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analySEEs Report: Impact of Corruption on Economic Growth Performance in Developing Countries

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analySEEs Impact of Corruption on Economic Growth Performance in Developing Countries Quamrul Mahmud 2008 www.analySEES.co.uk Page 1 www.analySEEs.co.uk Introduction Economic development is a multidimensional process which requires many factors working efficiently in an interrelated system. From the inception of country concept, all countries in the world have been trying to increase economic growth. But economic history tells that only few countries have been successful to achieve desire
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   www.analySEES.co.ukPage 1   analySEEs   2008 Impact of Corruption on Economic GrowthPerformance in Developing Countries   Quamrul Mahmud www.analySEEs.co.uk    www.analySEEs.co.uk Page 2 Introduction Economic development is a multidimensional process which requires many factors working efficiently inan interrelated system. From the inception of country concept, all countries in the world have beentrying to increase economic growth. But economic history tells that only few countries have beensuccessful to achieve desired economic growth while many othercountries are lagging behind their economic goals.During the post war period, when trade liberalisation and economicintegration were emerging issues, there was a major positivechange in economic growth performance in different parts of theworld. In this period many developing countries, especially in EastAsia, have shown tremendous success in developing their economicconditions from a lower-income country to a higher-incomecountry. But at the same time many developing countries, mostly inSub-Saharan Africa, Central and South Asia and Latin America, havenot yet been successful to break the vicious circle of poverty. Post war period, East  Asian countries have shown tremendous success in developingtheir economic conditions from a lower-incomecountry to a higher-income country    www.analySEEs.co.uk Page 3Cross-country difference in economic growth performance in developing countries is caused by manyfactors such as institutional inefficiency, environment degradation, negative impact of globalisation andtrade liberalisation, misuse of foreignaid, technological backwardness,inefficient market structure andresource allocation, non-competitivefinancial sector, inefficient utilisationof natural resources and, above all,government failure and corruption.This essay explains how corruptioncan be attributed as an importantfactor for cross-country differences in economic growth performance in developing countries. It will beargued that corruption is a major reason for decrease in investment, misallocation of resources,inefficiency of public and social services, international terrorism and income inequality.   www.analySEEs.co.uk Page 4 Impact of corruption on investment Corruption hits economic growth through its negative relation with investment. Vaclav Havel, formerCzech President (October 2001), argues, ‘corruption may either deter investment or render it lessproductive through its adverse impact on the risk and cost of doing business’ (Mauro 1995). Economicgrowth is lowered by corruption because investment is negatively correlated with corruption, especiallywhen dishonest bureaucracies delay the distribution of permits and licenses for investment (Mauro1995). Mauro (1995) also considersthat negative association betweencorruption and investment issignificant, both in a statistical andin an economic sense. For example,if Bangladesh were to improve theintegrity and efficiency of itsbureaucracy to the level of that of Uruguay, its investment rate wouldrise by almost five percentage points and its yearly GDP growth rate would rise by over half apercentage point.Furthermore, corruption hinders investment by increasing cost of production and transactions becausecorrupt practices are conducted in secrecy and contracts are not legally enforceable (Brempong andCamacho 2006). Likewise, institutional inefficiency, as an ultimate consequence of corruption, alsodiscourages both local and foreign investment.
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