Corruption and Economic Development PDF

**[Corruption and Economic Development]** At the macro level, the literature generally shows that corruption has a negative, direct impact on economic growth and development. Corruption also has an indirect effect on a country's economic performance by affecting many factors fuelling economic growt...

**[Corruption and Economic Development]** At the macro level, the literature generally shows that corruption has a negative, direct impact on economic growth and development. Corruption also has an indirect effect on a country's economic performance by affecting many factors fuelling economic growth such as investment, taxation, level, composition and effectiveness of public expenditure. Economists have long identified a number of channels through which corruption may affect economic growth (Mauro 1995; Tanzi 1997; Gupta 2000; Gyimah-Brempong 2001, among others): Corruption distorts incentives and market forces, leading to misallocation of resources. Corruption diverts talent and resources, including human resources, towards "lucrative" rent-seeking activities, such as defence, rather than productive activities. Corruption acts as an inefficient tax on business, ultimately raising production costs and reducing the profitability of investments. Corruption may also decrease the productivity of investments by reducing the quality of resources. For example, by undermining the quality and quantity of health and education services, corruption decreases a country's human capital. Rent-seeking behaviour is also likely to create inefficiencies, fuelling waste of resources and undermining the efficiency of public expenditure. **[How to tackle Corruption?]** 1. **Leadership\ **Corruption is cancer, and it spreads very fast. Many new dynamic leaders consider the elimination of corruption as their primary duty, but they fall into the hatches of corruption due to greed and selfishness. Top leaders must set an example that to be successful in life honesty, integrity, and hard work is extremely important. However, honesty and motivated individuals alone cannot eradicate the problem. 2. **Credibility\ **You can't clap from just one hand; you need two hands. To counter the corrupt, the offenders on both sides of the demand and supply chain must be convinced that the government is serious about combating corruption. One suggestion towards the same is to "fry some big fish", which means publicly try and punish some well-known corrupt people in our country. 3. **Involvement of people\ **The Right to Information Act, 2005 empowers the citizens of India to ask for information related to the government, and the same must be made available to the public unless it is a confidential piece of information. Once people are convinced that there is a strong effort to protest against the corrupt officials, they will respond and extend their full participation in resolving this issue. It is only the people of India who can stop corruption in India! Hence, people's involvement becomes inevitable. 4. **Responsible Media\ **A Media which is responsible will gather, analyse, organize, present and disseminate information neutrally to create public awareness and help in undertaking reforms to overcome corruption. Nevertheless, its ability to garner political support and mislead the people should not be underestimated. 5. **Watch-dog agencies\ **The watch-dog agencies such as the Central Vigilance Commission (CVC) is the governmental wing which addresses corruption in the government. It is an autonomous body. This body can only thrive only where the political atmosphere is filled with honest people, civil servants are free from governmental interference, and better incentives are given to discourage corruption. If not, bodies such as the CVC will be of no use or worse, misused for political gain. 6. **Improving Institutions\ **Improvement of the legal framework speedy disposal of cases, less time-consuming ways to conduct business in the law courts and in the administration of justice, promotion of efficiency of the security forces such as the police, strengthening the auditor general's office, appointment of a responsible inspector general who will be responsible for the investigation of corruption in India. 7. **Revision of Laws\ **Existing laws relating to corruption must be modified and amended. Severe punishments and not just fine must be imposed on the perpetrator. 8. **Education\ **Minimizing corruption is possible with the help of knowledge. According to a survey, Kerela is the least corrupt state in India because it has the highest literacy in India. 9. **E-Governance\ **Corruption in India can be reduced by increasing the contact between the government and the governed. E-governance could help a lot in this regard. E-government refers to the communication between Government-to-business, Government-to-government, government-to-employees as well as the interaction between the entire governmental framework through information and communication technology (ICT). This will enable the important exchange of information, with the RTI also helping this process. Further, here are the Indian laws that are working towards combating corruption -- - Prosecution section of Income Tax Act, 1961 - The Prevention of Corruption Act, 1988 -  The Benami Transactions (Prohibition) Act, 1988 to prohibit Benami transactions. -  Prevention of Money Laundering Act, 2002 - Lokpal and Lokayukta Act, 2013 Corruption occurs not just in India but everywhere in the world, especially in places where the risk of getting caught is low and the rewards are high. It is not a matter of whether it is unlawful or illegal but a question of personal integrity and dignity. It is unethical to hoard money and gain an advantage by wrong-doings. It results in social inequality, widens the gap between the rich and the poor, makes the administration slow and makes the country shameful in the eyes of the world. It is important for the people of India to realize that what starts as greed and selfishness turns into corruption one day. Apart from the remedies suggested above, the mindset of the people has to change, and the people themselves can only do that. There is no medicine, no book that can teach the same to them. The root of greed