In this post covers the effects of corruption on economic development in Nigeria, the Causes, Challenges and how it has effected her economic development.
INTRODUCTION
Corruption is efforts to secure wealth or power through illegal means for private gain at public expense; or a misuse of public power for private benefit. Corruption like cockroaches has co-existed with human society for a long time and remains as one of the problems in many of the world’s developing economies with devastating consequences.
Corruption is not only found in democratic and dictatorial politics, but also in feudal, capitalist and socialist economies. Christian, Muslim, Hindu, and Buddhist cultures are equally bedeviled by corruption Menon, is a global problem, and exists in varying degrees in different countries. World Bank studies put corruption at over $1 trillion per year accounting for up to 12% of the Gross Domestic Product of nations like Nigeria, Kenya and Venezuela Corruption is endemic as well as an enemy within.
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It is a canker worm that has eaten deep in the fabric of the country and had stunted growth in all sectors. It has been the primary reason behind the country difficulties in developing fast. This is evident in Transparency International’s has consistent rating of Nigeria as one of the top three most corrupt countries in the world. As part of effort at fighting corruption and strengthening the economy, Nigeria embarked on an aggressive pursuit of economic reform that through privatization, banking sector reform, anti-corruption campaigns and establishment of clear and transparent fiscal standards since.
The importance of infrastructure for economic growth and development cannot be overemphasized. The poor state of electricity, transport and communications is a major handicap for doing business in Nigeria. The Federal Government of Nigeria through its Central Bank made progress in consolidation of the banking system which was prior to the reforms was highly fragmented, with many banks having very small and undiversified capitalisation.
The reform stipulated a minimum paid-up capital of $188 million, up from $15 million, with a deadline for compliance at the end of December 2005. This resulted in a record number of bank mergers and acquisitions. As a result, the number of banks in Nigeria has shrunk from 89 in 2004 to 25 in December 2005.
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What is Corruption?
Corruption happens when one abuses power entrusted to them for personal gain. This misuse of power erodes the trust between two or more parties and makes a democracy weak. Not only that, but corruption can also hinder the economic growth of a nation and aggravate poverty and inequality. It is essential to understand how corruption works to be exposed and the corrupt can be held responsible for creating a corrupt system. Corruption is deceitful behavior that people in positions of power exhibit for personal gain.
It is most commonly seen amongst government officials or managers. There are different forms of corruption, including bribery, embezzlement, extortion, networking, under-the-table transactions, manipulation of the election result, money laundering, and more. the finance world, we see many investment managers that run a Ponzi scheme (investment fraud). This is a form of corruption. Similarly, other circumstances can be labelled as corrupt.
Professionals belonging to the financial services industry, like the chartered financial analysts, have to follow a specific code of ethics that helps them avoid situations that can lead to a conflict of interest. There are different penalties one may face if found guilty of corruption. They can be fined, imprisoned and suffer a loss of reputation. Apart from personal effects, the organization can also have a negative impact because of corruption that may be long-lasting.
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The Causes and Challenges of Corruption in Nigeria
The economic growth approach has the ability to test the relationship between economic growth and corruption, but its main limitation lies in using the correct index of corruption in the objective function. The indices reflect either the general perception of the people on the level of corruption present in the country or the expertise perception, and they fail to reflect the actual level of corruption present in the country.
The current literature on the impact of corruption lacks a theoretical framework that incorporates the potential effect of corruption on output through its impact on the arguments to the production function. Nor does it address the effect of corruption through its impact on economic growth and development. The literature to date, has only examined the hypothesized influences separately, ignoring the larger potential aggregate impact of corruption on output.
To overcome the shortcomings in the theoretical reviews, neoclassical model of economic growth that explicitly includes human capital accumulation and the direct and indirect effects of corruption on economic growth have been developed. This approach is superior to previous studies employing a variety of approaches that ignore the potential indirect effect of corruption on economic growth and development. Our theoretical model suggests that output and growth are influenced by the level of corruption.
