1. Corruption: Definition, Quantification and Measurement Shrabani Saha Lecturer Department of Economics and Finance Massey University

2. Introduction Research Background Transparency International corruption report finds that of the158 countries evaluated for its 2005 Corruption Perception Index (CPI) “Seven out of ten countries score less than 5 out of a clean score of 10….Nine out of ten developing countries score less than 5 against a clean score of 10…” – New Zealand scores 9.6 and is tied for the second place with Finland in 2005 – Brown, (2000, September 16). Corruption is alive and well in ‘honest’ NZ. New Zealand Herald. URL is available at: http://www.nzherald.co.nz/search/story.cfm?storyid=9260297C-39D9-11DA-8E1B-A. Corruption undermines development by weakening the institutional foundation on which economic growth depends (Klitgaard,1988; Bardhan,1997). Mauro (1995, 1997, 1998) finds that corruption reduces investment share of GDP, expenditures on health and education which, in turn, has a damaging impact on the country’s economic growth. 2

3. What is corruption?  In spite of corruption’s universal existence, there is no common definition of it.  Rose-Ackerman 1978 and Jain 2001, broadly identifies three types of corruption in a democratic society based on the relationship between the general public and government, Which are:  Political corruption  Bureaucratic corruption  Legislative corruption 3

4. What is corruption? The existing literature also classifies corruption as: ◦ Grand corruption and ◦ Petty corruption Bardhan (1997) argues that even if we confine ourselves only to the economic context, there are alternative divisions drawn between different forms of economic corruption. 4

5. What is corruption? For example, ◦ Centralised and decentralised corruption ◦ Well-organised and chaotic corruption Like different forms of corruption, different levels or, structures of corruption exist as well, e.g. bottom-up corruption and top-down corruption 5

6. What is corruption?  Finally, in recent years there is a growing concern over corruption in the private sector, especially in the developed countries.  However, the conventional view regards corruption as the misuse of public offices only.  Public officials are expected to act in the interest of the public while a different set of expectations are assigned to the members of the private sector.  The rationale behind a private agent is to maximise profit for private enrichment. 6

7. Definition  Corruption is a multifaceted concept such as fraud, appropriation of public assets and embezzlement of public funds for personal use by politicians.  Gray and Kaufmann (1998) said that fraud and embezzlement have clear and direct negative impact on a country’s economy so that their costs do not need any detailed and sophisticated discussion.  In contrast, the analysis of bribery and its impact on economic development is more complex, which requires thorough research. 7

8. Definition  The literature on corruption mainly emphasises corrupt activities such as sale of public goods and bribery in several forms.  Thus, corruption can be defined as the illegal profiteering from illegitimate transactions such that a position of entrusted power is used for private enrichment.  This definition of corruption comprises one or more of the following elements: 1.There must be at least two parties to an act of corruption, namely the person who offers the reward or inducement and the party accepting it. 2.There must be misuse of office or position of authority for private gain. 8

9. Definition 3. There is either an offer and /or acceptance of inducements. 4. An act through which public or entity property is dishonestly misappropriated. 5. Corruption involves breach of trust. 9

10. Measurements of Corruption Not only is corruption difficult to define, it is also hard to measure or quantify corruption because of its various forms. In the existing literature either per unit bribe or total revenue collected from bribes appears as a measure of corruption. If per unit bribe stands as a measure of corruption, then an increase in the per unit bribe increases the level of corruption. 10

11. Measurements of Corruption If total revenue collected from bribes measures corruption, then an increase in total revenue from bribes enhances corruption, even when the per unit bribe is less. Shleifer and Vishny, (1993) illustrates centralised and decentralised corruption by measuring both per unit bribe and total revenue collected from bribes. 11

12. Measurements of Corruption  In centralised corruption, bribe per unit is less, even though the total amount of bribe paid may be higher due to the larger supply of public goods.  In decentralised corruption, per unit bribe is higher than in centralised corruption, but total revenue collected from bribe income is less.  If bribe per unit is used as a measurement criterion for corruption, then the level of corruption increases in a decentralised economy. 12

13. Measurements of Corruption  The total amount of bribes collected from corrupt transactions as a measure of corruption creates problems when it is used to compare the level of corruption between countries due to different income levels.  For example, an African country and an East Asian Country.  Bardhan (2006, p. 342) argues that the actual amount of money that is transacted in the corrupt deals may be much more in the East Asian country than that in the African country. 13

14. Measurements of Corruption  In many developing countries the occurrence of petty corruption transpires in day-to-day life.  For example, in India, it can be seen in any city, that traffic police officers often collect money from passing vehicles.  If all the money collected by these police officers in a year is added up, it may not substantially exceed the money that was collected in one single corrupt transaction in a developed country when it buys a fighter aircraft.  For example, in 1976, Lockheed officials had paid $22 million in bribes to foreign officials in the process of negotiating the sale of aircraft including the F-104 Starfighter, the so-called "Deal of the Century". 14

15. Measurements of Corruption Since the number of corrupt transactions is large, even if the amount of money collected from corrupt transactions is not so large, the developing countries may have come to be regarded as more corrupt. The number of corrupt transactions that take place in a country may be taken as a good measure of corruption. 15

16. Measurements of Corruption The difficulty in defining and measuring the levels of corruption in different countries has presented a major obstacle for the cross-country empirical research on corruption. More recently, researchers have begun to develop corruption indices, based on surveys; most of these are perceived corruption indices. 16

17. Measurements of Corruption The following are some of the studies that have attempted to measure corruption: ◦ Business International Corporation ◦ Political Risk Services ◦ Transparency International ◦ World Bank Most researchers have used a combination of these indices to estimate the relationships between corruption and a host of other variables. 17