Table 6.2 Ranking of top six corrupt countries based on Corruption Perception Index: 2001–2010

Table 6.2 Ranking of top six corrupt countries based on Corruption Perception Index: 2001–2010a

Year/country Bangladesh Nigeria Uganda Indonesia Kenya Somalia

Number of countries in TI CPI Most corrupt country and rank (in parentheses)

2001 91 90 98 88 84 N/A 91 Bangladesh (91) 2002 102 101 93 96 96 N/A 102 Bangladesh (102) 2003 133 132 113 122 122 N/A 133 Bangladesh (102) 2004 145 144 102 133 129 N/A 145 Bangladesh (145) 2005 158 152 117 137 144 N/A 158 Bangladesh (158) 2006 156 142 105 130 142 N/A 163 Haiti (163) 2007 162 147 111 143 150 179 179 Somalia (179) 2008 147 121 126 126 147 180 180 Somalia (180) 2009 139 130 130 111 146 180 180 Somalia (180) 2010 134 134 127 110 154 178 178 Somalia (178)

Source: Corruptions Perceptions Index, http://transparency.org/policy_research/surveys_indices/cpi, accessed 10 May 2011. a This ranking should be interpreted with caution since it changes with the inclusion of more and more countries in the TI Corruption Perception Index.

The principal–agent model occurs when the government (principal) pays a salary to bureaucrats (agent) to provide some service to clients. Clients then reimburse the bureaucrats with a tax or tariff. Corruption occurs when the client has to pay an additional bribe to the agent in order to receive the service that the bureaucrat is already being paid for. In this case, the bureaucrat is earning more than the initial specified salary.

Corruption in Bangladesh has a long history. Pre-liberation the Pakistani government gave out large loans to financial institutions in the hopes that they would in turn pass it on to new industrialists and agriculturalists. This was done in order to promote the industrialization and modernization of agriculture. The large, but limited, amount of funds passing through these institutions gave bank officials an enormous amount of power in deciding who received loans. There were numerous reports of bribing and it was of general consensus that to be considered for the larger industrial loans political benefaction was required. After 1971, all private banks were nationalized. While the new government promoted industrialization, the methods which determined the receivers of loans largely mirrored the previous government, with many being the result of political patronage to party supporters, bureaucrats and their relatives. Those who had close relationships with the bureaucracy were able to default on loan repayments due to concessions in the forms of interest waivers, “blocked accounts” and repeated rescheduling (Transparency International Bangladesh, n.d.).

While corruption in the banking sector is widespread, it is also a large problem for the customs sector. Corruption in this sector is caused by the excess and unnecessary power given to customs officers. Current regulations give customs officers a high degree of discretionary power, allowing them to declare the value, quality or quantity of goods that enter the country. Customs officers are required to complete their assessment of incoming goods “without undue delay”, which is again up to the discretion of the officer. These provide more than enough reasons for importers to pay for the misdeclaration of goods as well as “speed money” to customs officers, who have more than enough power to accept bribes (Transparency International Bangladesh, n.d.).

More recently, corruption has become prevalent in the telecommunications sector. Despite the high level of growth experienced by this sector, the revenues of the Bangladesh Telegraph and Telephone Board (BTTB) fell

from 2001 to 2006. This was caused by the large growth of illegal Voice over Internet Protocol (VoIP) operations by private operators. The ability of the operators to provide such illegal services with such ease is a result of inaction by the Bangladeshi government to regulate the VoIP industry. As reported by Transparency International (2009a), 53.3% of the daily 30 million calls entering Bangladesh are controlled by illegal VoIP operators, causing the government to lose TK12 billion in revenue each year.

What becomes obvious when examining the above three sectors is that corruption in Bangladesh has arisen due to a lack of regulation. In the case of the customs sector this lack of regulation has resulted in large amounts of power being placed in the hands of customs officers allowing them to accept bribes without the consequences. In the telecommunications sector, however, a lack of regulation has allowed public companies to run illegal services, again without fear of the government and any retribution it may entail.

What are the consequences of corruption?

Existing literature has explored the empirical relationship between corruption and economic growth as well as other factors existing within a country. Husted (1999) found that the level of a country’s corruption is correlated to the levels of; economic development; high uncertainty avoidance; high masculinity and; high power distance. Correlation with some of the variables may, surprisingly, show corruption to be a positive influence within certain communities. Uncertainty avoidance, for example, is “the extent to which members of a culture feel threatened by uncertainty or unknown situations” (Hofstede, 1997, cited by Husted, 1999). Corruption, as found by Husted (1999), reduces this uncertainty. In contrast, Mo (2000) found that a 1% increase in corruption levels reduces growth by 0.72%; the most effective pathway through which corruption has this effect is through political instability. In addition, he found that corruption leads to the reduction in the level of human capital and private investment. More recently, Schneider (2007) found that the extent of the shadow economy within a country also determines the extent of corruption present. To be more precise, he found that in high income countries corruption and the shadow economy are substitutes, while in low income countries they are complements.

There exist two opposing views on the impact of corruption on economic growth; some argue that it retards while others suggest that it promotes growth. Those that argue the former suggest that corruption distorts the composition of government expenditure. It is in the interest of corrupt politicians that they promote those industries in which it is easier to exact large bribes. This can cause larger spending of public resources in these areas. Corrupt politicians may therefore be more inclined to spend on large-scale investment projects than on textbooks and teachers’ salaries, even though these promote greater economic growth than the former. It can be argued that corruption has a negative effect on economic growth mainly through private investment. Mauro (1996) found that a country that experiences an increase from 6 to 8% on the CPI score will also have a 4 percentage point increase in the investment rate and a 0.5 percentage point increase in its annual per capita GDP growth rate. Li et al. (2009) found that corruption leads to workers moving from innovation to rent-seeking sectors, thereby decreasing growth. In addition, they found that the greater the inequality of asset distribution, the greater corruption decreases growth rates. They argue that corruption in countries with higher government spending experiences lower growth rates. This is because a large amount of spending by the government reduces investment rates which in turn discourages people from becoming entrepreneurs.

Rock and Bonnett (2004) also emphasize the effects of the organization of corruption on growth. They find that a higher level of organization corruption will have less effect on growth than if it was disorganized. This is because if there was a low level of organization then there would exist a number of people operating as individual monopolists. When this occurs, bribes have the potential to reach infinity, causing both economic growth and investments to decrease. On the other hand, if there is a high level of organization, people will monopolize corruption thereby limiting what they take as they know it will be possible to increase returns in the long run by giving them incentive to invest.

It has been argued that “corruption can, in extreme cases, be not only desirable but essential to keep the economy going” (Morgan, 1964). Mauro (1998) has reasoned that government employees who are allowed to exact bribes may work harder and corruption may help entrepreneurs