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. ordinary citizens… often trying to access basic public goods and services’ We use Transparency International’s Corruption Perceptions Index (CPI) as  Political corruption: ‘Manipulation of a proxy for corruption. This dataset policies, institutions and rules of defines corruption as the ‘abuse of procedure in the allocation of resources public office for private gain’. and financing by political decision makers, who abuse their position to sustain their power, status and wealth’

4 Various academic literature attribute the likelihood of high PwC 7 corruption to high levels of natural resources in a country. The Global Corruption Barometer**: People's perceptions on Nigeria vary by institutions

Businesses Judiciary Military Political Police Parliament parties & legislature

Low Perception of corruption High

Score 4-5* Score 3-4* Score 2-3*

**The Global Corruption Barometer is a representative survey of more than 114,000 households in 107 countries. We use the Corruption Perceptions Index for our analysis as it is more commonly used in literature, making it easier for comparison and sensitivity analysis.

The Corruption Perceptions Index measures perceptions rather than amounts of corruption each year Interpreting the Corruption Perceptions Index (CPI) The index measures the perception of corruption in countries. Unlike amounts of corruption across big and small corruption, perceptions are subjective and businesses, rich and poor citizens, may change drastically due to media country experts, local media and attention and sudden expositions of international organisations. These corruption. scores are amalgamated across surveys and standardised across countries The index predominantly focusses on every year so that the scores range corruption from the perspective of business from 0 to 10. welfare in general. Therefore, it lacks in- depth information about where or which The index is based on perceptions and type of corruption is dominant. does not reflect the actual amounts of

Perceptions are measured for: Experts interviewed range from: Interviewees come from the following institutions at both  Accountability of the  Global and local experts the national-level and local government to the public  Multilateral lending institutions level:  Success of the judicial system to  International organisations prosecute  Local newspapers and  Police and military  Ease of access of information to magazines  Executive, legislative and the public  Country specialists who draw on judiciary  Transparency of government opinions of in-country  Taxation, customs and licensing actions, particularly spending freelancers, clients and others bodies  The extent to which bribes are  Survey of business leaders who  Inspection bodies paid for favours represent cross-section of  The independence of nation’s corporate community government branches  Local and foreign enterprises  The strength of the country’s institutional framework in managing corruption

8 Impact of Corruption on Nigeria's Economy Corruption has a dynamic impact, which is felt more by poorer households and smaller firms

The dynamic effect: corruption has a long run negative impact on growth, primarily through reduction in human capital and investment

04 , 01 Factors affecting corruption uity Corruption  Poverty …cor  Predictable corruption becomes a cost  Poor institutions of ‘business as usual’, which  Sudden surge of natural r ty & poor uption… businesses pass on to consumers resources rent  increasesver ineq Unpredictable corruption deters po investment and innovation institutions, resulting in...

self perpetuating cycle Disproportionate impact of corruption and Households poverty …lo Rich pay lower Poor lack economic g w proportion of access to ers income in tax public goods

ro Businesses wt vestment h Big corporates SMEs have raise barriers to more limited …reduces in entry access to credit and productivity 03 02 Macroeconomic outcomes from Channels corruption  Lower human capital  Lower labour productivity  Higher leakage through money  Lower capital formation laundering  Inequity and poverty  Weak investment  Lower economic growth  Poor fiscal revenue and expenditure  Poor institutions

Source: Global Corruption Barometer and Transparency International 2013 PwC 9 Government Businesses Household Countries with higher corruption are associated with lower tax revenue and expenditure as a % of GDP Corruption is associated with poor public Corruption is associated with erosion of finance management and provision of public talent in public institutions and goods therefore, government effectiveness  Corruption encourages tax avoidance, resulting  Corruption encourages hiring based on in a lower tax base for government revenue nepotism, cronyism and patronage, not collection. PwC studies estimate Nigeria’s tax merit. Therefore, reducing the quality of revenues at 8% of GDP, which is the lowest for the public institutions. comparison countries.  There is unnecessary bureaucracy,  Corruption allows for government expenditure creating further opportunities for bribes. in vested interest rather than public interest.  Therefore, enforcement of contracts and  Therefore, resulting in a lack of provision for property rights is weak. public goods such as infrastructure for businesses; and education and healthcare for households.

