EC1111 Lecture 5 Terminology · Governance (World Bank and United Nations definitions): o The exercise of political authority and the use of institutional resources to manage society's problems and affairs o The use of institutions and structures of authority to allocate resources and coordinate economic activity in society o The process of decision-making, through which decisions are implemented · Institutions (Douglas North, 1991): Institutions are the humanly devised constraints that structure political, economic and social interaction. o They consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights). Governance · Main actor is Government Non-Military and Non-Government are grouped as Civil Society · Others may be involved depending on the level of government o E.g. at national level: media, lobbyists, international donors, MNC's o Rural areas: NGO's, Co-operatives, Military? Good Governance will have eight (8) major characteristics: o Participatory o Consensus-oriented o Accountable o Transparent o Responsive o Effective and Efficient o Equitable and Inclusive o Follows the rule of law Corruption · Misuse of public power for private or political gain. o Illegal activities including bribery, fraud, embezzlement, self-dealing, conflicts of interest and providing a quid pro quo in return for campaign gifts (Rose- Ackerman, 2004)
Administrative corruption · Use of bribery and favoritism to o Pay lower taxes, o Escape regulations, o Win low-level procurement contracts Crony Capitalism or State Capture . The state serves the interests of a narrow group of business people and politicians o Sometimes mixed with criminal elements o Even when the government changes, new people who come to power continue to perpetrate these offenses . According to World Bank and EBRD, this type of corruption is the most serious problem in the former Soviet Union states (e.g., the rise of the oligarchs, an example of Wealth capturing Power) o Firms tied to government do well, but the economy as a whole suffers. . Sometimes, Power Captures Wealth o E.g., President Suharto of Indonesia had many business interests o Berlusconi? Effects of corruption . The World Bank has identified corruption as the single greatest obstacle to economic and social development o Undermines development by distorting the rule of law and weakening the institutional foundation on which economic growth depends (so it is bad for growth) · Reduces effectiveness of public administration and distorts public expenditure decisions o Diverts resources away from sectors such as health and education to personal bank accounts o Diverts resources away from productive sectors o Encourages 'white elephant projects' o Erodes rule of law and harms the reputation of, and trust in the state. (Thus bad for developing institutions) Costs of corruption · Worldwide bribery totals at least ff1 trillion per annum In accounting terms, bribes are transfers from one pocket to another. But they are not an accurate measure of corruption's impact. . The economic costs are the distortions induced by these transfers.
. These costs might be higher than the volume of bribes themselves (or they might, under