ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

1.0 INTRODUCTION
This assignment seek to discuss the fiscal and economic costs of corruption. The
second greatest obstacle to socio-economic development in the 21 st century is
corruption (Ellis and Fender, 2003). Epstein and Axtell (1996) highlighted that the abuse
of positions of authority has resulted in a rise of an elite group in ruling political parties
while the standards of living of the vast majority declines. Therefore, corruption has
become an unquestionably current emotional topic in South Africa because of how it
has negatively impacted the welfare of the people. In South Africa, public protectors
report and the public service commission statements exposed the modus operandi of
typical administrative fraudsters. The report also showed the pernicious nature of
corruption by public officials who are supposed to safeguard the nation (Hennie, 2013).

2.0 OVERVIEW OF CORRUPTION IN SOUTH AFRICA

The democratization and restructuring of South African government has resulted in

answerability and transparency in the allocation of public funds (Hammond, 2000). The
public service commission (PSC) of South Africa has conducted a research on the
misconduct of public funds by public officials. The rate of financial misconduct cases
has continued to increase since 2001 up to 2012 (Public service commission, 2012).
Court cases of financial misconduct were 1865 in South Africa from 2001 to 2004, from
2005 to 2007 court cases further increased by 461 to 2326. The number of court cases
continued to increase resulting in more leakages in the economy through corruption.
These figures are illustrated in table 1.1.

The abuse of authority by public officials has become the trending current notion in
South Africa. The release of the public protector and state capture reports on the
Nkandla corruption saga and the bribe allegations by the GUPTAs family in bid to
control the political environment has caused great concern among members of the
society (Chutel, 2016). The dilemma of self-enrichment and looting of state fund for
private gain has resulted in protest in most cities by different political parties as
approximately R246 million is diverted to private Nkandla deal while 8 million people
cant find jobs and 13 million people are dont have enough basic necessity such as
food (Morken, 2016). The exploitation of the taxpayers by public officers does not only

1
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

affect standards of living locally but it distorts international confidence in the South
African economy (Cohen, Mbatha and Sguazzin, 2016).

2.1 Financial Misconduct Cases in the Public Service From 2001 To 2014

FINANCIAL MISCONDUCT CASES IN THE PUBLIC SERVICE FROM 2001-2014

YEAR CASES AMOUNT NOT PERCENTAG
REPORTED (MILLIONS) RECOVERED E NOT
RECOVERED
2001-2004 1865 335.6 - -
2005-2007 2326 296.6 175.3 59%
2008-2010 3207 467.8 103 22%
2011-2014 3839 1459.9 272.6 18.7%
Source: (Public service commission 2014) (table 1.1)

According to the Transparency International Corruption Perceptions Index of 2016.

Comparing emerging economies like Brazil, Russia, India, China and South Africa
(BRICS), South Africa is recording the highest rating in terms of transparency 44, 44
and 45 out of 100% in 2014, 2015 and 2016 respectively although it is still far from total
transparency of 100% (Corruption Perception Index, 2016). Other BRICS members
have a lower rate of transparency although all BRICS members seem to be in the same
range despite of Russia which is still experiencing very low levels of transparency.

2.2 Corruption Perception Index for Brics Countries from 2014 To 2016

2
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

50

45

40

35

30

25

20

15

10

0
SOUTH AFRICA CHINA INDIA RUSSIA BRAZIL
2014 2015 2016

Source: (Corruption perception, 2016) (table 1.2)

3.0 IMPACT OF CORRRUPTION ON THE ECONOMY

There are still different schools of thoughts on the impact of corruption on economy
(Gellner, 2000). Gupta, Davoodi & Rosa (1998), argued that corruption can be either
positively or negatively related to economic development. Hammond (2000), also
maintained that its relationship upon the economic depends upon how strong or weak
the institutions are. Given a weak or poor institution corruption has a positive impact
upon the economy especially on emerging markets like China, South Africa, Russia and
India. In nations where there are levels of inequality, for instance in South Africa.
Considering table 1.2, BRICS member states are still experiencing low levels of
transparency and accountability because they are still rated below 50%. In this case
corruption can act as a means of redistributing income if the marginalized races and
small and medium enterprises are given tenders they dont deserve through corruption.
Therefore, corruption helps to overcome burdensome levels of inequality, inefficient
provision of public facilities and inflexible laws (Lui, 1985). Acemoglu and Verdier (2000)
also supported Lui (1985)s view of corruption having a positive impact weak and poor
institutions and governance by stating that corruption grease the wheels that is it can
reimburse for red tape and institutional dimness.

