Effects of Corruption and Economic Reforms on Economic Growth and Development: Lessons from Nigeria

Effects of Corruption and Economic Reforms on Economic Growth and Development:
Lessons from Nigeria
Abiodun Elijah OBAYELU
E-mail: obayelu@yahoo.com
Department of Agricultural Economics, University of Ibadan, Nigeria
Being a paper prepared and submitted
For
2007 African Economic Conference
Abstract
This paper gives an overview of the Nigeria’s recent experience on corruption in the context of
economic reforms programme. It discusses the possible causes and effects of corruption, which
are seen to be rooted in socio-cultural practices and the political and economic situation of the
country. Data were drawn chiefly from news stories, reports of tribunals and commissions of
enquiry, interviews of Nigerians with relevant information, anecdotes, and personal knowledge
of Nigeria. The results of the study show that there have been significant reductions in the level
of corruption in the country through the introduction of government anti-corruption instruments.
In addition, this study found a negative correlation between levels of corruption and economic
growth thereby making it difficult for Nigeria to develop fast. In Nigeria, corruptions stifle
economic growth; reduce economic efficiency and development despite the enormous resources
in the country. Corruption creates negative national image and loss of much needed revenue. It
devalues the quality of human life, robs schools, agricultural sectors, hospital and welfare
services of funds. It discourages foreign investments leading to decrease in Foreign Direct
Investment. It exacerbates inequality, desecrates the rule of law and undermines the legitimacy
and stability of democratic regimes. It slows down administrative processes thereby making the
implementation of government reforms policies ineffective. People engage in corrupt practices in
Nigeria as a result of high level of poverty, high unemployment rate, under-remuneration of
workers, financial hardship, persuasion by friends and colleagues in public offices, desire to
please kinsmen, late payment of contractors by government, over-concentration of power and
resources at the center, unregulated informal economy, nepotism, tribalism in the administration
of justice and lack of honest leaders. The biggest challenge for the country therefore is not just to
punish corrupt behaviour or go into bargaining plea. The country must reverse the prevailing
culture in which corruption is viewed as permissible. People should be educated on the dangers
of excessive materialism and the culture of ‘get rich quick’. There is also the need for more job
creation with better remuneration.

Keywords: corruption, economic reforms, economic growth, economic development and
Nigeria.




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Section one: Theoretical and Conceptual underpinnings of Corruption and
Economic Reforms
1.1 Background
information
Corruption is efforts to secure wealth or power through illegal means for private gain at public
expense; or a misuse of public power for private benefit. Corruption like cockroaches has co-
existed with human society for a long time and remains as one of the problems in many of the
world’s developing economies with devastating consequences. Corruption as a phenomenon, is a
global problem, and exists in varying degrees in different countries (Agbu, 2001). Corruption is
not only found in democratic and dictatorial politics, but also in feudal, capitalist and socialist
economies. Christian, Muslim, Hindu, and Buddhist cultures are equally bedeviled by corruption
(Dike, 2005). Corrupt practices are not an issue that just begins today; but the history is as old as
the world (Lipset and Lenz, 2000).
In Nigeria, it is one of the many unresolved problems (Ayobolu, 2006) that have critically
hobbled and skewed development. It remains a long-term major political and economic
challenge for Nigeria (Sachs, 2007). It is a canker worm that has eaten deep in the fabric of the
nation. It ranges from petty corruption to political / bureaucratic corruption or Systemic
corruption (International Center for Economic Growth, 1999). World Bank studies put
corruption at over $1 trillion per year accounting for up to 12% of the Gross Domestic Product of
nations like Nigeria, Kenya and Venezuela (Nwabuzor, 2005).
Corruption is endemic as well as an enemy within (Agbu, 2003). It is a canker worm that has
eaten deep in the fabric of the country and had stunted growth in all sectors (Economic and
Financial Crime Commission (EFCC), 2005). It has been the primary reason behind the country
difficulties in developing fast (Independent Corrupt Practices Commission (ICPC), 2006). This is
evident in Transparency International’s has consistent rating of Nigeria as one of the top three
most corrupt countries in the world (Ribadu, 2003).
As part of effort at fighting corruption and strengthening the economy, Nigeria embarked on an
aggressive pursuit of economic reform that through privatization, banking sector reform, anti-
corruption campaigns and establishment of clear and transparent fiscal standards since 1999.
The major aim of the economic reforms in Nigeria is to provide a conducive environment for
private investment (African economic outlook 2006). The reform process has the following key

