Corrupt activity hinders development, contributes to the depletion of the public purse and distorts markets, furthering hindering local and foreign direct investment.
Economic impact of corruption
Public money is for government services and projects. Taxes collected, bonds issued, income from government investments and other means of financing government expenditure are meant for social grants, education, hospitals, roads, the supply of power and water and to ensure the personal security of our citizens.
Corruption and bad management practices eat into the nation’s wealth, channelling money away from such projects and the very people most dependent on government for support.
Countless studies around the world show how corruption can interrupt investment, restrict trade, reduce economic growth and distort the facts and figures associated with government expenditure. But the most alarming studies are the ones directly linking corruption in certain countries to increasing levels of poverty and income inequality.
Corruption can also harm the chances of success for small and micro-enterprises. It’s been demonstrated around the world – particularly in developing economies – that small businesses pay more than twice as much of their earnings as larger companies, limiting their ability to grow and become job creating.
Because corruption creates fiscal distortions and redirects money allocated to income grants, eligibility for housing or pensions and weakens service delivery, it is usually the poor who suffer most. Income inequality has increased in most countries experiencing high levels of corruption.
In October 2011 Willie Hofmeyr, then head of the Special Investigating Unit (SIU) told South Africa’s Parliament that between R25-billion and R30-billion of government’s annual procurement budget alone was lost to corruption, incompetence and negligence. Corruption in procurement leads not only to waste of public money and resources, but inferior quality of products and services, and can deter more qualified suppliers from doing business with the state.
Underscoring other global researchers, the African Union, UN and Transparency International agree that corrupt activity hinders development, contributes to the depletion of the public purse and distorts markets - further hindering local and foreign direct investment.
In broad terms Transparency International calculates that investing in a “relatively corrupt” country compared to an “uncorrupted” one is some 20% more costly. The direct economic impact is obvious: investment critical to job creation and poverty alleviation goes elsewhere. That cost is “hidden” and defies calculation.
Another cost to an economy affected by corrupt activities include capital flight, which means that funds required to acquire assets abroad shrinks a country’s savings pool that could otherwise have been invested in the local economy.
Other more general consequences that are difficult to quantify include higher costs and declining quality of public sector infrastructure projects; the slide of the economy towards an “underground sector”; diminishing economic efficiency and macroeconomic instability and an increased tendency to be negatively affected by global economic crises.
The Washington research group, Global Financial Integrity said in a report that South Africa had suffered an illegal outflow of R185-billion due to corruption in both the public and private sectors between 1994 and 2008.
Since credible political leadership is undermined by corruption, it is essential that government be seen to take corruption seriously to enhance its image at home and abroad. In doing so, we can remain competitive in the race for foreign capital, successfully target and spend the Treasury’s money and fulfil our mandate of a better life for all.