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Economies that are afflicted by a high level of corruption -- which involves the misuse of power, whether
in the form of money or authority, in order to achieve certain goals in illegal, dishonest or unfair ways -- are
not capable of prospering as fully as those with a low level of corruption. Corrupted economies are just not
able to function properly because corruption prevents the natural laws of the economy from functioning
freely. As a result, corruption in a nation's political and economic operations causes its entire society to suffer.
According to the World Bank, the average income in countries with a high level of corruption is about a third
of that of countries with a low level of corruption. Also, the infant mortality rate in such countries is about 3
times higher and the literacy rate is 25% lower. No country has been able to completely eliminate corruption,
but studies show that the level of corruption in countries with emerging market economies is much higher
than it is in developed countries.
Inefficient allocation of resources
In best practice companies choose their suppliers via tender processes (request for tender or request for
proposal) which serve as mechanisms to enable the selection of suppliers that offer the best combination of
price and quality. This ensures the efficient allocation of resources. In corrupted economies the companies
that otherwise would not be qualified to win the tenders, are oftentimes awarded projects as a result of unfair
or illegal tenders (e.g. tenders that involve kickbacks). This results in excessive expenditure in the execution
of projects, and substandard or failed projects etc., that lead to overall inefficiency in the use of resources.
Public procurement perhaps is most vulnerable to fraud and corruption due to the large size of financial flows
involved (OECD). Its estimated that in most countries public procurement constitutes between 15% and 30%
of GDP.
Corrupted economies are characterized by a disproportionately small middle class and significant
divergence between the living standards of the upper class and lower class.(For a profile of the middle class in
the US, see article: Are We Losing the Middle Class?) Because most of the country's capital is aggregated in
the hands of oligarchs or persons who back corrupted public officials, most of the created wealth also flows to
these individuals. Small entrepreneurs are not widely spread and are usually discouraged because they face
unfair competition and illegal pressures by large companies who are connected with government officials.
Because little confidence can be placed in the legal system of corrupted economies in which legal
judgments can be rigged, potential innovators cannot be certain that their invention will be protected by
patents and will not be copied by those who are not afraid of being subject to punitive measures by the
authorities, because they can bribe these authorities. (For related reading, see: Patents Are Assets, So Learn
How To Value Them.) There is thus a disincentive for innovation, and as a result emerging countries are
usually the importers of technology, because such technology is not created within their own societies.
Small entrepreneurs tend to avoid having their businesses officially registered with tax authorities to
avoid taxation. As a result the income generated by many businesses exists outside the official economy, and
thus are not subject to state taxation and are not included in the calculation of the country's GDP. (See: The
GDP And Its Importance.) Another negative effect of shadow businesses is that they usually pay their
employees lower wages than the minimum amount designated by the government and they do not provide
acceptable working conditions (including appropriate health insurance benefits) for employees. (For related
reading, see article: Countries with the Largest Shadow Markets.)
Corruption is one of the disincentives for foreign investment. Investors who seek a transparent and fair,
competitive business environment will avoid investing in countries where there is a high level of corruption.
Studies show that there is a direct link between the level of corruption in a country and measurements of the

competitiveness of its business environment. The following table features a small sample of countries and
shows the relationship between their ranks in competitiveness and their corruption index.
A working paper of the International Monetary Fund (IMF) published in 2010 shows that corruption has
an adverse impact on the quality of education and healthcare that are provided in countries with emerging
economies. Corruption increases the cost of healthcare and education services through illegal and unofficial
payments that are made in countries where bribery and connections play an important role in the recruitment
and promotion of teachers. As a result, the quality of education decreases. Also, corruption in the designation
of healthcare providers and recruitment of personnel, as well as the procurement of medical supplies and
equipment, in emerging economies results in inadequate healthcare treatment and a substandard, or restricted,
medical supply, and thus lowers the overall quality of healthcare in these countries.
Most countries with emerging economies suffer from a high level of corruption that slows their overall
development. The entire society is affected as a result of the inefficient allocation of resources, the presence
of a shadow economy, and low-quality education and healthcare. Corruption thus makes these societies worse
off and lowers the living standards of most of their populations.
