For which are interconnected and interwoven. A complex system

For
the purpose of this study, the three relevant theories discussed are extractive
corruption, complex systems, and economic growth theories. Extractive
corruption theory basically concerned about the relationship between the state
and society. The state comprised of the elites which is being perceived as the
strongest force in the state-society relationship which uses the state apparatus
as its instrument to exploit the society based on new-patrimonial states.  Put differently, not only the state is the
strongest force in society but also many centers of powers (Okechukwu and Inya
2011), which makes all power to corrupt, and absolute power corrupts
absolutely. Concentration of political power in few hands may lead to abuse of
power, selfish wealth-seeking and primitive state which is detrimental to the
society. The argument is that the ruling elites misuse the power by using
violence, force and persuasion to command respect. They may also use
sophisticated institutional arrangements like presidential, dominant-multi-single-party
system, and the cooperation of rivals in order to restrict participation and
power sharing. All these manifest in Nigeria. More so, the theory is also known
for its new-patrimonialism characteristics, that is, a kind of political system
where there is no difference between public and private pursuit, pervasive and
patron-client structures, and existence of strong political weakness. Weber
(1964) stated further that there are no criteria for appointment to an office
other than the ruler’s favor. In other words, the classical or traditional
patrimonialism is one in which the right to rule is ascribed to a person rather
than an office and exercised more through the informal clienteles and
nepotistic practices than strong formal routines of authority. In Nigeria, due
to the misuse of state powers by the ruling elites most of the resources which
are ear-marked for developmental projects are utilized for their personal
gains. The underdevelopment in Nigeria was caused by the personal attitude of
these small elites who are politically and economically dominating families which
have established hegemonic circle to siphon the country’s wealth for personal
use.

Complex
systems contain a large number of mutually interacting parts (Rind, 1999) which
are interconnected and interwoven. A complex system is one whose evolution is
very sensitive to initial conditions or to small perturbations, one in which
the number of independent interacting components is large, and one in which
there are multiple pathways by which the system can evolve (Whitesides and
Ismagilov, 1999). In this regard, there are two key concepts in complex
systems, emergence’ and complexity (Bar-Yam, 1997). In line with neo-classical
approach which defined corruption as abuses of public office and resources for
private or group gain, acts which are produced by specific political-economic
processes happening in specific socio-cultural environments, so corruption is
the product of a malfunctioning system where there are multiple actors who are
complex within themselves and in their relations with each other and with the
system. The argument for this is that when political office holders clash for
power and wealth in an environment where the legitimacy of the system is in question,
multiple motivations and opportunities that exist within the structure,
triggers or fuels corrupt transactions. If corrupt practices entrench and
corruption is normalized in the eyes of the actors, systemic values are
eventually replaced with corrupt ones and the system itself starts enforcing
the new rules of the game. To survive in the game, actors follow these rules in
their interaction with the other actors and corruption entrenches more. This is
common in Nigerian political, economic and social system where those that have
been ruling the country since independence were actors engaged in corrupt acts.

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Neoclassical
counter-revolution economists used three approaches, namely the free market
approach, the new political economy approach and the market-friendly approach,
to counter the international dependence model. These approaches mainly argued
that underdevelopment is not the result of the predatory activities of the
developed countries and the international agencies but was rather caused by the
domestic issues arising from heavy state intervention such as poor resource
allocation, government-induced price distortions and corruption in particular
(Meier 2000). Liu (1996) argue for the endogenous growth models where
productive human capital or physical capital are driving forces rather than
diverting resources to non-productive political capital which will lower the
economy’s long-term growth rate. Society is better off if the level of this
investment (political capital) is lower. As a response to public sector
inefficiency, economists of the counter-revolution thinking, such as Bauer (1984),
Lal (1983), Johnson (1971), and Little (1982), focused on promoting free
markets, eliminating government-imposed distortions associated with
protectionism, subsidies and public ownership.

In
line with the above, the two schools of thought which are relevant to corruption-economic
growth nexus are discussed. One school of thought holds that corruption introduces
efficiency in the economy and affects economic growth positively. Leff (1964),
Huntington (1968), Summers (1977), and Acemoglu and Verdier (1998) who are the
proponents of this school of thought argue that corruption (i.e. payment of
bribery to bureaucrats in many forms) acts like catalysts that promote economic
growth because it facilitates rapid process for the approval of projects. The proponents
of the second school of thought including Murphy (1993), Gould and Amaro-Reyes
(1983), United Nations (1990), Mauro (1995), Mo (2001), and Monte and Papagni
(2001) maintain
that corruption negates
economic growth because it is disadvantageous to businesses and innovators,
especially those that lack the necessary cash flows and established lobbying
power to either bribe or lobby the bureaucrats.

Corruption
can be defined as encompassing all forms of irregular, unethical, immoral
and/or illegal practices and transactions, dealing and activities in the
process of handling commercial or public transactions or in the performance of
official duties. It is the dishonest or fraudulent conduct by those in power,
typically involving bribery. It is the illegitimate use of power to benefit a
private interest (Morris 1991). The World Bank (1997) defines corruption as the
abuse of public office for private gains or to circumvent public policies and processes
for competitive advantage and profit. Also, it can be abused for personal
benefit through patronage, nepotism, the theft of state assets or diversion of
state revenue.

