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Does Corruption Impede Economic Growth In Pakistan Economics Essay

The present study investigates the impact of corruption on economic growth by incorporating financial development and trade openness in growth model in case of Pakistan. We have used time series data over the period of 1987-2009. We have applied structural break unit root test to test the integrating order of the variables. The structural break cointegration has also been applied to examine the long run relationship between the variables.
The long run relationship between the variables is validated in case of Pakistan. We find that corruption impedes economic growth. Financial development adds in economic growth. Trade openness stimulates economic growth. The causality analysis has exposed the feedback effect between corruption and economic growth and same inference is drawn between trade openness and corruption. Trade openness and economic growth are interdependent. Financial development Granger causes economic growth implying supply-side hypothesis in case of Pakistan.
Keywords: Corruption, growth, Pakistan
Introduction In recent years, there is a wide spread of corruption in many countries of the world and especially in developing economies where its consequences has serious implications. The role of institutions in fostering economic growth has been recognized widely by the economists in these days. Existence of corruption in any country indicates the weaknesses of the institutions, thus, corruption is the output of weak institutions. A common definition of corruption is the abuse of public office for private gain (World Bank, 1997). Corruption is accepted in various ways such as bribery, the sale of public property by government officials, kickbacks in public procurement, and misuse of government funds (Reinikka and Svensson, 2005).
Corruption is not an issue of one country or region but also it is a worldwide issue. Corruption retards economic growth and minimizes the chances of economic development in the developing countries. The misuse of the public office by the higher political as well as civilian authorities for acquiring national wealth has been taking place in the world at the expense of public welfare (Oni and Awe, 2012). According to World Bank, corruption is “the single greatest obstacle to economic and social development. It undermines development by distorting the role of law and weakening the institutional foundation on which economic growth depends”. Corruption as a topic of research has attracted the attention of the economist of global financial institutions like World Bank and IMF in recent years due to its detrimental impacts on economic growth.
Economists have described five reasons behind the corrupt society or political set up, illegal accumulation of wealth and corruption in an economy. Firstly, corrupt government is the product of corrupt society and corrupt president cares corrupt government (Aburime, 2009). Secondly, the office of the political corrupt government collects national wealth illegally and become a major source of corruption in the country. Thirdly, the existence of a set of imperatives and incentives in the developing countries encourage the corruption transactions. These imperatives and incentives are such as widespread societal craze with materialism, high income inequality and poverty, exaltation and esteem of ill-gotten wealth by the general public and low and irregular salary packages for government employees with large families to bring up (Frisch, 1996 and Aburime, 2009). Fourthly, accumulation of illegal wealth through corruption by the corrupt government encourages the other individuals of the society to have access and control over the means of corruption. In this way these corrupt individuals take the controls of the administrative process to have access to offshore accounts and practices of money laundering (Aburime, 2009). Finally, when there is no fear of punishment in a society corruption spreads very rapidly. Taxation systems in the developing countries have many flaws and unable to track down individuals’ financial activities which further promote corruption in the society.
I.I Pakistani Context The economy of Pakistan experienced a very sluggish rate of economic growth and a high level of volatility in its growth rate for the last five years. Moreover, Pakistan fail to achieve the set target of 5.3 percent growth rate in the last eight years, average 2.6 percent economic growth rate was registered in these eight years. There is a variety of reasons for this poor economic performance; increasing corruption is the dominating determinant that affected the economic growth in Pakistan. Corruption is the result of institutional weaknesses which discourages the economic growth of a country. Historical background of Pakistan flourishes that the most governance indicators have remained unchanged and corruption apparently spread to all gross root levels of federal, provincial and local governments. In 1995, Corruption Perception Index (CPI) was 2.25 and Pakistan was considered among the most corrupt countries of the globe. Some routine efforts were made by the government of Pakistan to eradicate the corruption from the country. Due to these efforts Corruption Perception Index showed some improvement in 1998, then it improved further to 2.7 from 2.53 in 1997 (International Transparency Report, 2007). Today, Pakistan on the basis of Corruption Perception Index is ranked at 139th out of 174 countries of the world, which means that 35th corrupt country of the world (International Transparency Report, 2012).
