Corruption, a deterrent to growth

A major obstacle to growth in developing countries is the deep-rooted corruption that plagues them. In developed countries corruption does not play too close to the surface and publicly exposed people will almost always face the wrath of the law. In developing countries it is usually the case that corrupt acts go unpunished when they are committed by the rich, no matter how exposed the situation or the individual is. It could actually be argued that a little corruption can be good for, or at least harmless to a nation. It is important that few people (bold or greedy enough) get burned by the system to serve as a deterrent to others. Moreover, perfection is an impossible feat so there's that. The problem arrises when unchecked corruption plagues nations. It is difficult to directly link corruption to growth or lack of it because of the numerous factors that come into play. For those who think the only way corruption stalls growth is through misappropriated funds that should be used to forge productivity being directed to other arenas, this post promises to shed more light. Empirical evidence suggests that corruption stalls growth through its effect on investment, innovation and entrepreneurship (Mauro 1995). There are obviously many more mediums, a lot of which are difficult to measure, and some of which will be alluded to.

(Corruption - lack of trust, lack of transparency, unfair business environment, lack of or weak market regulation, lack of or minimal investment in the education system leading to an intellectually impoverished population - Discourages Investment)

Investment is the most basic of all three. In countries with high corruption there is very little trust from both home and abroad. At home this results in the unwillingness of people to save and to invest. Of course in developing countries the average man is more inclined to save than to invest mostly as a result of lack of understanding about investing and what it entails. Sometimes people are so mistrusting of the government or its institutions in general that they would rather keep their money in the house for fear of losing it to opaque systems, or save among themselves (an old-school method). Even if there happens to be deposit insurance in developing countries people will generally either not be aware of it or they would doubt its efficacy. It could be argued that low savings in the developing world is due to lack of education. In the case of domestic savings and investment it is really difficult to separate the effect of lack of education from the effect of lack of trust in government regulated institutions. Now that it has been established that people in developing countries (which have a higher number of poor people) would rather save, it is up to the banks to lend to companies and firms that grow by using the saved monies to invest in capital projects. On the foreign side we have fear of political instability, the problem of lack of transparency and lack of trust in the systems that normally ensure adequate distribution of capital leading to skepticism about investing. This leads to little investment, or something just as unfavourable- finicky foreign investors. Foreign direct investments make up the bulk of direct investment in the stock market, but those FDIs are fickle so when there is the slightest hint of trouble or even an inkling (no matter how unfounded), panicking investors cash out and turn their suspicions into the developing market's problems.

(Corruption - bureaucracy, awarding monopoly power deserved or undeserved, bribe systems, awarding contracts to whom the most bribes can be from, non-conducive environments due to misspending of budgetary allocations - Kills Entrepreneurship)

The non-conducive environment to entrepreneurship is another issue that developing countries face. SMEs (small and medium-sized enterprises) are necessary for growth. The main difficulty here is the bureaucracy and the cost environment. In developing countries apparatuses don't work (electricity, good roads, water and so on) and so it is expensive to run businesses. In fact, home production is so expensive that most people prefer to import whatever they plan to produce and sell at home.  The bureaucratic environment created by corruption also ensures that people are frustrated until it occurs to them to drop a bribe to fast track things. In that way bureaucracy perpetuates corruption and corruption encourages bureaucracy.

(Corruption - Inadequate investment in education system, large impoverished population, ineffective legal system - Kills Innovation)

Innovation is stiffened by corruption in two major ways. It makes it difficult for people to learn/develop new skills, and in corrupt societies weak judiciaries leave people skeptical about the ability of their patents to protect their innovation. In developing countries getting valuable primary and secondary education is difficult since the education system is plagued by unqualified teachers who give bribes to be employed and this limits the impact of basic education on innovativeness. There is also the issue that children are so busy helping their parents fend for the family that there is no time to cultivate the necessary interests or knowledge that are important for the seed of innovation to be planted. Corruption means that the judicial system is not trustworthy. This by itself promotes corruption and enables the rich to continue to enrich themselves at the expense of the larger poor population. The resources of the country will continue to be directed into private accounts and it goes on and on.