3
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

However, (Hardin, 2001) argued that corruption does not have a positive impact on the
economy, therefore the idea of corruption having no correlation with the states
governance does not stand up to analysis when looking at the long-term destructive
impression of corruption on trade and industrial growth, impartiality and the excellence
of a nations supremacy and institutional environment. Mayntz, (2003) supported the
notion of Hardin, (2001), that corruption causes long term problems on economic
growth, socio-economic exclusion and poverty, collection of revenue and inequality and
finally causes macroeconomic instability. This section provides an analysis of how
corruption can impact the economy in terms of level of distributing income, public
finance and expenditure, macroeconomic stability and the attraction of foreign and
domestic investments.

3.1 ECONOMIC GROWTH

Mungiu-Pippidi, (2006) stated that corruption cannot be measured by the amount of
state property stolen or bribes paid rather on the loss of output caused by misallocation
of resources and distortions of incentives. Table 1.1 shows how state resources were
being used for private gain. Resources where diverted from providing public services
like health, defense and education to pursue individual agendas. Mungiu-Pippidi, (2006,
2010) supported Mauro (1995)s notion which states that corruption distorts incentives
to produce and market forces leading to misallocation of funds and state property as
shown in table 1.1. Rothstein and Holmberg, (2011) also highlighted that corruption
association with political formation has a tendency of diverting resources to talents and
lucrative rent seeking activities. These resources are channeled to cronyism and rent-
seeking activities by rent-seeking lobbyists who invests in military goods and secret
investigators with the motive of protecting politicians while education and health remain
under funded. Corruption also hinders growth it increases production cost, reduce
effectiveness of asset and profitability of investment (Shleifer and Vishny, 1993).

Since investment is a component of gross domestic product, the reduction in investment

due to increase in production cost depresses savings and impedes economic growth.
All these obstacles results in an multiplier problem on economic growth because the
impediment of growth distorts procedures in decision making associated with creating

4
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

investment and allocation of government expenditure. Mauro (1995) mentioned that

there is a negative relationship between governments spending ratio to GDP in
economies were corruption is at maximum. This notion has been accentuated by
Rinaldi, Feichtinger and Wirl (1998), they stated that government officials allocates
resources basing on the opportunity they get through extorting bribery on infrastructure
and defense issues rather than on the basis of societal welfare. Tanzi & Davoodi
accentuates on the ideology as they states that corruption has affected growth in
emerging economies. He stated that higher public spending associated with lower
government revenue which is associated with lower expenditure on crucial government
categories like education, health and infrastructure development is likely to trigger
stunted growth. It has also been acknowledged that corruption causes lower capital
productivity and it is a variable investors considers the most.

3.2 THE GROWTH OF SMALL MEDIUM AND MICRO ENTERPRISES (SMMEs)

The existence of corruption on the allocation of state resources such as land have a
direct impact on small medium and micro enterprises. Political corruption in Africa
where land is distributed only to members of a certain political party or who support a
certain legacy discourages the growth of SMMEs because individuals do not have land
to provide as collateral security to access loans in financial institutions. Therefore, the
existence of socio-economic exclusion in our societies continue to widen the disparity
between landowners and tenants because tenants do not have prospects to starts
business but land owners continue to enrich themselves since profit is their reward.

Corruption is a barrier to small and medium enterprises because it distorts market

incentives and increases cost of production (Shleifer and Vishny, 1993). In order to set
up small and emerging businesses, legal formalities must be followed (United Nations
Information Services, 2013). These processes include acquiring permits and title deeds
from the public sector. Since it is time consuming brides and improper favoritism occurs
resulting in increased cost of formation. Therefore, stated SMMEs pay bribes to make
things done more than big companies (United Nations Office of Drugs and Crime,
2012).

3.3 CORRUPTION ON REVENUE COLLECTION AND TAX SYSTEMS

5
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

Corruption has a substantial negative impression on tax revenues and collection (Attila
2008). Due to tax evasion caused by corruption more than half of government revenue
that should have been collected cannot be traced (Herzfeld 2005). The abuse of public
officials has acted as an efficacy ornamental tool in revenue collection which enables
officers promote tax evasion hence lowering the amount of revenue available for
spending by the government (Ghura, 1998). Tanzi and Davoodi, (1998), using the
corruption perception indices proved that there is a negative relationship between
corruption and revenue per GDP. Using 97 countries they concluded that one-point
increase in corruption perception index (CPI) is associated with 1.5 point decline in
revenue-GDP ratio.