If one of the physical inputs in the production function suffers a quality loss in the presence of corruption, then this will also affect growth and the steady state level. None of these models have been adopted in the analysis of corruption in Nigeria. This is largely due to want of data on corruption. A number of factors have been identified as instrumental to enthroning corrupt practices in Nigeria. These include:
- briefly, the nature of Nigeria’s political economy, the weak institutions of government, and a dysfunctional legal system. Absence of clear rules and codes of ethics leads to abuse of discretionary power make most Nigerian vulnerable to corrupt practices. The country also has a culture of affluent and ostentatious living that expects much from “big men, “extended family pressures, village/ethnic loyalties, and competitive ethnicity
- The country is also one of the very few countries in the world where a man’s source of wealth is of no concern to his neighbors, the public or the government. Once a man is able to dole out money, the churches, the Mosques pray for him, he collects chieftaincy titles and hobnobs with those who govern. The message to those who have not made it is clear: just be rich, the ways and means are irrelevant.
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- Low civil service salaries and poor working conditions, with few incentives and rewards for efficient and effective performance, are strong incentives for corruption in Nigeria. Other factors are: less effective government works with slow budget procedures, lack of transparency, inadequate strategic vision and weak monitoring mechanisms make Nigeria a fertile the environment for corrupt practice.
- The overall culture of governance has also played an important role. Most of Nigeria leaders and top bureaucrats are setting bad examples of self-enrichment or ambiguity over public ethics thereby promoting the lower-level officials and members of the public into corrupt practices.
- Informal rules are found to supercede formal ones, thereby making stringent legal principles and procedures to lose their authority. Hence, bribery and corruption are taken by many Nigerians as norm even in the face of anticorruption crusades intended to support clean governance.
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Effects Of Corruption on Economic Development
There is a large body of evidence that indicates that while corruption may help to reduce the costs induced by cumbersome administrative processes in some contexts in the short term, it has a long-term detrimental effect on the operations of companies and a corrosive impact on a country’s overall governance environment, eroding the efficiency and legitimacy of state institutions, and ultimately undermining sustainable development and the rule of law.
- corruption is negatively correlated with economic growth: country-level data to explore cross-country variations in both governance and economic indicators, have consistently found that corruption significantly decreases economic growth and development. For example, cross-country data indicate that corruption is consistently correlated with lower growth rates, GDP per capita, economic equality, as well as lower levels of human development.
- Corruption affects the quantity, quality, cost and profitability of investment: Corruption is also known to distort the decision-making process associated with public investment and affects the composition of government expenditure. Corruption may lead public officials to allocate public resources less on the basis of public welfare than on the opportunity they provide for extorting bribes, such as large infrastructure or defense projects. Mauro finds that government spending on education as a ratio to GDP is negatively and significantly correlated with corruption in a cross-section of countries.
- Corruption as an obstacle to economic growth: Corruption also has an indirect effect on a country’s economic performance by affecting many factors fueling economic growth such as investment, taxation, level, composition and effectiveness of public expenditure.
- Corruption distorts incentives and market forces, leading to misallocation of resources.
- Corruption diverts talent and resources, including human resources, towards “lucrative” rent-seeking activities, such as defence, rather than productive activities.
- Corruption acts as an inefficient tax on business, ultimately raising production costs and reducing the profitability of investments.
- Corruption may also decrease the productivity of investments by reducing the quality of resources. For example, by undermining the quality and quantity of health and education services, corruption decreases a country’s human capital.
- Rent-seeking behavior is also likely to create inefficiencies, fueling waste of resources and undermining the efficiency of public expenditure.
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- Corruption is negatively correlated with economic growth: Macro level studies, using country-level data to explore cross-country variations in both governance and economic indicators, have consistently found that corruption significantly decreases economic growth and development. For example, cross-country data indicate that corruption is consistently correlated with lower growth rates, GDP per capita, economic equality, as well as lower levels of human development.
- Corruption undermines a country’s tax structure and its revenue collection capacity: When it takes the form of tax evasion, corruption may lead to a significant loss in tax revenue collected in a country, which in turn is likely to have adverse budgetary consequences. that corruption not only lowers the tax to GDP ratio, but also causes long-term damage to the economy by increasing the size of the underground economy, distorting the tax structure and corroding the tax morality of taxpayers, which is likely to further reduce the tax revenue base of a country.