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Semester
MACRO ECONOMICS
TITLE OF STUDY
Assignment I
CODE
BIT 2214
STUDENTS
Introduction
Similarly, for several years during the 1980s the U.S. government
restricted the import of Japanese automobiles to a certain quota, creating
an artificial shortage of foreign cars. The result? General Motors and other
U.S. car manufacturers not only sold more cars, but also raised their
prices, thereby enjoying an economic rent (the difference between the
price of domestic cars and the cheaper but unavailable Japanese
alternative). This in Kenya occurred with the importation of vehicles such
as the land rover from Europe (English and German territories especially)
until very recently, with the introduction of funny models such as
“Success” and “Body”, which we refer commonly as China models.
In the recent past there have been a number of studies that have reported
Sources of corruption
1. Firstly, trade restrictions are the prime example of a government-
induced source of rents. If importing a certain good is subject to
quantitative restriction (for example, only so many foreign
automobiles can be imported each year), the necessary import
licenses become very valuable and importers will consider bribing
the officials who control their issue. More generally, protecting a
home industry (such as infant industry) from foreign competition
through tariffs creates a semi-monopoly for the local industry. Local
manufacturers will lobby for the establishment and maintenance of
these tariffs and some may be willing to corrupt influential politicians
to keep the monopoly going. Studies have shown that a very open
economy is significantly associated with lower corruption. In other
words, countries tend to be less corrupt when their trade is relatively
free of government restrictions that corrupt officials can abuse.
2. Government subsidies can constitute a source of rents. Studies show
corruption can thrive under industrial policies that allow poorly
targeted subsidies to be appropriated by firms for which they are not
intended. The more such subsidies are available to industries, the
higher the corruption index, an example in Kenya is in the supply of
subsidized fertilizers that was being re-branded by suppliers to be
sold later at a higher price.
3. Price controls, whose purpose is to lower the price of some good
below its market value (usually for social or political reasons), are
also a source of rents and of ensuing rent-seeking behavior. Price
controls create incentives for individuals or groups to bribe officials
to maintain the flow of such goods or to acquire an unfair share at
the below-market price.
4. Multiple exchange rate practices and foreign exchange allocation
schemes lead to rents. Some countries have several exchange
rates--one for importers, one for tourists, one for investors, for
example. Differentials among these rates can lead to attempts to
obtain the most advantageous rate, although this rate might not
apply to the intended use of the exchange. Multiple exchange rate
systems are often associated with anti-competitive banking systems
in which a key bank with government ties can make huge profits by
arbitrating between markets. Some countries have little foreign
currency and distribute what they have through various schemes,
with varying degrees of transparency. If, for example, state-owned
Tools of corruption
• Nepotism In this context "is the granting of public office on the bases
of family ties." This is a good example of a point where different
cultures have very different attitudes towards some forms of
corruption.
• Racism is the provision of unfair advantage to members of the same
race. This is especially seen in international territories, where
contracts are usually awarded to the white race, in the thought that
they are superior in terms of technology and expertise.
• Tribalism is the provision of unfair advantage to members of the
same tribe. This is a very open case in Kenya, where government
offices are sometimes awarded to members of the same tribe.
• Shared experience "there the patron and client have usually worked
together in the past and are on good terms and the patron promotes
or has promoted the client on the basis of these past experience and
warm relationship."
• Shared Interest In this case, "the patron does not have common
experience with someone he she wishes to promote, but rather a
common interest" (for example, they both come from the same
republic and/or are of same ethnic group; they both favor a large
increase in defense expenditure in contrast to what others want,
they are of the same gender.) Another case would be seen where
large contracts may be awarded to foreign investors to facilitate the
ease of future economic bindings such as grants and aid, like Kenya
and China on the road projects.
Causes of corruption
Leslie Holmes (1993 p.157) breaks down the causes of corruption divides
into three categories, cultural, psychological, and system-related.
Effects of Corruption
As stated above, recent empirical evidence suggests that corruption
lowers economic growth. This may happen through a wide range of
channels. Herein is a summary of these effects:
1. Entrepreneurs will be aware that their future proceeds and
investments may be claimed by corrupt officials. Payment of bribes
is often required before necessary permits are issued. Therefore
investors may perceive this as a tax – which thus shall reduce their
incentive to invest in such a country.
2. Of particular relevance to African countries and developing nations
as a whole is the possibility that corruption might reduce the
effectiveness of aid flows, ultimately resulting in aid flows financing
unproductive public expenditures. In the recent past, one in which
our country Kenya has faced is the focus on issues of good
governance before the inflow of aid and in some cases where
governance is judged to be poor, some donors have scaled back
their assistance or even stopped providing assistance completely.
3. Corruption may also bring about loss of tax revenue when it takes
the form of tax evasion or the improper use of discretionary tax
exemptions. This falls under corruption when there is counterpart
payment to the tax official responsible.
4. By affecting tax collection or the level of public expenditure then it
can be proven that corruption may have adverse budgetary
consequences. Alternatively, where corruption takes the form of
improper use of directed lending at below market interest rates by
public sector financial institutions corruption may result in an
undesirable lax monetary stance.
5. The allocation of public procurement contracts through a corrupt
system may lead to inferior public infrastructure and services. An
example will be the case of corrupt bureaucrats allowing the use of
cheap, substandard materials in the construction of buildings or
bridges and roads.
6. Corruption may also affect the composition of government
expenditures. Corrupt officials may come to prefer those types of
expenditures that allow them to collect bribes and actually manage
to keep them secret for very long. This is very common in large
expenditures on special items such as weaponry (tanks saga in
Kenya and Somalia, German police helicopters that lay in Kenyan
docks for long without being even taken on test flights) or the
building of roads (Rift valley case where roads are used to dry
maize) and bridges or even dams (dams that remain unused in
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