and selfishness must be eradicated from their brains. **[ROLE OF MARKETS & MARKET FAILURE]** A perfect market is based upon many assumptions like, perfect competition, perfect information, complete markets, no transaction costs, etc. When any of these perfect assumptions violate, there occurs a market failure. [Under market failure, the market may produce more than or less than what is socially desirable or not at all.] Also, many a time there may be consumption and production spill overs which may affect those who are not directly involved in market exchange. Market failure in short [implies a loss of allocative efficiency or a situation in which the allocation of goods and services is not efficient.] In such a situation, [the potential total surplus in the market may not be maximised and deadweight loss may exist]. Market failures are often associated with [information asymmetries, non-competitive markets, principal--agent problems, externalities, or public goods]. The existence of a market failure makes the case for the intervention of government to bring in optimum solutions in particular market. [Government policy intervention can be in terms of taxes, subsidies, bailouts, wage and price controls, and regulations which may lead to an efficient allocation of resources.] When there is an imperfection in the form of imperfect market structure like monopoly, oligopoly, monopolistic competition etc., these lead to lesser production and charge higher prices in the market than perfectly competitive market. In case of natural monopolies, a single firm gains from economies of scale originating from large scale production. This implies that there is cost efficiency in this market structure compared to perfect competition. But such a natural monopoly may take advantage of its position by charging higher prices even when its costs are so less. Thus, government by taking over such monopolies or by regulating these will lead to higher gains for the society as a whole in the form of decreasing. **[Market Failure and its Remedies]** The market failure is a situation in which market fails to efficiently provide or allocate goods, services and resources. This occurs due to the presence of certain imperfections in the market which constrain the market from achieving the optimum welfare. The following reasons cause the market failure and prevents the market to achieve productive and allocative efficiency. **1. Imperfect market structure** These include monopoly, oligopoly, duopoly and monopolistic competition which leads to non-achievement of Pareto optimal solutions because markets may fail to control the abuses of monopoly power. **2. Missing or incomplete markets.** For some goods and services the relevant markets may not exist at all, resulting in a failure to meet a need or want, such as the need for public goods, such as street lighting, highways etc. It may also happen that for certain goods the markets may be incomplete. For example, incomplete markets may fail to produce enough merit goods, such as education and healthcare. **3. Presence of externalities.** Externalities are said to occur in an economic system when a decision maker does not bear all the costs or reap all the gains from his actions. It means that externalities can be adverse as well as beneficial. Externalities which are not desirable are called as negative externalities. These occur when consumers and producers fail to take into account the effects of their actions on those who are not directly involved in the market exchange. Similarly, there are certain external effects of an individual's actions which confer benefits to others. It means that the social marginal benefit of such positive consumption and production is high. But private individuals under produce or under consume these. In the case of externalities, parties external to the exchange bears cost or enjoy benefits. These can be called as third parties and these are individuals, organisations, or communities indirectly benefiting or suffering as a result of the actions of consumers and producers attempting to pursue their own self-interest. As the allocation in the presence of externalities is not Pareto efficient, so market failure occurs. **4. Imperfect information.** An allocation will be efficient only when all the parties involved are having perfect information. But sometimes markets may not provide enough information because it may not be in the interests of one of the parties (involved in exchange) to provide full information to the other party. This also causes market to fail to produce optimally. **5. Provision of Public goods.** The public goods are those goods which are non-excludable and non-rival, due to these characteristics of public goods market system fails to provide them efficiently and leads to allocative inefficiency. **[Remedies for market failure]** The government is expected to step in whenever free market forces result in inefficiency in allocation. The government has four types of role in an economic system: 1\. Legislative or regulatory 2\. Allocative 3\. Distributive 4\. Stabilization For accomplishing these roles, there are basically two strategies with the government in order to reduce or eliminate market failures: **1. Using the price mechanism** Market failure occurs because the price mechanism is not working efficiently at its own. So, the government influences the price mechanism to change the behaviour of consumers and producers. This would mean taxing the 'harmful' products, thereby increasing their prices and providing subsidies for the 'beneficial' products. In this way, behaviour is altered through financial incentives, in the same way in which markets work to allocate resources. **2. Using legislation and force** Another strategy for remedying market failure is by using the regulatory framework of law to change the market behaviour. This includes various command and control policies, regulatory policies etc. This may involve banning cars which are harmful for environment and imposing higher social costs, or having in place a licensing system for the sale of alcohol, or by penalising polluters, in order to control the unwanted behaviour. In the majority of cases of market failure, a combination of these remedies is most likely to succeed.