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pillars: improved macroeconomic management, reform of the financial sector, institutional
reforms, privatisation and deregulation, and improvement of the infrastructure.
The importance of infrastructure for economic growth and development cannot be
overemphasized. The poor state of electricity, transport and communications is a major handicap
for doing business in Nigeria. The Federal Government of Nigeria through its Central Bank
made progress in consolidation of the banking system which was prior to the reforms was highly
fragmented, with many banks having very small and undiversified capitalisation. The reform
stipulated a minimum paid-up capital of $188 million, up from $15 million, with a deadline for
compliance at the end of December 2005. This resulted in a record number of bank mergers and
acquisitions. As a result, the number of banks in Nigeria has shrunk from 89 in 2004 to 25 in
December 2005.
The privatisation and deregulation programme is also a notable area of success of Nigeria
economic reforms. The programme started in 1989 following the inauguration of the 11-member
Technical Committee on Privatisation and Commercialisation (TCPC) on 27 August 1988. In the
first round of privatisation, between 1989 and 1993, the TCPC privatised 55 firms. Offer for sale
was the predominant mode of privatisation. The second round of privatisation, which began in
1999, aimed at full or partial divestment of government interest in 98 public enterprises in 14
sectors. At present, an approximately 45 public enterprises have been privatized in Nigeria.
The main objective of this paper is to analyse the effects of corruption on economic growth and
development of Nigeria in the context of its economic reform programme since 1999 to date.
Attempt at achieving this objective has led to the segmentation of the paper into three main
sections. The first section talks about the introduction and theoretical underpinning of corruption
and economic reforms, section two deals with causes, extent and challenges of corruption in
Nigeria and the last section conclude the paper with some policies recommendations.

1.2
Conceptual underpinnings of corruption and Economic reforms
It is very easy to talk about corruption, but like many other complex phenomena, it is difficult to
define corruption in concise and concrete terms. Not surprising, there is often a consensus as to
what exactly constitutes this concept. There is always a danger as well that several people may
engage in a discussion about corruption while each is talking about a different thing completely.
But in recent years there is a body of theoretical and empirical research on corruption (such as:

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Elliot 1997; Rose-Ackerman 1999; Gill 1998; Girling 1997; Human Development Cooperation
(HDC) 1999; Kaufmann and Sachs 1998; Mauro 1995; Guhan and Paul, 1997; Shleifer and
Vishnay 1993; Stapenhurst and Kpundeh 1999; Vittal 1999; World Bank 1997 and the most
recently, Farida and Ahmadi-Esfahani, 2007).
To avoid the confusion of definition of corruption, this paper gives an operational definition of
corruption as conceptualized by some studies. Corruption is like cancer, retarding economic
development. According to Eigen (2001) corruption is seen as a “daunting obstacle to sustainable
development", a constraint on education, health care and poverty alleviation, and a great
impediment to the Millennium Development Goal of reducing by half the number of people
living in extreme poverty by 2015.
The World Bank defines corruption as the abuse of public office for private gains. Public office
is abused through rent seeking activities for private gain when an official accepts, solicits, or
extorts a bribe. Public office is also abused when private agents actively offer bribes to
circumvent public policies and processes for competitive advantage and profit. Public office can
also be abused for personal benefit even if no bribery occurs, through patronage and nepotism,
the theft of state assets or the diversion of state resources (World Bank 1997). A public official is
corrupt if he accepts money for doing something that he is under duty to do or that he is under
duty not to do. Corruption is a betrayal of trust resulting directly or indirectly from the
subordination of public goals to those of the individual. Thus a person who engages in nepotism
has committed an act of corruption by putting his family interests over those of the larger society
(Gire 1999).
In Asian Development Bank perspectives of corruption as cited by Agbu (2001), corruption is
defined as the behaviour of public and private officers who improperly and unlawfully enrich
themselves and/or those closely related to them, or induce others to do so, by misusing the
position in which they are placed. Systemic corruption also referred to as entrenched corruption,
occurs where bribery (money in cash or in kind) is taken or given in a corrupt relationship. These
include kickbacks, pay-off, sweeteners, greasing palms, etc) on a large or small scale. It is
regularly experienced when a license or a service is sought from government officials. It differs
from petty corruption in that it is not as individualized. Systemic corruption is apparent
whenever the administration itself transposes the expected purposes of the organizations; forcing
participants to follow what otherwise would be termed unacceptable ways and punishing those