Having looked at some of the ways in which corruption damages the social and institutional fabric of a
country, we now turn to reform options open to governments to reduce corruption and mitigate its effects.
Rose-Ackerman (1998) recommends a two-pronged strategy aimed at increasing the benefits of being honest
and the costs of being corrupt, a sensible combination of reward and punishment as the driving force of
reforms. This is a vast subject. We discuss below six complementary approaches.
1. Paying civil servants well
Whether civil servants are appropriately compensated or grossly underpaid will clearly affect motivation
and incentives. If public sector wages are too low, employees may find themselves under pressure to
supplement their incomes in unofficial ways. Van Rijckeghem and Weder (2001) did some empirical work
showing that in a sample of less developed countries, there is an inverse relationship between the level of
public sector wages and the incidence of corruption.
2. Creating transparency and openness in government spending
Subsidies, tax exemptions, public procurement of goods and services, soft credits, extra-budgetary funds
under the control of politiciansall are elements of the various ways in which governments manage public
resources. Governments collect taxes, tap the capital markets to raise money, receive foreign aid and develop
mechanisms to allocate these resources to satisfy a multiplicity of needs. Some countries do this in ways that
are relatively transparent and make efforts to ensure that resources will be used in the public interest. The
more open and transparent the process, the less opportunity it will provide for malfeasance and abuse. Collier
(2007) provides persuasive evidence on the negative impact of ineffective systems of budget control.
Countries where citizens are able to scrutinize government activities and debate the merits of various public
policies also makes a difference. In this respect, press freedoms and levels of literacy will, likewise, shape in
important ways the context for reforms. Whether the country has an active civil society, with a culture of
participation could be an important ingredient supporting various strategies aimed at reducing corruption.
New Zealand, which is consistently one of the top performers in Transparency Internationals Corruption
Perceptions Index, is a pioneer in creating transparent budget processes, having approved in 1994 the Fiscal
Responsibility Act, providing a legal framework for transparent management of public resources.
3. Cutting red tape
The high correlation between the incidence of corruption and the extent of bureaucratic red tape as
captured, for instance, by the Doing Business indicators suggests the desirability of eliminating as many

needless regulations while safeguarding the essential regulatory functions of the state. The sorts of regulations
that are on the books of many countriesto open up a new business, to register property, to engage in
international trade, and a plethora of other certifications and licensesare sometimes not only extremely
burdensome but governments have often not paused to examine whether the purpose for which they were
introduced is at all relevant to the needs of the present. Rose-Ackerman (1998) suggests that the most
obvious approach is simply to eliminate laws and programs that breed corruption.
4. Replacing regressive and distorting subsidies with targeted cash transfers
Subsidies are another example of how government policy can distort incentives and create opportunities
for corruption. According to an IMF study (2013), consumer subsidies for energy products amount to some
$1.9 trillion per year, equivalent to about 2.5 percent of global GDP or 8 percent of government revenues.
These subsidies are very regressively distributed, with over 60 percent of total benefits accruing to the richest
20 percent of households, in the case of gasoline. Removing them could result in a significant reduction in
CO2 emissions and generate other positive spillover effects. Subsidies often lead to smuggling, to shortages,
and to the emergence of black markets. Putting aside the issue of the opportunity costs (how many schools
could be built with the cost of one years energy subsidy?), and the environmental implications associated
with artificially low prices, subsidies can often put the government at the center of corruption-generating
schemes. Much better to replace expensive, regressive subsidies with targeted cash transfers.
5. Establishing international conventions
Because in a globalized economy corruption increasingly has a cross-border dimension, the international
legal framework for corruption control is a key element among the options open to governments. This
framework has improved significantly over the past decade. In addition to the OECDs Anti-Bribery
Convention, in 2005 the UN Convention Against Corruption (UNCAC) entered into force, and by late 2013
had been ratified by the vast majority of its 140 signatories. The UNCAC is a promising instrument because it
creates a global framework involving developed and developing nations and covers a broad range of subjects,
including domestic and foreign corruption, extortion, preventive measures, anti-money laundering provisions,
conflict of interest laws, means to recover illicit funds deposited by officials in offshore banks, among others.