30 Countries with higher corruption are associated with lower tax revenue Correlation coefficient = -0.39 25

20 Malaysia 15 Colombia

evenue (% GDP) 10 Ghana ax r T 5 Nigeria 0 Low ------> High Corruption Perceptions Index (CPI)

Countries with higher corruption are 30 Correlation coefficient = -0.21 associated with lower tax revenue

20 e (% GDP) Colombia 15 Malaysia 10 Ghana

nment expenditur Nigeria 5 Gover

0 Low ------> High Corruption Perceptions Index (CPI)

10 Impact of Corruption on Nigeria's Economy Sources: World Bank Development Indicators and PwC analysis Government Businesses Household Corruption is associated with lower investment; and higher prices and barriers to entry for businesses

Corruption is associated with an Corruption is associated with lower increase in barriers to doing business property rights and investment,  Big companies are able to access especially FDI public goods by leveraging their  Corruption threatens property balance sheets. These include stable rights, discouraging investment electricity and water pipes among that requires high capital others. expenditure as businesses are unwilling to place high capital at  Smaller firms cannot afford these and risk. rely on the government for provision but corruption weakens public fund  Corruption is associated with lower management and public goods technological transfers as foreign provision. Therefore, it makes it more companies are unable to protect difficult for SMEs to compete. intellectual property.

Countries with higher corruption are Countries with higher corruption are associated with higher prices associated with lower investment

20 Correlation coefficient = 0.40 Correlation coefficient = -0.45 12 18 Ghana 11 16 Colombia 14 10 Nigeria Malaysia 12 9 Nigeria 10 8 Ghana 8 7 6 (logUS$ inflow) Colombia 6 Inflation (CPI % change) 4 Foreign Direct Investment 5 2 Malaysia 0 4 Low ------> High Low ------> High Corruption Perceptions Index (CPI) Corruption Perceptions Index (CPI)

PwC 11 Government Businesses Household Corruption is associated with lower average standard of living, education levels and greater inequality

50 Countries with higher corruption are associated with lower income per 45 Correlation coefficient = -0.62 capita and standard of living 40 35

30 25

per Capita in ‘000s 20 Malaysia 15 GDP 10 Colombia 5 Nigeria Ghana 0 Low ------> High Corruption Perceptions Index (CPI)

Countries with higher corruption are 124 associated with lower education levels Correlation coefficient = -0.66 104

84 Colombia

64 Malaysia

44 Ghana Nigeria

Secondary enrolment (% gross) 24

4 Low ------> High Corruption Perceptions Index (CPI)

60 Countries with higher corruption are Correlation coefficient = 0.35 associated with higher income inequality 55

50 Colombia Nigeria 45 Malaysia 40 Ghana 35

SWID Gini Index (0-100) 30

20 Low ------> High Corruption Perceptions Index (CPI)

12 Impact of Corruption on Nigeria's Economy Sources: World Bank Development Indicators, The Standardized World Income Inequality Database and PwC analysis Methodology for creating scenarios

We created three scenarios to simulate the ‘foregone output’ and the ‘output opportunity’ for Nigeria

We estimate the ‘foregone output’ in Nigeria since the onset of democracy in a. A gradual increase in the Nigerian CPI 1999 up to 2014 and the ‘output score over 5 years so that the Nigerian opportunity’ to be gained by 2030. CPI score is equal to that of the comparison country’s by year 5. During We do this based on 3 scenarios that this time period, Nigerian GDP slowly simulate; Nigeria catches up with gains from gradual improvements in CPI. Ghanaian, Colombian and Malaysian Corruption Perceptions Index scores b. An average increase in Nigerian CPI by respectively, within five years of the average annual difference between introducing anti-corruption policies, Nigeria and the comparison country’s and gains from these lower levels of CPI scores between year 5 and year 15. corruption for ten years. During this time period, Nigerian GDP gains from an average annual The cost of corruption estimation is enhancement due to lower corruption. based on the dampening effects of corruption on Nigerian GDP from using See pages 18 - 20 for further explanation and the IMF paper calculations. illustrations of each scenario. Our simulations have a twofold effect on Nigeria’s corruption perceptions index scores and GDP:

PwC 13 Results demonstrating the economic cost of corruption in Nigeria - Scenario 1 (Ghana)

Nigeria’s 2014 GDP could have been Nigeria’s GDP could have been 22% USD 113 bn higher if it had reduced higher in 2014 if it had reduced corruption to Ghana’s levels corruption to Ghana’s levels

700 25% 626 22% 600 -113 20% 20% 18% 500 513 16% 15% 14% 400 12% 10% 10% 300 introduction of 8% anti-corruption 6% USD bn at 2013 prices Baseline Levels Cost of Corruption (% GDP) policies 200 5% 4% Scenario Levels 2% 0.5%1%1% 0.1% 100 0% 2001 2011 2002 2012 2005 2007 1999 2003 2009 2013 2000 2010 2004 2014 2008 2006 2001 2011 2002 2012 2005 2007 1999 2003 2009 2013 2000 2010 2004 2014 2008 2006 Losses from corruption per person, USD 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2 7 15 27 42 81 125 174 229 291 364 428 494 567 651 We use average Naira to USD exchange rate over the 15 year period between 1999 - 2014 to convert corruption losses and GDP. This is to avoid skewing results from currency fluctuations.

Nigeria’s 2030 GDP can be USD Nigeria’s 2030 GDP can be 327 bn higher if it reduces 22% higher if it reduces corruption to Ghana’s levels corruption to Ghana’s levels

2000 25% 1,783 22% 1800 20% +327 20% 1600 18% 1,456 16% 1400 15% 14% 12% 1200 10% 10% 8% Scenario:introduction USD bn at 2013 prices 1000 6% Baseline ofanti-corruption 5% policies 4% Scenario 800 Cost of Corruption (% GDP) 1% 2% 2% 0.2%0.5% 600 0% 2021 2022 2015 2017 2025 2027 2019 2023 2029 2020 2030 2024 2018 2028 2016 2026 2021 2022 2015 2017 2025 2027 2019 2029 2023 2020 2030 2024 2018 2028 2016 2026 Losses from corruption per person, USD 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 5 16 34 58 91 170 257 350 450 558 671 793 924 1065 1217 For projecting Nigerian GDP, we use the PwC World in 2050 macroeconomic model. For projecting Nigerian population growth, we use IMF forecasts and PwC analysis.

14 Impact of Corruption on Nigeria's Economy Sources: PwC analysis, IMF WEO and Transparency International Scenario 2 (Colombia)

Nigeria’s 2014 GDP could have been Nigeria’s 2014 GDP could have been USD 93 bn higher if it had reduced 18% higher if it had reduced corruption to Colombia’s levels corruption to Colombia’s levels

606 20% 700 18% 18% -93 17% 600 16% 15% 14% 13% 513 500 12% 12% 10% 10% 400 8% 8% 7% 300 Scenario: introduction 5% 6% of anti-corruption USD bn at 2013 prices Baseline Levels Cost of Corruption (% GDP) 4% 4% policies Scenario Levels 2% 200 2% 2% 1% 0.2%0.5% 100 0% 2001 2011 2002 2012 2005 2007 1999 2003 2009 2013 2000 2010 2004 2014 2008 2006 2001 2011 2002 2012 2005 2007 1999 2003 2009 2013 2000 2010 2004 2014 2008 2006

Losses from corruption per person, USD 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3 8 16 29 47 79 114 155 199 250 309 360 412 471 537 We use average Naira to USD exchange rate over the 15 year period between 1999 - 2014 to convert corruption losses and GDP. This is to avoid skewing results from currency fluctuations.

