Business as Usual: Corruption and Business Activity

Article excerpt

A regression analysis is used to verify the determinants of corruption. Using a cross-sectional data set of 48 countries, a significant relationship between GDP per capita and the level of corruption is confirmed. However, it is likely that GDP per capita is a determinant of corruption and affected by corruption. An instrumental variable technique is used to help determine the true impact of GDP per capita on corruption.

Key Words: GDP per Capita, Transparency International, corruption, freedom, government interference, bureaucracy,

I. Introduction

Corruption - what causes it, its costs, and remedies - is a major concern in international business today. Corruption has been blamed for underdevelopment in some countries and a lack of foreign investment in others. Corruption is the result of too much government interference in the economy, or not enough government oversight. Corruption stems from a lack of competition according to some analysts, while others highlight cultural factors, and still others focus on low wages among bureaucrats.

Remedies to fight corruption run the gamut from promoting development and competition to invoking stiffer penalties for the individuals involved (Klitgaard, 2000).

All of this points to a multi-faceted problem with entangled causes. A better understanding of the causes of corruption would help in the design of policies to overcome it. For instance, if corruption is found to be primarily the result of badly functioning large bureaucracies, then attention could be devoted to improving the functionality of national and business institutions.

On the other hand, if corruption is rampant primarily in economies where governmental restrictions are prevalent, then an opening up of the economy to competition and a reduction in regulation will help.

The reasons why corruption is prevalent in some countries are not well understood. Consider the theory that governments that are heavily involved in their economies, whether it is redistributing income or granting licenses for foreign trade, promote corruption. The idea certainly has intuitive appeal and some anecdotal evidence stands behind it. Vietnam and India have relatively high rates of government interference in economic matters and both have high levels of corruption. But Demark, Norway, and Finland have very high levels of government intrusion in their economies and some of the lowest levels of corruption in the world.

II. Measuring Corruption

The standard definition of corruption comes from Nye (1967, pg. 966): "Corruption is behavior which deviates from the formal duties of a public role because of private-regarding (personal, close family, private clique) pecuniary or status gains; or violates rules against the exercise of certain types of private-regarding influence." This broad definition allows for most forms of corruption - bribery, coercion, kickbacks, protection, and other illegal forms of business and politics.

In 1995 Transparency International, an organization "dedicated to curbing both international and national corruption", began releasing its annual Corruption Perceptions Index (CPI). The CPI is an index of indexes in that it combines various surveys and measures of corruption into a single number based on a scale from 0 to 10. The 1999 CPI covers 99 countries and includes data from the following sources:

* Freedom House Nations in Transit

* Gallup International

* The Economist Intelligence Unit

* The Institute for Management Development, Lausanne

* The International Crime Victim Survey

* The Political and Economic Risk Consultancy, Hong Kong

* The Wall Street Journal, Central European Economic Review

* The World Bank and University of Basel

* The World Economic Forum

A detailed methodology of the CPI is available at Transparency International's website (www. …