Also,
corruption is the abuse of public trust for private gain; it is a form of
stealing (Todaro and Smith, 2003). In addition, Transparency International (TI,
1996) adopts a more detailed approach by describing corruption as behavior on
the part of officials in the public sector, whether politicians or civil servants,
in whom they improperly and unlawfully enrich themselves, or those close to
them, by the misuse of the public power entrusted to them.

The
major problem with corruption in Nigeria has been lack of good governance in
the form of accountability and transparency. This position is shared by Orubu
and Awopegba (2003) that good governance must, at a minimum, include
accountability of those in government to the governed, transparency, due
process, the rule of law, and political systems that allow for popular
participation in the decision-making process. A non-adherence to these
principles can, therefore, be seen as a clear route to corruption.

However,
corruption is seen to be against public interest or to violate certain legal
and moral laws and principles which are directly or indirectly harmful to the
society. Also, it affects efficiency and the success of policy implementation,
which is crucial for growth in Nigeria. More so, corruption weakens the ability
of the State to promote good governance, fairness and social justice (Anderson
and Tverdova, 2003) while higher corruption is associated with higher poverty
and income inequality (Gupta, 1995). It distorts proper and fair competition in
markets, discourages potential foreign investment (FDI) as a result of cost
additions and uncertainty creation (Gastanaga, Jeffery, and Bistra, 1998; Wei,
2000; Ugwuodo, 2002; Asiedu, 2003; and Dike, 2004). Considering its impact on
poverty and foreign investment, corruption became linked negatively to economic
growth. In addition, reduces the resources available for economic development infrastructure
(Azfar et. al., 2001). Moreover, discourages potential public donors; increases
ineffective and unserviceable foreign debts (Frisch, 1996); and helps distort
markets by redirecting economic activity from one sector to another, thus destroying
the structure and pattern of economic development and reducing the efficiency
of economic activity.

Economic
growth can be defined as the increase in the monetary or market value of goods
and services produced by an economy over time. According to Todaro and Smith (2009),
economic growth is an expansion of the system in one or more dimensions without
a change in its structure. Ajayi (1996) define economic growth as the increase
in a country’s real output of goods and services over a period of time. Ijirshar
(2015) perceived economic growth as an increase in the capacity of an economy to
produce goods and services, compared from one period of time to another which
can be measured in nominal terms (including inflation) or in real terms
(adjusted for inflation).

Several
studies conducted over the past decade have clearly emphasized the negative
impact of corruption on economic growth due to the increase transaction costs,
the reduction in the efficiency of public services, the distortion of the
decision-making process, and the undermining of social values.

Based
on the assumption that underpaid employees will tend to supplement their
incomes with bribes, Rijckeghem and Weder (1997) test the relationship between
public sector salaries and the level of corruption and find a negative
relationship between them. Rauch and Evans (2000) test the same hypothesis, but
cannot find a strong relationship. Paldam (1999) finds a negative correlation
between GDP per capita and corruption levels. However, no causality between GDP
and corruption can be derived from this says Lambsdorff (1999), because we
cannot know if a country is poor because of corruption or it is corrupt because
of poorness. Wei (2000) hypothesizes that openness to international trade is an
indication of a country’s cleanliness, also a negative correlation between
foreign direct investment levels and corruption and finds empirical support for
his proposition. Broadman and Recatinini (2000), working on the same
relationship, cannot find such strong evidence to this hypothesis. Wei and Schleifer
(2000) look at local corruption and capital flows to emerging markets. They
found that corruption affects both the volume and the composition of capital
inflows into countries. In particular, corruption reduces inward FDI
substantially. FDI is more vulnerable than other forms of capital inflows to
corruption. Theoretically, this may be due to corruption having more of a
direct interference with operations involving FDI.

On
the other hand, there are empirical studies with mixed results on the impact of
corruption on economic growth. Egger and Winner (2005) employ a panel data of
73 countries between 1995 and 1999 and find a positive relationship between
corruption and foreign direct investment (FDI). The authors argue that
corruption can help circumvent bureaucratic delays and thus is a stimulus for
FDI, from which government officials reap a portion of the profits. In his own
study, Omenka (2013) linked the causes of corruption to include poverty,
pressure from families, community ethnic loyalties among others. Also, Anoruo
and Braha (2015) study find that corruption retards economic growth directly by
lowering productivity, and indirectly by restricting investment. Furthermore,
the results of the study of Hanousek and Kochanova (2015) on whether
bureaucratic corruption measured as the frequency of unofficial payments to
public officials impacts the sales and labour productivity growth of firms in
Central and Eastern European countries reveal a higher bribery mean retards
both the real sales and the labour productivity growth of firms. Finally, Nwogu
and Ijirshar (2016) examined the impact of corruption on economic growth and
cultural values in Nigeria. Auto-Regressive Distributed Lag (ARDL) Model was
used to test the long-run relationship among the variables. The result shows
that Relatively Corruption Rank (RCR) has significant but negative influence on
economic growth in Nigeria. Other corruption indices such as corruption perception
Index and corruption rank which are presented in an inverse form had positive
impact on the growth of the Nigerian economy.

 

Despite
these insightful findings, a problem with this and other similar literature on
the issue is that as they use several regressions to analyze the relationship
between corruption and economic growth their results could be quite easily
influenced by omitted variable bias as the explanatory power of other macro-level
governance factors might have been captured by the results of their corruption
regression models. This study tries to remove this problem by using a combined
variable for the most commonly cited macro-level growth indicators as the test
variable for my model. This gap is filled by including poverty and trade
openness as part of the control variables using Fully Modified Ordinary Least
Square (FMOLS) regression technique.