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Impact of Corruption on Nigeria's Economy

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Impact of Corruption on Nigeria's Economy Impact of Corruption on Nigeria's Economy www.pwc.com/ng Contents Executive summary 3 Introduction 4 Corruption and its impact on the economy 5 Methodology for creating scenarios 13 Results demonstrating the economic 14 cost of corruption in Nigeria Appendices 18 Scenario 1 18 Scenario 2 19 Scenario 3 20 Country case studies 21 Bibliography 23 Contacts 24 2 Impact of Corruption on Nigeria's Economy Executive summary Corruption is a pressing issue in Nigeria. In this report we formulate the ways in President Muhammadu Buhari launched which corruption impacts the Nigerian an anti-corruption drive after taking economy over time and estimate the impact office in May, 2015. Corruption affects of corruption on Nigerian GDP, using public finances, business investment as empirical literature and PwC analysis. We well as standard of living. Recent estimate the ‘foregone output’ in Nigeria corruption scandals have highlighted the since the onset of democracy in 1999 and large sums that have been stolen and/or the ‘output opportunity’ to be gained by misappropriated. But little has been 2030, from reducing corruption to done to explore the dynamic effects of comparison countries that are also rich in corruption that affect the long run natural resources. The countries we have capacity of the country to achieve its used for comparison are: Ghana, Colombia potential. Channels through which this and Malaysia. may occur include: Our results show that corruption in Nigeria Lower governance effectiveness, could cost up to 37% of GDP by 2030 if it’s especially through smaller tax base not dealt with immediately. This cost is and inefficient government equated to around $1,000 per person in expenditure. PwC studies estimate 2014 and nearly $2,000 per person by 2030. Nigeria’s tax revenues at 8% of GDP, The boost in average income that we which is the lowest for comparison estimate, given the current per capita countries income, can significantly improve the lives of many in Nigeria. Weak investment, especially FDI, as it’s harder to predict and do We believe this work provides robust business evidence and impetus for reducing corruption in Nigeria. Lower human capital as fewer people, especially the poor, are unable to access healthcare and education PwC 3 Introduction In this paper, we estimate the negative impact of corruption in Nigeria President Muhammadu Buhari • second, estimate the ‘foregone launched an anti-corruption drive output’ in Nigeria by simulating after taking office in May, 2015. This lower corruption in the past 15 comes after a series of high profile years; and corruption scandals in Nigeria that have highlighted the sheer size of the • third, estimate the output that corruption problem. Nigeria can achieve by simulating lower corruption in the next 15 years. In this paper, we explore the negative impact of corruption on Nigeria’s The lower corruption scenarios are GDP.1 simulated based on the corruption levels of benchmark countries. To do this, we: • first, analyse how corruption In the next paper, we will explore how affects the economy over time; anti-corruption policies affect corrupt behaviours and which policies are likely to have the biggest impact in Nigeria. Over a series of papers, we address the following questions: paper 1 what is the impact of what is the cost of corruption on the corruption in Nigeria Nigerian economy paper 2 which anti-corruption policies are most what policies can be suitable to address used to reduce corruption in Nigeria corruption 4 Impact of Corruption on Nigeria's Economy 1 Referred to as ‘economic cost of corruption’ or ‘cost of corruption’ for simplicity. Corruption and its impact on the economy We have undertaken five steps to estimate Nigeria’s cost of corruption 2 4 Reviewed the empirical Created 3 scenarios that show literature on the impact of the lower levels of corruption corruption on economic that Nigeria could have growth to inform our estimates achieved in the past and of the link between the can achieve in the future. corruption perceptions index and GDP. Literature Identifying Benchmark Scenario Estimating review impact of Nigeria building impact corruption on economic growth 1 3 5 Studied >30 papers that quantify Identified 3 comparator Calculated the impact of the impact of corruption on countries that meet the criteria corruption on economic economic outcomes. for providing relevant growth and output for each Identified the transmission benchmarks to Nigeria. scenario, using the coefficient channels of corruption on identified in step 2. economic outcomes. We examined over 30 studies to understand the way that corruption affects GDP in Nigeria We examined 32 studies in total; 20% Of the shortlisted 3 studies, we selected sponsored by International organisations the IMF study “Does Mother Nature including the OECD, IMF, DFID and corrupt? Natural Resources, Corruption Transparency International; 22% and Economic Growth” by Leite and published by Nigerian Academics Weidman (1999) to estimate impact of affiliated with Nigerian Universities; 16% corruption on economic growth. We chose published by other Academics across this study because: mediums such as journals, articles and It controls for endogeneity using the PhD publications among others; as well as two stage least squares econometric 3% in-house studies assessing the health regression. of the Nigerian economy such as the It accounts for Nigeria specific World in 2050 publication (please see confounding factors such as the bibliography for further details). prevalence of natural resources Seventy percent (70%) of the 32 studies rents, which are generally associated quantitatively evaluated the impact of with higher levels of corruption in corruption on economic growth through the literature. regression techniques whilst also The data set encompasses a large exploring the qualitative links between number of countries, including corruption and economic outcomes. Of Nigeria, therefore making the results these 22 papers, we selected 3 studies highly applicable to Nigeria as well that explicitly accounted for as other similar benchmark endogeneity.2 countries. 2 This means that the study is able to avoid overestimating the impact of corruption PwC 5 due to other factors that affect growth and are correlated with corruption. After reviewing the literature, we chose the IMF study to estimate the impact of corruption on economic growth The IMF study estimates that the of trade over the period. impact of 1 point change in the Investment ratio to GDP average over corruption index 3 results in a 1.2 the period percentage point change in Country-specific variability in economic growth per annum. commodity prices We also use the study’s Geographic location i.e. Sub-Saharan methodology - calculating impact Africa on growth when a country moves from its own rank to another We do not attempt to capture the country’s rank on the corruption impact of corruption on growth through index. the interaction of corruption with other issues that may dampen economic The study shows the impact from growth. Therefore, the impact on corruption, irrespective of the economic growth from a simulated following which may also impact decrease in corruption will not capture the growth of the economy: the impact on growth from other factors that independently affect Initial level of income in the growth. Such factors include: political economy stability and strength of public Natural resources institutions among others. Level of trade openness over the period and change in terms Benchmarking to identify comparison countries for Nigeria Natural resources rents and corruption perceptions share a positive correlation of 0.4 200 180 160 Nigeria 140 120 100 Colombia ranking 80 60 Malaysia Ghana 40 20 0 0 10 20 30 40 50 60 70 Corruption Perceptions Index (CPI) Total natural resources rents (% of GDP) average 2011 - 2013 3 The IMF uses the International Country Risk Guide (ICRG) index as a measure of corruption. This index is made up of political, financial and economic risk assessments produced by International Reports. We use the Corruption Perceptions Index (CPI) by Transparency International, see slide 10 for more details. The ICRG and CPI are strongly correlated with correlation coefficients greater than 0.8, depending on the years in the sample. ICRG ranges from 0- 6 and CPI ranges from 0-10. Therefore, we assume that a 1 point change in ICRG = 10/6th point change in the CPI. 6 Impact of Corruption on Nigeria's Economy Source: Corruption: A Theoretical and Empirical Analysis, Christopher Tamina (2015) To build scenarios for the change in Ghana, Colombia and Malaysia fulfil corruption in Nigeria, we’ve selected the criteria. To calculate the cost of countries that meet the following corruption in Nigeria, we will simulate criteria: that Nigeria faced lower corruption and natural resources rents greater than therefore higher growth between 1999 10% of GDP i.e. a resource rich and 2014. country 4 have faced corruption problems and To simulate lower corruption levels in rank better than Nigeria on the Nigeria, we show that between 1999 and Corruption Perceptions Index 2014 Nigerian corruption was as low as: have implemented anti-corruption Scenario 1: Ghana’s policies before and have improved Scenario 2: Colombia’s corruption and macro-outcomes Scenario 3: Malaysia’s We use the Transparency International measure and definition of corruption What is corruption? The index categorises corruption into three parts: Corruption is defined and perceived Grand corruption: ‘Acts committed at a across a spectrum of illegal payments high level of government that distort and transactions such as bribes, policies or the central functioning of the embezzlement, and money laundering state, enabling leaders to benefit at the among others. Since corruption is expense of the public good’ illegal, capturing the amount of corruption is not possible, by Petty corruption: ‘Everyday abuse of analysing the amounts of corruption entrusted power by low- and mid-level payments that have proven to be so in public officials in their interactions with court.
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