Pakistan is a country with weak institutions which is the biggest alone cause of corruption. Other reasons of corruption are; insufficient political will to eradicate corruption from the society, bureaucracy is the principal authority for the administration of institutes, salaries in the public sector are very low as compared to the other sectors of the economy and higher rate of inflation. The government bodies are held responsible for spreading the corruption in Pakistan because these bodies control and allocate public resources of the country. The department of police is supposed to maintain the law

An Introduction To The Economy Of South Africa Economics Essay

The formal economy of South Africa started with the arrival of the Dutch in 1652. As the Dutch colony increased in size some of the colonists were set free to pursue commercial farming leading to the dominance of Agriculture in the economy. Then at the end of the 18th century when the British came, farming spread deeper into the inner Mainlands.
Then in 1870 diamonds were discovered in Kimberly, and worlds largest gold deposits were seen in Witwatersrand making the economy as the resource dominated one. The country also entered into a period of industrialization during this time including the organization of the first South African trade unions. The government soon started putting laws distinguishing between different races. In 1948 the National Party won the national elections and the started implementing even stricter race based policy named Apartheid, thus dividing the economy into a privileged white one and an impoverished black one.
It was estimated that in the 1980s the government of republic of South Africa owned 40% of the physical capital of the economy. The government also set prices and enforced regulations. The name of the economic system in South Africa under the National Party was called Corporatism. Corporatism means private ownership with extensive public regulations.
For the last 2 decades (1980 onwards) privatization has been an important issue for the South African economy. The move towards privatization was prompted by several factors such as:
The state enterprises were suffering losses that had to be covered from government revenues.
The revenue from the private sector would alleviate the government shortage of funds.
The new government in 1994 refrained from resorting to economic populism. Inflation was brought down, public finances were stabilized and some foreign capital was attracted. However the growth at that time was still below level. At the start of 2000 the president of South Africa vowed to promote economic growth by stepping up the pace of privatization and cutting down unwanted government spending. From 2004 onwards the economic growth picked up significantly and both employment and capital formation increased.
So in all the South African economy can be divided into 8 main periods. They are:
From 1910-1922: when British influence dominated in economic and political terms and a racially segregated community was formed.
From 1922-1933: The era of economic nationalism
From 1933-1948: Dominance of English power and birth of industrialization with less government interference.
From 1948-1960: The period of Afrikaner ascendancy (Afrikaners were the descendants of the Dutch and German settlers)
From 1960-1973: Black urbanization became important and attempts were made to impart more institutional force to Apartheid.
From 1973-1984: Industrialization and realization that the racial policy was damaging the country.
From 1984-1994: transitions where economic growth decreased mainly due to economic sanctions placed on South Africa by many countries.
1994 onwards: Apartheid ended and democratic elections were held. The new government elected initiated economic reforms to establish South Africa as a more dynamic and internationally competitive economy.
GROSS DOMESTIC PRODUCT After World War II when manufacturing industry began to grow as the biggest contributor to the GDP and the overall economic growth in the 1960 rivaled that of Japan averaging about 6.9% per year in real terms.
In 1970 however both agriculture and manufacturing industry stagnated and the service sector (especially insurance industry, financial services and transport services) became the fastest growing sectors.
The price of gold was allowed to float in the 1970s and by the end of the decade the high prices of gold and other export commodities led to a brief recovery in economic growth.
Mining still continued to be important because of minerals like gold which dominated exports. So when the importance of gold in GPD declined, it still continued to affect the balance of payments.
Economic growth slowed in 1970s because of declining gold prices and gold revenues and rising prices of oil imports.
Severe droughts hit in 1980s affected the agricultural output. Then the erratic changes in gold prices led to a series of boom and busts, reducing average annual GDP to only 1.5%
National economic stagnation continued in the 1990s and GDP declined further in 1991 and 1992. In 1993 private consumption accounted for 57% of the GDP in 1993 representing a minimal increase (0.4%) over 1992.
The recovery strengthened in 1994 where GDP represented a 2.6% real growth over 1993. Per capita GDP averaged about US$ 3010 placing South Africa in upper income developing countries.
For many rural families in South Africa informal activities are the major source of household income hence GDP measurements were adjusted upward by 5.6% to include a modest estimate of output from the informal sector.
