Introduction
I was caught completely off-guard at the depth of the consternation and disbelief expressed by quite a few readers who responded to the estimates that I had provided of the amount of money Guyana loses due to three corrupt practices (public procurement fraud; illicit capital flight; and the underground economy) in last week’s column ($313billion or about US$1.5billion). To recall, that column had provided estimates of the orders of magnitude of the economic haemorrhage Guyana is presently suffering due to corruption in three economic areas: procurement fraud ($28-35billion or about US$140million); illicit capital flight($90billion or about US$450million); and, the underground economy($188billion or about US$940million).
I had expected that, on the eve of the momentous national and regional elections of May 11 2015, little if any attention would be afforded by readers for a regular Sunday column that particular Sunday. I was wrong in this assessment. Pointedly, however, most of the readers who have responded to my effort have also urged me to provide some further analysis of this sorry situation. Today’s column will attempt to do this.
It is perhaps best to start by reminding readers of the context of last week’s contribution. That column was the continuation of a two-part lesson (4) in a series of columns, which began on March 29. As indicated this series is intended to offer ‘Lessons for the next government’ by providing “The ABC of Guyana’s public investment management regime”. As events have unfolded the next government “will be controlled by a new coalition of political parties: A Partnership for National Unity and the Alliance for Change, APNU +AFC. This gives me great hope, as to the best of my knowledge past PPP/C governments have never interacted with me on any suggestions appearing in this Sunday Stabroek column.
Impact on inequality and poverty
The size, scale, and therefore implied pervasiveness of corruption in Guyana’s economic life that is revealed in the data cited above are linked directly to the reproduction of inequality and poverty in the country. As previously noted these two phenomena are at the heart of the country’s deepest and most complex problems in all spheres of life, whether economic, political, social, cultural or behavioural.
Fortunately, a number of empirical studies undertaken by international organizations (particularly United Nations agencies, the IMF, and World Bank) have sought to assess the impacts of corruption on inequality and poverty across a wide sample of developing countries. These reveal the following statistically robust effects, which I believe apply to Guyana: 1) widespread corruption stifles efficiency and economic growth by distorting the economic value of resources, leading thereby to their misuse and misallocation; 2) similarly, it dis-incentivizes productivity growth and innovation because it increases rewards and returns to rent-seeking behaviours (explained below); 3) such behaviours also produce negative effects on the willingness of private economic actors to invest; and further, 4) widespread corruption undermines the roles of market incentives as the determining efficiency criteria and instead enhances criminal motivations in the decisions of economic actors to buy (consume), produce, sell, save, and invest. This substitution yields lower rates of economic growth and development, because it promotes the benefits from corrupt practices thereby impeding sustainable poverty reduction.
Similarly these studies reveal severe distributional effects on personal income and wealth. To begin with, it would be observed that the bulk of the economic haemorrhage of Guyana that I have indicated is based on tax and regulatory/oversight evasion. There is a clear and distinct bias towards evasion in prevailing corruption in Guyana. This produces significant negative fiscal effects on income and wealth distribution. Consequently, 1) the prevalence of tax evasion generally favours well-connected economic actors (favouritism and nepotism) over the not-well-connected; (2) it is empirically revealed that government revenue losses from tax evasion impacts disproportionally on real spending on social services, safety nets, and infrastructure; 3) the policing of tax evasion and economic corruption, such as capital flight and the underground economy, increases the costs of raising taxes and the administration of the regulatory and oversight system. It is in effect a tax on society as it diverts resources available for public spending to protect against economic corruption; and finally 5) tax and regulatory evasion is one of the most established drivers of the underground economy, which as we noted accounts for about one-third of Guyana’s official GDP.
Conclusion
What is of immense significance at this stage is the corrosive impact extensive economic corruption is having on the wider society. This can be seen in a number of ways; first, with such deeply entrenched economic criminality, the rule of law is constantly being undermined in both a systematic and systemic manner. Secondly, bad governance, especially in the economic, political, and business spheres has found a fertile environment in which to take root, and indeed flourish. Third, economic corruption has eroded the quality (environment) of public institutions, particularly those responsible for regulatory and oversight functions. Finally, we should note at this juncture that the market system and its price incentive mechanism, which is integral to both the prevailing global capitalist economy and Guyana’s is also subject to similar corrosive effects. Above it was indicated that rent-seeking behaviours are common.
Rent-seeking behaviour, as used in this column, is distinguished from profit-seeking behaviour as it refers to the well-established notion in economics where economic agents spend money/funds on finding ways of increasing their own income and or wealth (rent) without creating new or additional income or wealth for the society at large. This is indeed the result, which arises from corrupt practices such as bribery, smuggling, capital flight, and tax evasion. Rent-seeking behaviour clearly represents poor resource allocation and reduced efficiency while profit-seeking behaviour is driven by the opposite − the best resource allocation possible and maximum efficiency.
Last week’s column ended by pleading for a new government to milk the potential windfall good governance offers. Next week I shall explore this democratic dividend as the APNU+AFC styles it in its Manifesto.