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who resist and try to live up to the formal norms (International Center for Economic Growth,
1999).
In an elaborate analysis, Alatas (1990) divided corruption into seven distinct types: autogenic,
defensive, extortive, investive, nepotistic, supportive, and transactive. Autogenic corruption is
self-generating and typically involves only the perpetrator. A good example would be what
happens in cases of insider trading. A person learns of some vital information that may influence
stocks in a company and either quickly buys or gets rid of large amounts of stocks before the
consequences arising from this information come to pass. Defensive corruption involves
situations where a person needing a critical service is compelled to bribe in order to prevent
unpleasant consequences being inflicted on his interests. For instance, a person who wants to
travel abroad within a certain time frame needs a passport in order to undertake the journey but is
made to pay bribes or forfeit the trip. This personal corruption is in self-defense. Extortive
corruption is the behavior of a person demanding personal compensation in exchange for
services. Investive corruption entails the offer of goods or services without a direct link to any
particular favor at the present, but in anticipation of future situations when the favor may be
required. Nepotistic corruption refers to the preferential treatment of, or unjustified appointment
of friends or relations to public office, in violation of the accepted guidelines.
The supportive type usually does not involve money or immediate gains, but involves actions
taken to protect or strengthen the existing corruption. For example, a corrupt regime or official
may try to prevent the election or appointment of an honest person or government for fear that
the individual or the regime might be probed by the successor(s). Finally, transactive corruption
refers to situations where the two parties are mutual and willing participants in the corrupt
practice to the advantage of both parties. For example, a corrupt businessperson may willingly
bribe a corrupt government official in order to win a tender for a certain contract. The focus in
this paper will be on the extortive, nepotistic, and transactive corruption, not only because they
appear to be at the core of the corruption phenomenon, but also because the other forms appear
to be the offshoot of these three fundamental types. There would be no defensive corruption in
the absence of the extortive type.



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1.3
Various vocabularies used to describe corruption and corruption typology in
Nigeria
Description: There are different vocabularies used to describe corruption in Nigeria. Some of
these are bribery, extortion (money and other resources extracted by the use of coercion, violence
or threats), embezzlement (theft of public resources by public officials. It is when a state official
steals from the public institution in which he/she is employed, betrayal of trust, unfair
advantages, financial malpractices, egunje, dash, gratification, brown envelopes, tips,

emoluments, greasing, softening the ground, inducements, sub-payments, side payments,
irregular payments, payment under the table, undocumented extra payments, facilitation
payments, mobilisation fees, “routine governmental action,” revised estimates, padded
contracts, over(under)-invoicing, cash commissions, kickbacks, payoffs, covert exchanges,
shady deals, cover-ups, collusion, “10% rule” (bribe surcharge), “50% rule” (sharing bribe
within the hierarchy), “let’s keep our secret secret,” "highly classified" transactions, customary
gift-giving, tribute culture, nepotism(a special form of favoritism in which an office holder
prefers his/her kinfolk and family members), etc.
Typology: Corruption manifests itself in Nigeria inform of abuse of positions and privileges, low
levels of transparency and accountability, inflation of contracts, bribery/kickbacks,
misappropriation or diversion of funds, under and over-invoicing, false declarations, advance fee
fraud and other deceptive schemes known as “419”, collection of illegal tolls, commodity
hoarding, illicit smuggling of drugs and arm, human trafficking, child labour, illegal oil
bunkering, illegal mining, tax evasion, foreign exchange malpractices including counterfeiting of
currency, theft of intellectual property and piracy, open market abuse, dumping of toxic wastes,
and prohibited goods” just to mention few.
Government Efforts at combating Corruption in Nigeria: Nigeria remains mired in
corruption, crime, poverty, and violence despite the promulgation of several laws like in other
countries as the principal mechanism for curbing corruption. The legal instruments used to fight
corruption in Nigeria include the Criminal Code, Code of Conduct Bureau, the Recovery of
Public Property Act of 1984 and the newly formed commissions (the EFCC and the ICPC). Prior
to 1966, the Criminal Code was the primary source of law dealing with corruption in Nigeria.
But due to the narrow nature in dealing with corruption such as only criminalizing the conduct of
bribe-taking public servants leaving the private, it was replaced by Criminal Justice

