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Corruption and the economy

Updated September 24, 2018

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An issue relevant to the current national discourse is the relationship between corruption and economic growth. Is corruption the principal factor that accounts for most of Pakistan’s macroeconomic problems, such as low exports?

The most commonly cited measure of corruption is the Transparency International’s Corruption Perception Index (CPI), which ranks countries as per the perceived level of corruption in their public sectors.

The CPI ranking is based on perception, which may not truly reflect the reality. However, we assume that the perception is largely based on facts. We may, therefore, look at Pakistan’s ranking on the CPI over the last one decade and juxtapose it with the rates of economic and export growth and foreign direct investment (FDI) inflows.

A drop in corruption may not always be consequential for accelerating economic growth

In 2006, Pakistan’s CPI ranking was 142, which improved to 138 in 2007 and further to 134 in 2008. In the following two years, the ranking fell to 139 and 143, respectively. In 2011, it improved to 134, but deteriorated to 139 in 2012. The following four years (2013-16) saw an improvement to 127, 126, 117, and 116. In 2017, the ranking marginally fell to 117. Data shows that between 2006 and 2012, Pakistan’s CPI ranking remained in the range of 134 and 143. During last five years (2013-2017), however, it has been comparatively better — between 116 and 127. During the last three years, in particular, the CPI ranking has varied between 116 and 117. On the basis of the CPI ranking, we can safely say that the level of corruption came down significantly over last half a decade.

The table shows the CPI rankings along with some macroeconomic indicators. The above data warrants us against postulating corruption as the cause of the country’s macroeconomic problems, such as low economic and export growth and FDI inflows.

Corruption, no doubt, is a major problem in Pakistan. But the unsatisfactory performance of the economy on the above-mentioned indicators can be attributed to several factors, such as a low manufacturing and export base and a lack of entrepreneurship, competitiveness and credible institutions of economic governance. Besides, a difficult security situation and a rent-seeking corporate culture also share the blame.

It is necessary to address such issues to achieve an economic turnaround. A drop in corruption, though important otherwise, will not be consequential for accelerating economic growth.

The weakness of the premise that corruption is the cause of economic stagnation is further confirmed by relevant indicators from some other countries. Bangladesh’s CPI ranking in 2017 was 143, which means it is far more corrupt than Pakistan.

But Bangladesh grew 7.2 per cent in 2017, far higher than Pakistan’s growth rate. In 2007, Bangladesh’s CPI ranking was as low as 162. Yet the economy grew 7pc that year.

Likewise, Sri Lanka’s CPI ranking of 91 is a lot better than Pakistan’s, but its economic growth rate in 2017 was only 3.1pc.

Both India and China are ranked rather low on CPI — 81 and 77, respectively — but they are among the fastest-growing economies in the world. China is also among the top recipients of FDI.

hussainhzaidi@gmail.com

Published in Dawn, The Business and Finance Weekly, September 24th, 2018