Pelligrini and Gerlach, (2004) highlighted on that misappropriation of revenue has

manifested also in countries where natural resources are in abundance. Most
economies with natural resources endowment are growing at a slower rate than
economies with few resources because of patronage and partisanship. Nationalization
of state resources in an economy with weak systems results in channeling the revenue
to political and personal agendas while the masses suffer. Zimbabweans experience
this, resource curse situation. Tanzi & Davoodi (2000) also maintained that in the long
term corruption erodes tax revenue base, morality of tax payers and distorts tax
systems. The issue of disturbing tax systems which has resulted in less tax revenue
being collected

3.4 CORRUPTION ON MACROECONOMIC ENVIRONMENT

Stability in the macro economic environment is an important determinant of nations
competitiveness (World Bank, 1999). It is the third pillar used to determine the
economys global competitiveness (World Bank, 1999). Macroeconomic environment
includes rate of inflation, government budget balance, general government debt, gross
national savings and country credit rating. Corruption impacts directly especially on the
countries credit rating where the government take loans and divert the funds to dead
investment and for political agendas other than channeling it to productive sectors of the
economy. This issue creates bad credit management which crates burden for future
generation to pay loans which never benefited the majority. Since the funds where not

6
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

used on productive investments most countries fails to repay resulting in bad credit
rating in international financial institutions. In South Africa, approximately one billion is
lost due to corruption and the economy is running out of fiscal space that is ways
generating revenue to meet its expenditure. Debt financing becomes an alternative
which is a cost to the society because repayments of loans are necessary (World Bank,
2015).

3.5 CORRUPTION ON POVERTY AND INEQUALITY

According to John (2013), there is a positive relationship between level of corruption

and poverty and the level of inequality. The higher the level of corruption the more the
gap between the poor and rich continue to widen resulting in high levels of poverty in
communities (World Bank, 2013). Corruption causes biased tax systems which tend to
distort the progressiveness of tax. High income earners will tend to be tax less and low
income earner are taxed more. Therefore, income will have failed to be distributed fairly
amongst the society.

The existence of corruption results in poor tax administration which results in tax
evasion and improper tax evasion which results in very low tax revenue being collected
(Jinyoung, 2002). Unavailability of revenue results in less funds being channeled to
education causing educational inequality between members of the society. Inequality in
educational facilities results in poor human capital formation in the long run (Jinyoung,
2002).

Corruption has a tendency of shifting government expenditure from crucial social

programs to lucrative rent seeking activities that enriches the minority especially those
in public offices only while the majority suffers (Jinyoung, 2002). Unfair distribution of
assets also pose a greater threat on inequality (International Monetary Fund, 2006). The
more state resources like land and minerals are owned by few individuals, inequality
and poverty still exist because individuals do not own factors of production (Jinyoung,
2002). The majoritys reward continues to be salaries and wages while landowners gets
ever increasing profits.

7
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

3.6 CORRUPTION ON BLACK ECONOMIC EMPOWERMENT AND TENDERS

Despite the efforts taken by the government to curb levels of inequality that existed in
South Africa during the apartheid era, the rate of inequality is ever increasing amongst
members amongst members of the society (Statistics South Africa, 2010). In order to
rectify the levels of inequality in the country introduced based black economic
empowerment projects that establishes business which are owned by blacks so as to
improve the standards of living majority but it seems like the policy has failed to serve its
function due to corruption (Lipelelo, 2012). Resources that are supposed to benefit the
previously marginalized race are not being utilized properly and are diverted to other
lucrative rent seeking activities that promote individual interest (Lipelelo, 2012). The
concept of favoritism and nepotism has also manifested in the allocation of tenders
amongst clients (Munzhedzi, 2016). Therefore corruption has slowed down to rate of
poverty eradication and the pace through which inequality is being eliminated.

4.0 CONCLUSION

In conclusion, corruption has caused the deterioration of standards of living of the vast
majority of South Africans due to its direct negative impact on economic growth,
revenue collection and expenditure. Abuse of authority by public officials through
bribery, nepotism, sexism and political corruption has acted as an obstacle to
development and hinders the prospects of survival economic initiatives in both domestic
and foreign direct investment, level of inequality. Using the Corruption Perception
Index, South Africa is rated below 50% in term of level of transparency and
accountability. This shows that the government still have a major role in ensuring that
the anti-corruption committee works tirelessly to reduce levels of corruption.

8
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

REFERENCES
Chutel., L (2016) South Africas Jacob Zuma may finally have to step down after a
report confirms corruption allegations.

