STRUCTURAL CORRUPTION

The venality of politicians in poor developing countries like ours is well known. The reason for this is perceived to be well known as well, that being, the insatiable greed of developing country politicians. While this is an undeniable fact, the reality however is a bit more complicated. Economists have long observed that corruption is a structural component of very poor countries, therefore they will need to make strenuous efforts at economic development, despite the corruption, to reduce the corruption [1]. Ha, Joon Chang describes the phenomenon well in his book, Bad Samaritans. It works something like this:

A significant amount of economic activity in poor developing countries takes place in the informal sector. That means they have an unusually large amount of economic actors that are subsistence farmers, hawkers and other forms of petty traders, extremely small-scale artisans, danfo drivers, bricklayers, corner shop barbers and hairdressers etc. The table below gives the sizes of the informal sector (% of GDP) in selected countries around the world:

Source: Quarterly Informal Economy Survey by World Economics London

According to World Economics London, we are the third highest in the world after Afghanistan and Zimbabwe. I think it is worth noting that the size of the informal sector in Nigeria is about 8 times that of the U.S. Some research studies done in Nigeria suggest that between 1970 and 2010, the size of the informal sector in Nigeria ranged from 53.6 – 77.2% of GDP [2]. We also seem to have little excuse for it being this high as Ghana, a fellow Sub-Saharan African country that would be facing similar challenges and natural constraints, has an informal sector that is only 35.6% of its GDP. Kenya, at 32.6% is similar to Ghana. The average size of the informal sector in developing countries is around 36% [3].

The chief causes of a large informal sector have generally been shown to be unemployment, a high tax burden and onerous government regulation, with unemployment being responsible for about 85% of it globally, according to the International Monetary Fund (IMF) [4]. The effect of unemployment and a high tax burden tends to lead to vicious cycles where unemployment leads to a reduction of economic output, resulting in less need for hands in the formal sector, making it more difficult for those caught in the informal sector to move to the formal sector, thereby increasing the size of the informal sector as more people enter the labour market. This, of course, puts more pressure on public infrastructure than has been planned for by the government, making tax rate increases tempting. In the case of taxes, as the high tax burden incentivizes economic actors to operate in the informal sector, the government feels the pressure to increase the tax rate for the formal sector, to make up for the tax shortfall [5].

Economic activity in the informal sector is not monitored by the government for a lack of administrative capacity and the inherent difficulty in monitoring these kinds of activities, so these economic actors are invisible to the government for tax purposes. These conditions lead to low tax collection capabilities of third world governments, which in turn limits their budgets, which encourages corruption in several ways.

As a result of the relatively low tax base arising from a relatively large informal sector, third-world governments tend to have limited budgets. This makes it very hard or impossible to provide adequate social welfare services. This makes the poor very susceptible to patronage from politicians, who toss about benefits in exchange for votes and loyalty. Politicians need money to be able to distribute such largesse and so bribe-taking becomes the order of the day [6].  Furthermore, a limited government budget makes it difficult for the government to spend resources to fight corruption. As Ha-Joon Chang points out, fighting corruption doesn’t come cheap.

Economic development aids the fight against corruption by making economic activity more visible, improving the government’s tax collection administrative capacity and providing resources for fighting corruption [7]. In my personal opinion, to spur economic development, I think more emphasis has to be placed on manufacturing. Of the three major sectors of agriculture, industry (manufacturing) and services, the industry is known to have the greatest multiplier effect on job creation. You can learn more about industrialization from my book, Why Africa is not rich like America and Europe which can be found on Amazon.

It is understandable that in a country as corrupt as ours, that there will be strong objections to increasing the tax rate and the number of taxes. My knowledge of the subject is insufficient to argue for or against such a position. Although it should be uncontroversial that we desperately need to increase the tax base. My intention was solely to give you a deeper understanding of the dynamic called corruption. Understanding it in all of its dimensions is the first step to getting a handle on it.

References

1. Chang, Ha-Joon. 2008 Bad Samaritans: The Guilty Secrets of Rich Nations & The Threat to Global Prosperity. London: Random House
2. Oguagbor, Jonathan Emenike et al ‘Size and Causes of the informal sector of the Nigerian economy’ Journal of Economics and Sustainable Development 
3. Ibid
4. IMF Country Focus July 28 2021 ‘Five things to know about the Informal Economy’ https://www.imf.org/en/News/Articles/2021/07/28/na-072821-five-things-to-know-about-the-informal-economy
5. Oguagbor, Jonathan Emenike et al ‘Size and Causes of the informal sector of the Nigerian economy’ Journal of Economics and Sustainable Development 

• Chang, Ha-Joon. 2008 Bad Samaritans: The Guilty Secrets of Rich Nations & The Threat to Global Prosperity. London: Random House

• Ibid