What is Corruption?
Corruption can defined as “the misuse of entrusted power for personal benefit”. It can also be described as letting personal or family relationships influence economic decision making, be it by private economic agents or by government officials. Corruption is always kept more or less secret and therefore is the individual behavior of corrupt agents almost impossible to observe systematically in real life. You know it when you are subjected to it.
The objectives of government are vital to the understanding of the diverse negative effects of corruption on the public service. Corruption renders governments unable or unwilling to maximize the welfare of the public for personal or the gains of a small group of people.
A corrupt principal creates allocation inefficiencies and cripples its credible commitment to effective policies, and opens the door to opportunism. Because corruption must be hidden from the public and is not enforced by courts it entails transaction costs, which are larger than those from legal exchange. This suggests that corrupt contracts are primarily relational contracts where legal exchange serves as a basis for sealing and enforcing corrupt agreements. Legal exchange not only provides for corrupt opportunities, but for the necessary enforcement mechanisms. Examples of such legal exchange are long-term business exchange, belonging to the same firm or political party or being embedded in social relationships. The latter may even comprise the engagement in charitable institutions. Reform should not only focus on limiting opportunities for corrupt behaviour but also on impeding the enforcement of corrupt agreements.
Two types of Corruption
According to transparenecy International there are two types of corruption that one can encounter “According to the rule”- and “Against the rule”-Corruption.
“According to the rule” constitutes a situation where an individual receives an illegal payment for something he/she is required to do by law – for example when a state official solicit bribes from a company for expediting a routine public service. “Against the rule” refers to a situation where a bribe is paid to obtain a service that the receiver is not authorised to provide but gains access to through a bribe. For example skipping the queue to gain access to a prestigious school or gaining a permit for which would normally would not be granted. Both of which are deemed as counterproductive to positive social and economic development.
There is no way to know how widespread corruption really is and the level of impact on financial and social development. As a Social Risk corruption is properly one of the first things that organisations investigate when investigating possible investments in a region or country primarily because there is a direct link between the perceived level of corrupt behaviour and general social issues like crime, rule of law, healthcare, etc.
When evaluating social risk in a region Transparency International, EBRD, OECD, IMF and the UN good sources for your assessment pared with local sources such as trade groups, the embassy in the region, government business development initiatives, etc.
Links on more information on Corruption and its impact:
Uslaner, E.M. (2008), Corruption, Inequality, and the Rule of Law: The Bulging Pocket Makes the Easy Life. New York: Cambridge University Press, 30–249.
Svensson, J. (2005), “Eight Questions about Corruption,” Journal of Economic Perspectives 19(3): 19–42.
Weitzel, U. and Berns, S. (2006), “Cross-border Takeovers, Corrup- tion, and Related Aspects of Governance,” Journal of International Business Studies 37: 786–806.
Luo, Y. (2006), “Political Behavior, Social Responsibility, and Perceived Corruption: A Structuration Perspective,” Journal of International Business Studies 37, 747–766.
Cuervo-Cazurra, A. (2006), “Who Cares about Corruption?” Journal of International Business Studies 37: 807–822.
Jensen, N. et al. (2010), “Understanding Corruption and Firm Responses in Cross-national Firm-level Surveys,” Journal of International Business Studies 41: 1481–1504.