By Dr. Herath Gunatilake

Corruption is an issue that has been discussed widely during last two to three decades. While there was denial from accused parties, the International Monetary Fund’s (IMF) Governance Diagnostic Report provided clear evidence of widespread corruption in Sri Lanka. 

Sri Lanka faces the urgent need to undertake reforms to curb corruption to escape from the crisis and put the country on a sustainable path of economic growth

It acknowledges that “governance and corruption issues have imperiled national and social well-being”. The nation is facing the presidential election and understanding why Sri Lanka cannot progress in development without minimizing corruption is vital at this critical moment of the post independent history of Sri Lanka. This paper describes the economic and social costs of corruption that hinder the development of the country.

Petty and grand corruption

One simple way to define corruption is the abuse of entrusted power for private gains by political leaders or public officials. It is a form of dishonesty or criminal activity undertaken by a person or organization to acquire illicit benefits. Forms of corruption vary, but include bribery, extortion, cronyism, nepotism, parochialism, patronage, influence peddling, graft, and embezzlement. Corruption occurs in both the public and private sectors.  Media personnel and civil society actors can also be involved in corruption. Actors can be individuals, companies, or organisations such as a political party.

Sometimes the ‘advantage’ gained through corruption may not be ‘undue’ or clear-cut, but is nonetheless an advantage. For example, in some highly corrupt societies people can only secure access to public health or education if they pay bribes. In this example, the bribe-giver’s ‘benefit’ is merely his or her rightful due but without the bribe the public can’t exercise that right.  The bribe-takers receive an advantage for carrying out functions that are anyway their duty. Admission to popular schools is a clear example in Sri Lankan context.

One useful way to classify corruption is to consider ‘grand’ and ‘petty’ or ‘administrative’ corruption. Grand corruption typically takes place at the public sphere’s top tiers, and within the highest levels in private businesses. 
Grand corruptions are the acts by elite persons in the society who either make laws or responsible for implementing rules, policies and executive decisions. Grand corruption involves large sums of money. Grand corruption is also often called political corruption, highlighting the direct or indirect involvement of political leaders in such corruption. 

All of the excessive costs incurred by grand corruption are ultimately fall on the heads of people in terms of tax money or public debt

Petty or administrative corruption is small-scale, everyday corruption at the interface between public institutes and citizens. The petty corruption is the bribery linked to the implementation of existing laws, rules and regulations. For example, public servants deliver services, only if they receive a private payment that is in addition to the institutionalized official price for this service. Bribery paid to get the house construction plans approved, obtain the timber transport permits, get school admissions, get route permit for private bus, get the driver’s license, avoid the delays in pension payments are only few examples of a widespread petty corruption.

Big money outflows

Apart from the ethical and moral considerations, why should one be worried about corruption? Generally, corruption undermines economic development and threatens state security. It also undermines democratic values. UN member states acknowledged the threat of corruption to the development process and have included Goal 16 into the 2030 Agenda for Sustainable Development – calling on states to ‘substantially reduce corruption in all their forms.’ 

On the contrary, one may still argue that if the corrupt gains are being circulated within the economy, it may not affect growth and it will only have distributional implications. Most often the corrupt gains may be circulating within the economy in petty corruption. However, in grand corruption, very often, ill-gained money flows out of the economy.

Corrupt politicians’ love for large infrastructure developments, such as roads, railways, power plants, stadiums, ports, and airports is not because of the rate of returns to investments, but because of the opportunities for larger commissions and political gains

There are proven cases such as the case of Ferdinand Marcos in Philippines. In Sri Lanka too, many claim about politicians siphoning ill-gained money to Dubai, Seashells and Uganda. In fact, the IMF governance diagnostic report states that “current governance arrangements have not established clear standards for permissible official behaviour, acted to deter and sanction transgressions, nor pursued individuals and stolen public funds that have exited the country. This statement clearly shows that there are credible evidence that some of the embezzled wealth through grand corruption has been taken out of the country.

Economy and corruption

Corruptions affect the country’s economy in numerous ways, while some of the most important issues are listed here: Corruption diverts public spending from taxpayers’ money or borrowed money towards “wrong projects” disregarding economic principles. Corrupt politicians’ love for large infrastructure developments, such as roads, railways, power plants, stadiums, ports, and airports is not because of the rate of returns to investments, but because of the opportunities for larger commissions and political gains.

Grand corruption leads to higher cost for infrastructure development. It seems that escalated cost of a project allows collusion between contracting companies and politician and top bureaucrats (P&TB). Accordingly, contractors gain excess profits even after paying bribes and commissions creating a win-win deal for contractors and the P&TB. Bidding process is also sometimes, purposefully delayed for years until the P&TB cut a lucrative deal from the contractor.

Corruption incentivizes the P&TB to borrow from high-interest commercial sources, including international sovereign bonds (ISBs), despite the availability of low-interest loans from multilateral or bilateral donors. Conventional donors make it a requirement to undertake financial and economic analysis of projects and impose strict procurement guidelines whereas the commercial lenders are only interested in the creditworthiness of the borrowing country. 

Poor FDI flows

Higher costs of infrastructure can also be manifested in terms of poor-quality of the corrupt projects. P&TB influence competitive bidding process, and contracts are awarded to less qualified companies to receive bribes. Poor quality infrastructure entailes higher maintenance cost and frequent repairs. 

Some of the good development projects are never implemented because of failure to agree on the bribe. Often, this happens when the P&TB request a bribe that is too big given size of the project cost. The private investor who already spent couple of millions of dollars for feasibility studies had no option other than giving up the project. The country loses the opportunity to implement a good investment project that would have otherwise generated sizable employment. 

Grand corruption discourages or even prevents foreign direct investments (FDI). Simply when the imposed bribes are so large, private companies cannot make a reasonable profit.  Therefore, private investors avoid highly corrupt countries. Even after offering some lucrative tax incentives, some of the countries including Sri Lanka perform poorly in attracting FDI. One of the obvious reasons for low FDI in Sri Lanka may be that larger bribes unaffordable to investors. 

Fate of the nation

All of the excessive costs incurred by grand corruption are ultimately fall on the heads of people in terms of tax money or public debt. These excessive costs are part of the reported accounts that must be settled by people, including their children and, children’s children in the future.

While there are other areas where corruption is reflected through poor economic performance of a country, corruption has more than just financial and economic costs. It reduces public trust and citizens’ willingness to participate in society in the democratic process. Citizens who perceive politicians as corrupt may not bother to vote in elections, get engaged in politics, or pay taxes.

Corruption, which could derail entire development process, is a major challenge for Sri Lanka. In a broader sense, corruption is a characteristic of underdevelopment and many types of corruption disappear when countries develop. Unfortunately, corruption can also be a major constraint for development. In Sri Lanka, corruption, among other factors, has contributed significantly to the current economic crisis in the country. 

Sri Lanka faces the urgent need to undertake reforms to curb corruption to escape from the crisis and put the country on a sustainable path of economic growth. Given that the wide-spread corruption is one of the main barrier for the development of the country, the political will of the next government to curb corruption will determine the fate of the nation.

(Dr. Herath Gunatilake is the Executive Director of Center for Poverty Analysis (CEPA). Previously, he worked at Asian Development Bank (ADB) for 15 years holding different positions including the Director, Environment and Safeguards. Prior to his ADB work he was a Professor at University of Peradeniya.)