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(Miscellaneous provision) Decree in 1966. This however failed to stem the tide of corruption.
The rules were confusing, thus leaving open the livelihood that guilty persons might escape
punishment on technical grounds.
The code of Conduct was thereafter formed in the 1979 Nigeria constitution where complaints on
corrupt practices are referred to Code of Conduct Bureau Tribunal. The Bureau forbids public
officers from simultaneously receiving remuneration of two public offices and from engaging in
private practices while in the employment of government, the code bar public servants from
accepting gifts or benefits in kind for themselves or any other person on account of anything
done or omitted to be done in the discharge of their duties. It prohibits public officers from
maintaining or operating foreign bank accounts. Public officers are required to declare their
assets and those of their families immediately after taking office, at the end of every four years in
office, and at the end of their terms. Due to the non inclusion of the private sector which are also
corrupt in all these laws, In year 2000, the Independent Corrupt Practices and Other related
Offences Act was promulgated which eventually gave birth to the ICPC and the EFCC charged
with the responsibility of investigating, arresting and charging any offenders with corrupt
practices either economic or financial crimes in Nigeria to court

Section Two: Causes, Extent, and Challenges of corruption in Nigeria
2.1
Can corruption be measured?
Yes, corruption can be measured. This is evidenced by several studies in literature where several
different approaches have been used in modeling corruption (see table 1). Although the old
myth that corruption by its “intrinsic nature” is impossible to measure delayed the emergence of
serious empirical analysis of corruption (Kaufman, 1997). In the past, there was a consensus that
real magnitude of corruption cannot be measured. But the obvious difficulties in measuring
corruption have not kept a number of entrepreneurs, multilateral development banks, and
academics from attempting to do so (Farida and Ahmadi-Esfahani, 2007). Conceptually, it is
often difficult to accept the many limitations of the various measures of corruption. All widely
used 'scientific' methods in the field of corruption evaluation hold value in achieving the goal,
that is, to estimate the spread and map the structure of corruption. First, the general perception is
regularly used as a sensitive core indicator to measure corruption through the feeling such as
'lack of justice' in public transactions (Akerlof 1985). On the other hand, the incidence-based

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approach is more independent from media agenda, and the general sense of society and the most
cited and probably respected cross-country comparison of the “Transparency International
Framework”, corruption is primarily based on expert evaluation. The approach taken now is to
transform the computation of corruption perception index (CPI) as a common index derived from
different general polls and expert interviews (Knack 1995, Murphy 1993, Bardhan 1997, and
Mandapaka 1995).
In general, experience-based indicators appear to offer the greatest potential for comparability,
since they avoid some of the problems associated with perception-based indicators. Corruption is
often modelled as a principal – agent problem. A principal delegate some decision power to an
agent, where the principal’s rules of preference in exercising the power are known to the agent.
The principal’s problem is that the agent may serve his/her own interests rather than the
principal’s (Bardhan 1997).
The influence of corruption on economic growth has been modelled using economic growth
models (Krueger 1974; Murphy 1993; Mandapaka 1995; Mauro 1995). In addition, corruption
has been modelled using the game theoretic approach with three players: principle, agent, and
hidden principal (Andvig 1990; Laffont 1991; Basu 1992; Mookherjee 1995; Acemoglu 2000).
In addition, SWARM (as programming language) has also been widely used method (Turnovsky
1995; Jain 1998; Stapenhurst 1999) to simulate corruption models, and analyse the dynamic and
evolutionary process of corruption on various parameters. Falling short of empirical evidence
and profound experience, there is not even a theory available that may potentially assist in
putting the various approaches into comparative perspective. Every approach as indicated in
table 1 has strengths and weaknesses. Different models (Lucas type, Keynesian, Agent-based …)
and methods (Ordinary Least Square (OLS), 2 stage LS, Maximum Likelihood Estimator (MLE)
etc) have been used. Only few who used the economic growth approach were able to empirically
support the negative relationship between corruption and growth. This may be due to the
endogeneity bias, subjective surveys and sample size sensitivity. On the other hand, although
utilizing the game theory yields some useful insights into the notion of corruption, this approach
ignores government involvement, models only the demand side of corruption, and involves one
stage game while corruption occurs in continuing relationships. As for the MIMIC (Multiple
Indicators Multiple Causes), the output is a time-series index that can be used to construct
ordinal and cardinal time series of corruption, this model lacks structural interdependence in

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addition to co-linearity between indicators. Finally, simulation models show the strength of the
cause-effect relationship between corruption and growth, but cannot detect unstable equilibrium,
and the total convergence cannot be achieved in finite time.

