EC1111 - International Economic Policy RHUL Vinay P. Nundlall Seminar 5 - Suggested Answers and Feedback Question 1 What is the "cost of corruption"? Explain how corruption affects economic growth. A direct cost of corruption is the amount of money that exchanges hands in terms of bribes, frauds, embezzlements etc. This is difficult to estimate as recipients of these sums of money are unlikely to reveal the truth. The World Bank estimated that amount to be about $1 trillion per annum (representing 3% of world income) in 2002. However, the costs of corruption are much higher - we have seen that countries that are corrupt tend to have low HDI (that is, its citizens have a lower life expectancy, lower level of education and lower income which all means that quality of life is poor). Furthermore, these countries have both low GDP and low growth so they find themselves stuck in a trap where they cannot develop because economic policies just do not work .... The link between corruption and economic growth is as follows: In corrupt systems, investment (both domestic and foreign) is low. As capital stock is and engine of growth, and since there is no capital accumulation, productivity and technological innovation are hindered, and economic growth is low (or negative). Secondly, the majority of investment is diverted away from the health and education sector towards extracting mineral and oil resources (if they are present), the military (for example in armament contracts where negotiators can obtain kick-backs) and the construction sector (where it is possible to receive kickbacks and bribes). The victims are the poor and the powerless - and so human capital development suffers. Since human capital is important for growth, a country with poor human capital is trapped in poverty. Furthermore, investment in military and construction usually ends up in building facilities that are effectively useless (white elephant projects). Question 2 1
Corruption is a common feature across the world. However, various countries are differently affected by this problem. Go to the table from the Corruption Index 2016 Results on Transparency International's website at: https://www.transparency.org/news/feature/corruption_perceptions_index_201 6#table Scroll and examine the rankings of countries. Explain any pattern that you detect among the top 10 cleanest countries and among the bottom 10 most corrupted countries. The first 10 cleanest countries are Denmark, New Zealand, Finland, Sweden, Switzerland, Norway, Singapore, Netherlands, Canada and Germany. Their scores range from 90 to 81 (out of 100). The ten most corrupted economies are those of Somalia, South Sudan, North Korea, Syria, Libya, Sudan, Yemen, Afghanistan, Guinea Bissau and Iraq. Their scores range from 10 to 1ff (out of 100). The 10 cleanest countries are members of the EU and of the OECD. They form part of a group that is the wealthiest in the world. They are democratic and have a free market economy. Some of them have natural resources, while others depend on the services sector. Geographically, these countries are located in Western Europe, North America and Oceania. On the other