Since the UN has no enforcement powers, the effectiveness of the Convention as a tool to deter corruption
will very much depend on the establishment of adequate national monitoring mechanisms to assess
government compliance.
Others (Heinemann and Heimann (2006)) have argued that a more workable approach in the fight against
corruption may consist of more robust implementation of the anticorruption laws in the 40 states that have
signed the OECDs AntiBribery Convention. Governments will need to be more pro-active in cracking down
on OECD companies that continue to bribe foreign officials. In their efforts to protect the commercial
interests of national companies, governments have at times been tempted to shield companies from the need
to comply with anticorruption laws, in a misguided attempt not to undermine their position vis--vis
competitors in other countries. Trade promotion should not be seen to trump corruption control. Governments
continue to be afflicted by double standards, criminalizing bribery at home but often looking the other way
when bribery involves foreign officials in non-OECD countries.
6. Deploying smart technology
Just as government-induced distortions provide many opportunities for corruption, it is also the case that
frequent, direct contact between government officials and citizens can open the way for illicit transactions.
One way to address this problem is to use readily available technologies to encourage more of an arms-length
relationship between officials and civil society; in this respect the Internet has been proved to be an effective
tool to reduce corruption (Andersen et al., 2011). In some countries the use of online platforms to facilitate the
governments interactions with civil society and the business community has been particularly successful in
the areas of tax collection, public procurement, and red tape. Perhaps one of the most fertile sources of

corruption in the world is associated with the purchasing activities of the state. Purchases of goods and
services by the state can be sizable, in most countries somewhere between 5-10 percent of GDP. Because the
awarding of contracts can involve a measure of bureaucratic discretion, and because most countries have long
histories of graft, kickbacks, and collusion in public procurement, more and more countries have opted for
procedures that guarantee adequate levels of openness, competition, a level playing field for suppliers, fairly
clear bidding procedures, and so on.

According to the report of World Bank Philippine Economic growth slowed down to 5.3 percent in the third
quarter of 2014, due to weak government spending on the demand side and agricultural production on the
supply side.
Government consumption contracted by 2.6 percent while infrastructure spending fell by 6.2 percent.
Contributing to weak government spending are the Supreme Court decision which found some provisions of
the Disbursement Acceleration Program unconstitutional, budget execution bottlenecks, and slow
disbursement for Typhoon Yolanda reconstruction.
Despite the slowdown, more than a million jobs were created in October 2014, although the quality of jobs
remains a challenge. The 2013 Annual Poverty Indicator Survey (APIS) finds that real income of the bottom
20 percent grew much faster than the rest of the population. The survey also confirms that the governments
conditional cash transfer program is reaching the poor, as reflected in the substantial growth of domestic cash
transfers to the bottom 20 percent.
Lower government spending, investment delays and slowdown, and weaker exports are likely to limit
economic growth to 6 percent in 2014 and 6.5 percent in 2015. Provided that government can fully commit to
utilizing the budget as planned, as well as accelerating reforms, achieving growth of above 6.5 percent can be
Translating higher growth into inclusive growth can help the government achieve its poverty target of 18 to
20 percent by 2016.
Eradicating poverty requires a commitment to implement key reforms in the areas of infrastructure, health
and education; enhancing competition to level the playing field; simplifying regulations to promote job
creation; and protecting property rights.
Higher investments need to be supported by tax policy reforms as tax administration reforms are inadequate
to fully fund the investment gap. Worsening port and road congestion and possible power shortages in 2015
underscore the need to urgently raise investments.
Tax policy reform should aim for a more equitable, efficient and simpler tax system.
Reforms to strengthen tax administration and improve the transparency and accountability of government
are essential to make it a success. Key reforms include the passage of the Freedom of Information bill, which
institutionalizes open data, enhancing budget reporting, and simplifying tax procedures and processes.
Higher investments in infrastructure, health, and education need to be complemented by reforms to enhance
competition. Essential reforms include crafting and implementing a clear competition policy, liberalizing key
sectors of the economy to directly benefit poor Filipinos, and opening up the economy to more foreign