Annual GDP growth between 2004 and 2007 averaged 5% but fell to 3.7% in 2008 because of higher interest rates.
After 2008 the GDP contracted and the economy plunged into recession. This contraction continued into the first and second quarters of 2009 with GDP growth at -6.4% and -3% respectively.
In 1960s average annual inflation was about 3%. In line with the worlds trend it rose above 10% in 1974 and fluctuated between 11 to 14% in the early 1980s
Inflation reached a high of 18.6% in 1986 forcing a depreciation of rand and it continued to be high thereafter.
The erratic price of oil ( a crucial import bought on black market due to the OPEC sanctions) provided a continuous inflationary pressure.
Inflation continued to be high in early 1990s but it declined to 9.1% in 1995. This lower rate was due to decline in food prices, the relative stability of rand, and the lowering of import tariffs.
A new constitution approved in 1993 followed by a plea by African National President Nelson Mandela for foreign nations to lift sanctions led to a pledge of US$ 850 million in economic aid by the International Monetary Funds (IMF). This gave a signal to the foreign investors that South Africa was a safe place to invest and thus opening way to the current economic era.
There has been a long term transition from a production based on agriculture economy to a production based on industries. Consumer spending pattern changed from spending on basic goods to diverse and luxury items. Its vast mineral resources and natural assets have contributed to increase in the economic growth.
Mining has been one of the main driving force behind the development of South Africa. The mining industry in South Africa continues to play a strategic role in the country’s economic growth and development and in 2004 accounted for 6.6 percent of the gross domestic product (GDP). However, if the indirect multiply effects of the industry i.e. backward linkages such as transport and professional services and forward linkages such as power generation, among others are added to this the industry’s contribution is closer to 16 percent. In the same year the industry was a substantial foreign exchange earner representing 29.3 percent of the country’s total merchandise exports, contributing an approximated R90.3-billion to SA’s exports. It is the fifth largest contributor to the GDP.
However, due to the global recession, the mining industry experienced a series of disastrous events, such as a fall in commodity prices and consumer demand. This led to production cuts and cutbacks on major projects. Mining production fell alarmingly in 2009 after the highs of January 2005.The turnaround for this industry has been attributed to a gradual rise in oil and commodity prices worldwide, weakening of the US dollar, and the resurgence of the Chinese economy.
With expansion of manufacturing and mining industry, the share of Agriculture in GDP has fallen from 20% in 1930 to 3% in 2009.Due to diverse climate, terrain and ecology almost all kinds of food crops are cultivated in South Africa. The agriculture sector provides for most domestic needs, and South Africa exports corn (maize), wool, sugar, peanuts (groundnuts), tobacco, and other farm products.
The challenges which lie ahead in this sector pertain to the land reform policy of the Government. The South African Government has set a target of transferring 30% of productive farmland from whites to ‘previously disadvantaged’ blacks by 2014. This can lead to a similar situation currently in Zimbabwe where the whites have stopped producing due to uncertainty and the whole economy has gone for a toss because of hyper inflation.
Secondary Sector The share of manufacturing is around 30% in the GDP and with continuing relationship building with the Government of China there is going to be increased investment in this sector.
Out of this the automotive industry is one of South Africa’s most important sectors, with many of the major multinationals using South Africa to source components and assemble vehicles for both the local and international markets.
Despite its distance from some of the major markets South Africa produces high quality products at prices competitive with other automotive manufacturing and assembly centers. Vehicle manufacturers such as BMW, Ford, Volkswagen, Daimler-Chrysler and Toyota have production plants in the country, while component manufacturers (Arvin Exhust, Bloxwitch, Corning, Senior Flexonics) have established production bases in the country.
The South African automotive industry accounts for about 10% of South Africa’s manufacturing exports, contributes 7.5% to the country’s GDP and employs around 36,000 people. Vehicle exports were in the region of 170,000 units in 2007, exported mainly to Japan (about 29% of the value of total exports), Australia (20%), the UK (12%) and the US (11%). South Africa also exported ZAR 30.3 billion worth of auto components in 2006.
The outlook for the vehicle industry is bright in terms of both exports and the domestic market. A key challenge will be to raise local content, particularly in the vehicles now being exported in large volumes.
The other major industry is the ICT