in recent times in many parts of the
world we've seen enormous increases in
people's incomes
because output has been rising what's
caused the rise in output
perhaps the most single important thing
is
increases in investment more capital
equipment in
services in manufacturing
and in lower income societies
agriculture
has generated a huge rise in people's
well-being
if something causes that level of output
and that level of investment to fall
people will suffer
according to a world development report
one of the things that can cause
investment and potential output to fall
is corruption before we can think about
how corruption might harm investment
we need to be clear about what
investment means
investment is often used in the popular
press
to mean the purchase of stocks and
shares and so on
but to an economist investment means the
purchase
of capital items machinery
buildings and so on where output is
produced
and investment is incredibly important
for the well-being of an economy
if something causes us to invest
less as a society if there's less
capital equipment
then we're going to produce less output
and if we produce less
output we're going to be worse off
because we've got
less goods and services having thought
about
what investment means we're now in a
position to think about how
an increase in corruption might affect
investment the amount of capital
equipment
in the economy
just as one example of the value of
to a society this chicken processing
plant in eastern europe
invested in new capital equipment four
years ago
the result is that output has far more
than doubled
from the same number of workers raising
national
output and national income it's been so
successful
that they're now investing in new
machinery to produce related products
such as sausages and other food products
and hence raise
economic well-being how might corruption
discourage investment well in many ways
but we'll mention
two first bribes to officials
act as a tax on profits discouraging
marginal
investment but second and just as
important
as the world development report says
bribes are not only a disincentive to
further investment
because of the immediate costs but also
because they entangle
businesses in quote a web of
time-consuming
and economically unproductive relations
what is going to prevent them from
investing
in the country is that they don't really
know
the rules of corruption because if
you're acquainted with the rules it
becomes
very easy you just calculate bribes
and corruption into your costs and
if you know uh who are the people that
you're supposed to pay
uh to it it's life is very easy
but if you don't know that uh you're
struggling
there's no way to go around it
i'm in greece which is reckoned to be
the most corrupt country in the eu
it's reckoned that 500 to 750 million
euros
changes hands in the form of bribes
involving something of
the order of ten percent of the
population of the country
what those bribes get used for the main
things
are doctors building permits
and perhaps most important of all to
help tax evasion
you give the tax officials some money
and then you pay less tax for the
government
relatively few people in greece are
willing to talk about corruption
but in small cafes you find no shortage
of opinions
have you had any trouble in the business
with the
famous fakiaki has have i pronounced
that right
yeah i understand with me this is mostly
in the
tax houses and in the
government areas you know such like
hospitals
like things and when you go there
you have to finish something to do your
to do your business
you give under the table this was your
name
if you have problems with the tax house
let's say you have to pay
a hundred thousand euros and you deal
with the
tax money and they say okay you can pay
ten thousand euros and you give me
twenty thousand to me
it's obviously you have to benefit
about ten percent of citizens pay the
so-called
fakaliaki little envelopes each year
it is true that um there is an issue of
of corruption in in greece is part of
the system of the businesses
it's not a cultural issue and it not
referred doesn't refer only to greece
for me and for the things that i have
seen and i have investigated is more
a structural issue which means that
the system is developed in
that way that most of the times you
don't have any other option
than to try to find other ways
to do your business some
time ago some years ago it was okay
normal to pay if i can
give money under the table now people
are afraid
all these people in the government are
afraid and they don't take it that much
because in the television they see
you can see your face if you take
[ __ ] like that they have the other
day
the people that take the money are
afraid of it is very because you go
straight to the jail now and they are
afraid
but even countries perceived as
relatively free of corruption
have some problems does greece have a
problem yes it does
do the surrounding countries have a
problem yes they do
does the uk have a problem
yes they do but we call it lobbying we
don't call it corruption
all the evidence suggests that there's
corruption in just about all societies
but it varies hugely in places like
scandinavia it's clearly very low
but it still exists but even places like
this are of interest to the world bank
because if we can look at a range of
countries countries where corruption is
relatively high
but also where it's relatively low we
can have a much
stronger idea of the link between
corruption and the level of investment
well i think all kind of corruption is
negative for the society well a society
that says we have no problem with
corruption
are truly corrupt
but what's important is to be aware
where there are risk
and that there are risks for corruption
and have a system that's
transparent we need to look at such
countries as well as the more corrupt
in order to make comparisons and to see
if these countries
have relatively high levels of
investment so just how much does
corruption affect society's well-being
and in particular to what extent does it
affect the amount of investment in
society
the world bank undertook a regression
analysis to try to determine the effect
of corruption on investment levels
the results of that analysis are
presented in the table
the dependent variable investment is
actually
investment divided by gdp gross domestic
product
in other words investment is a
proportion of output
although for simplicity we'll now refer
to it just as
investment of the independent variables
