CORRUPTION

Transition Economies

Presented By AJ Cericola

Definition of Corruption

Misuse of Power for private gain

Bribery

Extortion

Manipulation of Laws

It’s all about growth…

Corruption Type 1:

Corruption Type 2:Administration Corruption

Intentional imposition of distortions in the prescribed implementation of existing laws

Corruption Across the Globe

Corruption and Growth

Corruption and Development

Sectors of Corruption: Enterprise Growth

SME’s are most important for jobs, innovation, and growth

1. Labor force and new jobs 2. Less capital intensive – more labor 3. Product innovative, not process innovative 4. More financially constrained; represent 94% of business finance 5. Contribute to growth in recession more than larger firms

Bribes Paid

Sectors of Corruption: Investment

Much economic theory assume positive relationship between investment and growth

4 areas Corruption affects investment: 1. Total investments 2. Size and composition of FDI 3. Size of public investment 4. Quality of decisions and projects

Sectors of Corruption: Investment

Studies show that improvements in the corruption index (i.e. reduction in corruption) can increase investment GDP ratio

Comparison:

1% increase in MTR on FDI = reduction of incoming FDI ~ 3.3%

1pt. increase on corruption index = reduction in the flow of FDI ~ 11%

Anti-Corruption: What can be done?

Case Study: Poland

1956: Khrushchev denounces StalinWorker’s strike in Poznan starts market socialism and limited civil liberties1980: emergence of Solidarity

1989: parliamentary political system with proportional representationStrong public administration skills

Case Study: Croatia & Slovak Republic

Advanced among Central & Eastern

European countries

Nationalism

Concentration of political power

1994: worst year of corruption for Slovak Republic and Croatia

Croatia

Croatia: FDI vs. Real GDP per captia

01

23

45

FDI inflows($US billions)

Real GDP percapita ($USthousands)

Slovak Republic

0

1

2

3

4

FDI inflow s ($USbillions)

Real GDP percapita ($USthousands)

Case Study: Latvia

State Capture is high

Economy is highly concentrated: political parties run close with economic interests

1995: adoption of conflict of interest laws

1997: Corruption Prevention Council

LatviaLatvia: FDI vs. Real GDP

00.5

11.5

22.5

33.5

44.5

Real GDP per capita($US thousands)

FDI inflows ($USbillions)

Transparency: CPI Index

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

CPI Index

1998 2000 2002 2004

Croatia

Latvia

Poland

Slovak Republic

After thoughts…

Why does Poland have a decreasing CPI? Do they not have an anti-corruption strategy?

Can bad infrastructure cause corruption?

Your Questions…