Nigeria’s 2030 GDP can be USD Nigeria’s 2030 GDP can be 19% 270 bn higher if it reduces higher if it reduces corruption to corruption to Colombia’s levels Colombia’s levels

20% 19% 1800 1,726 18% 17% 16% 15% 1600 +270 14% 13% 12% 1400 1,457 12% 10% 10% 9% 1200 8% 7% Scenario: introduction 6% 6% 1000 of anti-corruption 4% Cost of Corruption (% GDP) 4% policies Basline levels 3% USD bn at 2013 prices Scenario levels 2% 800 2% 1% 1% 0.2% 0% 600 2021 2022 2015 2017 2025 2027 2019 2023 2029 2020 2030 2024 2018 2028 2016 2026 2021 2022 2015 2025 2017 2027 2019 2023 2029 2020 2030 2024 2018 2028 2016 2026

Losses from corruption per person, USD 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 6 18 37 64 100 165 236 311 392 479 570 667 772 884 1004 For projecting Nigerian GDP, we use the PwC World in 2050 macroeconomic model. For projecting Nigerian population growth, we use IMF forecasts and PwC analysis.

PwC 15 1 6

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2023 2007 ve been 16% 16% 2024 2008 19% 19% 1990 2030 2025 2009 22% 22% 2026 2010 25% 26% 2027 2011 29% 29% 2028 2012 32% 33% 2029 2013 36% 37% 2030 2014 If corruption is addressed, Nigeria’s GDP could be USD 534 bn higher in 2030

The Graph below summarises the three scenarios Sources: PwC analysis, IMF WEO and Transparency International

Nigeria’s 2030 GDP can be up to USD 534 bn higher if it reduces corruption

2500

Impact from reducing corruption 2000

534 270 327 1500 2030 GDP USD bn 1000

1457

500

0 Baseline Scenario: Scenario: Scenario: Colombia Ghana Malaysia

We use average Naira to USD exchange rate over the 15 year period between 1999 - 2014 to convert corruption losses and GDP. This is to avoid skewing results from currency fluctuations.

For projecting Nigerian GDP, we use the PwC World in 2050 macroeconomic model.

Abbreviations

 CPI - Corruption Perceptions Index  ICRG - International Country Risk Guide  GDP - Gross Domestic Product  IMF - International Monetary Fund  IMF WEO - International Monetary Fund World Economic Outlook  FDI - Foreign Direct Investment  DFID - Department for International Development  OECD - Organisation for Economic Co-operation and Development

Sources: PwC analysis, IMF WEO and Transparency International PwC 17 Appendices Scenarios used to simulate the cost of corruption in Nigeria

Scenario 1: Nigeria reduces corruption to Ghana’s levels

Nigeria reduces CPI ranking to 44 by 2004 and 35 by 2014

100

0 CPI ranking, normalised 2001 2011 2002 2012 2005 2007 1999 2003 2009 2013 2000 2010 2004 2014 2008 2006

Nigeria Ghana Scenario 1

Nigeria baseline CPI scores and Ghana CPI scores

CPI scores, normalised 1

0 1999 2004 2009 2014

Nigeria Ghana

Nigeria reduces CPI ranking to 44 by 2004 and 35 by 2014

CPI scores, normalised 1

0 Year 1 Year 5 Year 10 Year 15 Nigeria, scenario 1 Nigeria

We estimated the foregone output due to corruption for Nigeria between 1999 and 2014 and between 2015 and 2030 based on the scenario that Nigeria catches up with Ghana’s corruption levels within five years of introducing anti-corruption policies and gains from lower levels of corruption for ten years.

The cost of corruption estimation is based on the dampening effects of corruption on output in Nigeria from:  A gradual increase in the Nigerian CPI score by 2 points over 5 years so that the Nigerian CPI score is equal to that of Ghana by year 5.  An average increase in Nigerian CPI by 1.59 points per annum, which is the average annual difference between Nigeria and Ghana CPI scores between year 5 and year 15. 18 Impact of Corruption on Nigeria's Economy Scenario 2: Nigeria reduces corruption to Colombia’s levels

Nigeria reduces CPI ranking to 41 by 2004 and 54 by 2014

100 90 80 70 60 50 40 30 20 10

CPI ranking, normalised 0 2001 2002 2012 2005 2007 1999 2003 2009 2013 2000 2010 2011 2004 2014 2008 2006

Nigeria Colombia Scenario 2

Nigeria baseline CPI scores and Colombia CPI scores

CPI scores, normalised 0 1999 2004 2009 2014

Nigeria Colombia

Nigeria CPI scenario scores

1 CPI scores, normalised

0 Year 1 Year 5 Year 10 Year 15 Nigeria, scenario 2 Nigeria

We estimated the foregone output due to corruption for Nigeria between 1999 and 2014 and between 2015 and 2030 based on the scenario that Nigeria catches up with Colombia’s corruption levels within five years of introducing anti-corruption policies and gains from lower levels of corruption for ten years.