Cohen, M Amogelang ., A and Sguazzin., A (2016) Flashback 2016: The R600m bribe
& other state capture scandals that shook SA

Ellis C.J. and Fender J. 2003. Corruption and Transparency in a Growth Model, ?
Epstein J. M. and Axtell R.L. 1996. Growing Artificial Societies: Social Science
from the Bottom Up, MIT Press and Brookings Press, MA.
Fukuyama F. 1995. Trust: The Social Virtues and the Creation of
Prosperity, London: Hamish Hamilton.
Gambetta D. 1990. Can We Trust Trust?, in: Gambetta D. (ed.), Trust: Making
and Breaking Cooperative Relations, Oxford: Blackwell, pp. 213-237.
Gambetta D. 2000. Corruption: An Analytical Map, in: Kotkin S. and Sajo A.
(eds.), Political Corruption in Transition. A Skeptics Handbook, Budapest: CEU
Press.
Gellner E. 2000. Trust, Cohesion, and the Social Order, in Gambetta, Diego
(ed.) Trust: Making and Breaking Cooperative Relations, electronic edition,
Department of Sociology, University of Oxford, chapter 9, pp. 142-157
Gupta S., Davoodi H. and Rosa A. 1998. Does Corruption Affect Income
Inequality and Poverty? IMF Working Paper, WP/98/76.
Hammond, R. 2000. Endogenous Transition Dynamics in Corruption: An Agent-
Based Computer Model, Working Paper No.19. Center on Social and Economic
Dynamics. The Brookings Institution.
Hardin R. 2001. Conceptions and Explanations of Trust, in Cook K.S. (ed.), Trust
in Society, New York: Russell Sage, pp. 3-39.
Krueger A. P. 1974. The Political Economy of a Rent-seeking Society, American
Economic Review, vol. 64, pp. 291-303.
Mauro P. 1995. Corruption and Growth, Quarterly Journal of Economics, vol. 90,
pp. 681-712.

9
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

Mauro P. 1998. Corruption: Causes, Consequences, and Agenda for Further

Research, Finance and Development, March, pp. 11-14.
Mayntz R. 2003. Mechanisms in the analysis of macro-social phenomena, MPIfG
working paper, No. 03/3.
Mungiu-Pippidi A. 2006. Corruption: Diagnosis and Treatment, Journal of
Democracy, vol. 17, no. 3, July, pp. 86-100.
Mungiu-Pippidi. 2010. The Experience of Civil Society as an Anticorruption Actor
in East Central Europe, A report by Alina Mungiu-Pippidi, Romanian Academic
Society and Hertie School of Governance.
Morken., B (2016) South Africa: Nkandla, Guptas and splits in the ruling class -
ANC in its deepest crisis ever: Pretoria, South Africa.
ODonnell G. 1996. Illusions about Consolidation, Journal of Democracy, vol. 7,
no.2, pp. 34-51.
Obayelu Abiodun Elijah. 2007. Effects of Corruption and Economic Reforms on
Economic Growth and Development:Lessons from Nigeria, African Economic
Conference 2007: Opportunities and Chailenges of Development for Africa in the
Global Arena, Addis Abbeba, Ethiopia.
Parsons T. 1997. Introduction to Max Weber.The Theory of Social and Economic
Organization, New York, The Free Press.
Piliponyte J. 2005. DIAGNOSIS OF CORRUPTION: A REVIEW OF EXISTING
INSTRUMENTS AND A CASE STUDY OF LITHUANIA,Paper prepared for
delivery to the Australasian Political Studies Association Conference 2005 in
Dunedin, New Zeeland.
Precupeu, I. 2007. Corruption in Romania. First Steps Towards a Grounded
Theory of Corruption. Discussion paper, University of Konstanz, 2007, accessed
on June 23rd, 2012 at: http://www.uni-
konstanz.de/crimeandculture/docs/Discussion_Paper_No_4_ICCV_Romania_Jul
y_2007.pdf
Precupeu, I. 2008.On the nature and causes of corruption in Romania. Evidence
from a Grounded Theory approach. Discussion paper, University of Konstanz,
2008, accessed on June 23rd 2012

10
ROBERT MWANYEPEDZA UNIVERSITY OF FORTHARE

at: http://www.unikonstanz.de/crimeandculture/docs/Discussion_Paper_No_13_I
CCV_April_2008.pdf.
Precupeu, I. 2009. Patterns of Perceptions Towards the Anticorruption Fight and
Policies in Romania. Balancing Between Faade and Essence, Calitatea Vieii,
XX, nr. 34, pp. 325350.
Rinaldi S., Feichtinger G., Wirl F. 1998. Corruption Dynamics in Democratic
Societies, Complexity, John Wiley & Sons, Inc., Vol. 3, No. 5.
Shleifer A. and Vishny R.W. 1993. Corruption. Quarterly Journal of Economics,
Vol. 108 no. 3 (August) , pp. 599-617.
Tanzi V. 1998. Corruption around the world: Causes, Consequences, Scope and
Cures, International Monetary Fund Staff Papers, vol.45, no.4.
Tanzi V.and Davoodi H. 1998. Corruption, Public Investment, and
Growth, Reprinted from The Welfare State, Public Investment and Growth,
edited by Hirofumi Shibata and Toshihiro Ihori (Springer-Verlag Tokyo, 1998), pp.
4160.

11