the level of corruption is based on
surveys of businesses
that deal in the 39 countries the world
bank study looked at
the predictability of corruption was
found in the same way
secondary school enrollment is
self-explanatory
initial gdp per capita is the initial
output per head at the beginning of the
period studied
policy distortion is a measure of how
badly economic policy is conducted
the numbers in the parentheses are the
standard errors
associated with each of the regression
coefficients
so what does all this information tell
us
estimation is by the ordinary least
squares method
so the regression won't pick up any
relationships that are there
that are not linear
now first let's look at the signs for
the coefficients
as we've explained we would have
anticipated that corruption
harms investment the greater the
corruption the lower the level of
investment
so we would expect the coefficient to
have a minus sign
and it does
the next variable is the predictability
of corruption
where the coefficient has a positive
sign
all other things being equal the more
predictable the corruption
the greater the investment
you may have been surprised by the
result we got for the
predictability of corruption but
actually if you think about it carefully
it becomes fairly clear imagine two
countries
each with the same level of corruption
but in one country
it's more predictable then they're more
likely to get investment
in that country because one of the
things that
businessmen hate is uncertainty
if you have a stable level of corruption
at a very high level
i know what i'm playing with if i have a
very stable level of corruption at a
very low level
i also know what i'm playing with we
want stability why it gives us
predictability
corruption practice or any practice that
can be considered as corrupted
it is part of the informal
business plan of multinational or
international company or a small
immediate enterprise
that operates here so if they don't have
a problem
about the uncertainty with regard to the
level of corruption
they're more likely to invest in that
economy
higher levels of secondary school
enrollment suggest a better educated
workforce
so more attractive to investors
therefore we would expect the
coefficient to be positive
and it is now consider
initial gdp per capita we would expect
that if initial output per head is low
at the beginning of the period studied
there's more potential for profitable
investment
so the minus sign of the coefficient is
an expected one
finally we would expect that the greater
the policy distortion
that is the worst the economic policy
that's being conducted
the less keen investors will be we would
expect a negative coefficient
and it is so we often learn something
about the relationship between the
dependent and the independent variables
by looking at the magnitude of the
coefficients
we can see how much a change in an
independent variable
affects the dependent variable
but the report doesn't tell us the units
of measurement
so here we've only been able to comment
on the signs of the coefficients
now to enter the term r squared this is
often called the coefficient of
determination
it tells us the percentage of the
variations in the dependent variable
that can be explained by variations in
the independent variables
here 24 of the variations in investment
as a proportion of gdp
in these 39 countries can be explained
by
variations in the items that we've
mentioned above
now we need to focus on the numbers in
parentheses the standard errors
associated with each of the explanatory
variables
these enable us to see how much trust we
can put in the size of the coefficients
let's see how that works for the level
of corruption
step one is to produce a t statistic
we do this by dividing the coefficient
by the standard error
so to two decimal places 5.8
divided by 2.2 gives a t statistic
of 2.64 step two
is to decide on the level of
significance we'll use
five percent that's not the only
possible choice
but it is the most common one
step three is to work out how many
degrees of freedom we have
this we find by subtracting the number
of independent variables
from the number of observations
in our case with 39 observations
six independent variables so 39
minus 6 equals 33 degrees of freedom
step 4 is to look up a value in the t
tables
if we look up for the value with 33
degrees of freedom
and we want a significance level of 5
iep
equals 0.05 we find a value of
1.69
step five is to compare our computed t
statistic with this value from the table
2.42 is greater than 1.69
since our computed value is greater than
1.69
what can we say we can
say that there's only a five percent
risk
of concluding that the underlying
coefficient value
is different from zero when it isn't
if you work through the same steps with
each of the other variables
you'll find that both corruption
variables are significant
at our chosen five percent level but
none of the other variables
are you might also care to check though
that at a ten percent level the policy
distortion variable is significant also
so we do have some evidence that
corruption really does have an effect
on investment activity
although the evidence from our study is
not very strong
there is a strong a priori case for a
link
and there is at least some evidence to
support the theory
this suggests that attempts to control
corruption are important in all
societies
corruption exists in in the eu
and in the united states and in the uk
but it's on a higher level an ordinary
people just
people don't don't notice it they don't
know about it
it happens on a very high governmental
level you can i can you know i can t i
can go into many developed economy
perspectives where
again i use the term lobbying okay i'm
pushing things is it
is it corruption to to give somebody
money in order to influence decisions
for example in the medical profession
well no it's just a pressure group it's
a it's a lobby group
okay so and you know you'll see the the
big differences in wages
at the end of the day is it just another
is it something in sheep's clothing okay
you're looking at the same thing
just in another type of context
the council of europe has declared
corruption a key political issue in
europe
and the european union has tried not
always successfully
to insist on corruption control as a
condition of membership
for potential new entrants regression
analysis can do many things
but just one of them is to point out the
need for such
controls
you