Corruption, Business Climate, and Economic Growth

Corruption, Business Climate, and Economic Growth

Harish C. Chandan (Argosy University, USA)
Copyright: © 2015 |Pages: 23
DOI: 10.4018/978-1-4666-6551-4.ch022
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Corruption is globally pervasive. Defined as abuse of entrusted power for private gain (Transparency International, 2013), corruption represents a set of economic, social, cultural, and political practices that are secretive and rooted in greed, ambition, or quest for power. This chapter reviews causes of corruption including the macro- and micro-level determinants of corruption such as leadership, management, and organizational culture. Various subjective and objective measures of corruption are discussed. Transparency International's Corruption Perception Index (CPI) and Heritage Foundation's Economic Freedom Index (EFI) are reviewed. The World Bank's Business Environment and Enterprise Performance Survey (BEEPS), Doing Business Indicator (DBI), and World Bank Institute's Governance Indicator (WBI-GI) are also reviewed, as is the role of global anti-corruption agencies and various instruments. Additionally, the relationship between corruption and foreign domestic investment, economic growth, and economic and political institutions are considered, as are anti-corruption intervention strategies for corruption and business ethics training.
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Corruption is pervasive globally and represents a set of economic, social, cultural, and political practices that are secretive and rooted in greed, ambition, or quest for power. These practices occur in government institutions, non-profit organizations, multi-national corporations, and private businesses (Kaufmann & Vicente, 2011). Some of these practices include bribery, embezzlement, money laundering, abuse of entrusted power, trading influence, and diverting organizational funds or property for personal gain. Other corrupt practices include avoiding taxes, skirting the law, financial fraud, insider trading, money laundering, manipulating the system using legal loopholes, nepotism, and discrimination. Some examples of the political corruption include voter fraud, political finance, political payback and retribution. Corruption is a very large global ‘underground industry’ in both emerging economies with high growth rates and developed economies with relatively small growth rates.

Corruption is defined as abuse of entrusted power for private gain (Transparency International, 2013). The abuse of power, secret dealings, and bribery continue to ravage societies around the world. An international survey of 114,000 respondents in 107 countries revealed that more than one in four people (27%) reported having paid a bribe in the last 12 months (Global Corruption Barometer, 2013). The scale of corruption varies significantly from country to country. While many developing countries face the challenge of addressing systemic corruption, some emerging economies, in fact, have lower levels of corruption than some wealthy countries (Kaufmann, 2013).

Corruption is not a victimless transaction as the victims of corruption are outside the parties who participate in a corrupt act and benefit from it. Corruption is associated with increased income inequality in a country, and may be viewed as unreported white-collar crime that is often considered a way of doing business. The World Bank estimates approximately US$1 trillion is paid in bribes each year around the world, representing 5% of world Gross Domestic Product (GDP). This estimate of annual worldwide bribery does not include the extent of embezzlement or ‘leakage’ of public funds. Corruption is equivalent to a 20% tax on foreign investors (World Bank, 2013). The African Union estimates the African continent loses 25% of GDP to corrupt practices.

A study on the causal relationship between economic growth and corruption in 42 developing countries concludes that adequate institutional facilities must be in place in developing economies to reduce losses from corruption especially within and after periods of economic growth (Wright & Craigwell, 2013). The business sector grows significantly faster where corruption is lower and property rights and rule of law are safeguarded. Good governance and anti-corruption measures lead to an improved investment climate and business environment. Both the public and private sectors have responsibility in improving investment climate since they interface each other (World Bank, 2013).

Key Terms in this Chapter

Doing Business Indicator: Ranks the economies in 10 areas of business regulation, such as starting a business, resolving insolvency and trading across borders.

Corruption: Is defined as abuse of entrusted power for private gain.

Corruption Perception Index (CPI): Is the annual ranking of countries “by their perceived levels of public sector corruption, as determined by expert assessments and opinion surveys. The CPI generally defines corruption as ‘the misuse of public power for private benefit’.”

Business Climate: Refers to the attitude of government and lending institutions towards business activity. It also includes the tax rate, inflation and attitude of labor unions towards employers.

Business Ethics: A form of applied ethics that examines ethical or moral problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.

Economic Freedom Index (EFI): Is an annual guide published by The Wall Street Journal and The Heritage Foundation. The Index covers 10 freedoms – from property rights to entrepreneurship – in 186 countries.

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