Table 1: Previous Models of corruption
Approach Scholars Models Methods
Limitations
Findings

Economic
(Murphy 1993)
Lucas type
OLS
Subjective surveys
Only few were
growth: It
(Mandapaka
Rent seeking


able to
explores the
1995)
Keynesian
2 stage LS
Endogeneity bias
empirically prove
relationship
(Triole 1996)
Neoclassical

the negative
between
(Mauro 1997)
Sample size
relationship
corruption and
(Bardhan 1997)
sensitivity
between
economic
(Hellman 2000)
corruption and
growth.
growth.
Game theory: It
(Andvig 1990)
Principle /
One stage
Models the demand
This approach
identifies the
(Laffont 1991)
Agent
game
side
yields some
conditions that
(Basu 1992)


useful insights
are necessary for
(Mookherjee
Heterogeneous
Ignores the
into the notion of
corruption and
1995)
bureaucrats
government
corruption.
those that are
(Dixit 1997)
(Agent)
involvement
conducive to it.
(Elliot 1997)

(Acemoglu
Corruption occurs in
2000)
continuing
relationships
Multiple
(Weck 1983)
LISREL
MLE Co-linearity
between
The output of this
indicators
(Frey 1984)
MIMIC
indicators
model is a time
Multiple causes:
(Balasa1985)

series index that
It considers
(Salvatore
Weak estimation
can be used to
observable data
1991)
techniques
construct ordinal
on potential
(Greenaway

and cardinal time
indicators to
1994)
Lack structural
series of
predict values
(Loayza 1996)
interdependence
corruption.
for unobservable
(Schneider

(corruption)
1997)
Giles 1999)
Simulation: It
(Turnovsky
Agent-based SWARM No way to detect
Many showed the
tests the
1995)

unstable equilibrium
strength of the
effectiveness of
(Jain 1998)
STELLA

cause-effect
some proposed
(Stapenhurst
Total convergence is
relationship
solutions to
1999)
not achieved in finite
between
combat
(Hammond
time
corruption and
corruption.
2000)
growth.
(Luna 2002)
(Situngkir 2003)
Source: Farida, M and Ahmadi-Esfahani, F. (2007). Modelling Corruption in a Cobb-Douglas
Production Function Framework” Australian Agricultural and Resource Economics society, 51 st
Annual Conference. February 13, 2007.


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The economic growth approach has the ability to test the relationship between economic growth
and corruption, but its main limitation lies in using the correct index of corruption in the
objective function. Most of indices of corruption that had been used (Mauro 1995, Knack 1995,
Murphy 1993, Bardhan 1997, and Mandapaka 1995) were based on surveys. These indices
reflect either the general perception of the people on the level of corruption present in the
country or the expertise perception, and they fail to reflect the actual level of corruption present
in the country. The current literature on the impact of corruption lacks a theoretical framework
that incorporates the potential effect of corruption on output through its impact on the arguments
to the production function. Nor does it address the effect of corruption through its impact on
economic growth and development. The literature to date, has only examined the hypothesised
influences separately, ignoring the larger potential aggregate impact of corruption on output. To
overcome the shortcomings in the theoretical reviews, neoclassical model of economic growth
that explicitly includes human capital accumulation and the direct and indirect effects of
corruption on economic growth have been developed. This approach is superior to previous
studies employing a variety of approaches that ignore the potential indirect effect of corruption
on economic growth and development. Our theoretical model suggests that output and growth
are influenced by the level of corruption. if one of the physical inputs in the production function
suffers a quality loss in the presence of corruption, then this will also affect growth and the
steady state level (Farida and Ahmadi-Esfahani, 2007). None of these models have been adopted
in the analysis of corruption in Nigeria. This is largely due to want of data on corruption.

2.2 Causes of corruption in Nigeria
A number of factors have been identified as instrumental to enthroning corrupt practices in
Nigeria. These include, briefly, the nature of Nigeria’s political economy, the weak institutions
of government, and a dysfunctional legal system. Absence of clear rules and codes of ethics
leads to abuse of discretionary power make most Nigerian vulnerable to corrupt practices. The
country also has a culture of affluent and ostentatious living that expects much from “big men,”
extended family pressures (Maduagwe, 1996), village/ethnic loyalties, and competitive ethnicity.
The country is also one of the very few countries in the world where a man’s source of wealth is
of no concern to his neighbours, the public or the government. Once a man is able to dole out
money, the churches, the Mosques pray for him, he collects chieftaincy titles and hobnobs with

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