number of corrupt transactions that take place
in a country may be taken as a good measure of
corruption.
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Measurements of Corruption
The difficulty in defining and measuring the
levels of corruption in different countries has
presented a major obstacle for the cross-country
empirical research on corruption.
 More recently, researchers have begun to develop
corruption indices, based on surveys; most of
these are perceived corruption indices.
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Measurements of Corruption
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The following are some of the studies that have
attempted to measure corruption:
◦ Business International Corporation
◦ Political Risk Services
◦ Transparency International
◦ World Bank
• Most researchers have used a combination of
these indices to estimate the relationships
between corruption and a host of other variables.
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