The cost of corruption estimation is based on the dampening effects of corruption on output in Nigeria from:  A gradual increase in the Nigerian CPI score by 2.2 points over 5 years so that the Nigerian CPI score is equal to that of Colombia’s by year 5.  An average increase in Nigerian CPI by 1.28 points per annum, which is the average annual difference between Nigeria and Colombia CPI scores between year 5 and year 15.

PwC 19 Scenario 3: Nigeria reduces corruption to Malaysia’s levels

Nigeria reduces CPI ranking to 27 by 2004 and 29 by 2014

120

100

0 CPI ranking, normalised 2001 2011 2002 2012 2005 2007 1999 2003 2009 2013 2000 2010 2004 2014 2008 2006

Nigeria Malaysia Scenario 3

Nigeria baseline CPI scores and Malaysia CPI scores

CPI scores, normalised 0 1999 2004 2009 2014

Nigeria Malaysia

Nigeria CPI scenario scores

1 CPI scores, normalised

0 Year 1 Year 5 Year 10 Year 15

Nigeria, scenario 2 Nigeria

We estimated the foregone output due to corruption for Nigeria between 1999 and 2014 and between 2015 and 2030 based on the scenario that Nigeria catches up with Malaysia’s corruption levels within five years of introducing anti-corruption policies and gains from lower levels of corruption for ten years.

The cost of corruption estimation is based on the dampening effects of corruption on output in Nigeria from:  A gradual increase in the Nigerian CPI score by 3.4 points over 5 years so that the Nigerian CPI score is equal to that of Malaysia’s by year 5.  An average increase in Nigerian CPI by 2.43 points per annum, which is the average annual difference between Nigeria and Malaysia CPI scores between year 5 and year 15.

20 Impact of Corruption on Nigeria's Economy Country Nigeria Nigeria is a natural resources rich and populous country case studies with high inequality and low foreign direct investment. Sub-Saharan Africa

 GDP (current US$) - $568.5bn  Total Population - 177.5mn  Primary school enrolment (% gross) - 85%  Poverty headcount ratio at national poverty lines (% pop.) - 46.0%  Life expectancy at birth (years) - 52  GNI per capita (current US$) - $2,970  Exports (% GDP) - 16.1%  FDI (% GDP) - 1.1%  Gini coefficient - 43 Criteria for scenario country selection:

Nigeria has introduced policies to reduce corruption and High natural resources 16% exports (% of GDP) crime, since the introduction of democracy in 1999. Examples include: 2.7 Relatively low CPI score  The Money Laundering Act 1995 (high corruption)  2000, President Olusegun Obasanjo inaugurated an anti-graft body, christened High CPI rank (high The Independent Corrupt Practices and 136 corruption) Other Related Offences Commission (ICPC) Previous history of anti-  Economic and Financial Crimes corruption policies commission Establishment act (2004)  The Money Laundering (Prohibition) act 2004

Ghana

Ghana is a natural resources rich country that ranks better than Nigeria on the CPI and sees higher FDI. Sub-Saharan Africa

 GDP (current US$) - $38.65bn  Total Population - 26.79mn  Primary school enrolment (% gross) - 107%  Poverty headcount ratio at national poverty lines (% pop.) - 24.2%  Life expectancy at birth (years) - 61  GNI per capita (current US$) - $1,600  Exports (% GDP) - 38.9%  FDI (% GDP) - 6.6%  Gini coefficient - 41 Criteria for scenario country selection:

Ghana has implemented anti-corruption policies over the High natural resources exports 18% (% of GDP) past 25 years, significantly reducing corruption. Examples of policies include: 4.8 Higher CPI score than Nigeria’s  Commission on Human Rights and (lower corruption) Administrative Justice (1992) investigated all instances of suspected corruption Lower CPI rank than Nigeria’s  The Serious Fraud Office Act (1993) - a 61 (lower corruption) specialized agency to monitor, investigate and prosecute any offence involving Previous history of anti- serious financial or economic loss to the corruption policies State  The Ghana Anti-Corruption Coalition (1999)  The anti-money laundering act 2008  The Whistleblowers Act 2006 PwC 21 Colombia

Colombia is a natural resources rich country that ranks better than Nigeria on the CPI and sees higher life Latin America & Caribbean expectancy at birth.

 GDP (current US$) - $377.7bn  Total Population - 47.79mn  Primary school enrolment (% gross) - 115%  Poverty headcount ratio at national poverty lines (% pop.) - 30.6%  Life expectancy at birth (years) - 74  GNI per capita (current US$) - $7,970  Exports (% GDP) - 16%  FDI (% GDP) - 4.2% Criteria for scenario country selection:  Gini coefficient - 50 High natural resources exports 10% (% of GDP) Colombia drastically reduced corruption between 1999 and 2004, introducing anti corruption policies such as: 3.7 Higher CPI score than Nigeria’s  1998 ratified the Inter-American (lower corruption) Convention Against Corruption  Commitment to e-government in 2000 Lower CPI rank than Nigeria’s and 2001 allowing greater public access 94 (lower corruption) to information, government plans, legal

frameworks and other services Previous history of anti-  Anti-money laundering regulation: setting corruption policies up of financial intelligence unit of Colombia 1999 and Committee for Coordination of Measures against Money Laundering 2004

Malaysia

Malaysia is a natural resources rich country that ranks Asia higher on the CPI than Nigeria, and has better standard of living indicators:

 GDP (current US$) - $326.9bn  Total Population - 29.90mn  Primary school enrolment (% gross) - 101%  Poverty headcount ratio at national poverty lines (% pop.) - 1.7%  Life expectancy at birth (years) - 75  GNI per capita (current US$) - $10,760  Exports (% GDP) - 80% Criteria for scenario country selection:  FDI (% GDP) - 4%  Gini coefficient - 39 High natural resources exports 10% (% of GDP) Malaysia has introduced anti-corruption policies within the last 5 years (2009-14). Examples of policies include: Higher CPI score than 5.2 Nigeria’s (lower corruption)  2013 Prime Minister signed Election Integrity Pledge and website launched Lower CPI rank than  Malaysian Anti-Corruption Commission 50 Nigeria’s (lower corruption) Act 2009 (MACCA)  Financial Services Act and Islamic Previous history of anti- Financial Services Act 2013 corruption policies  Whistle-blower Protection Act 2010 (WPA)  Personal Data Protection Act 2010

22 Impact of Corruption on Nigeria's Economy Bibliography

Acemoglu, D., Gallego, F., & Robinson, J. A. (2014). Institutions, Gupta, Sanjeev, Hamid Reza Davoodi, and Erwin human capital and development (No. w19933). National Bureau Tiongson. Corruption and the provision of health care and of Economic Research. http://economics.mit.edu/files/9940 education services. No. 2000-2116. International Monetary Fund, 2000. Acemoglu, D., Johnson, S., & Robinson, J. A. (2000). The colonial origins of comparative development: An empirical Hodge, Andrew, et al. "Exploring the links between corruption and investigation (No. w7771). National bureau of economic research. growth."Review of Development Economics 15.3 (2011): 474-490. http://economics.mit.edu/files/4123 Lambsdorff, Johann Graf. "How corruption affects Ade, O. Babatunde H., and M. Awoniyi. "Corruption, Foreign productivity." Kyklos 56.4 (2003): 457-474. Direct Investment and Economic Growth in Nigeria: An Empirical Investigation." Journal of research in international business Leite, Carlos A., and Jens Weidmann. "Does mother nature corrupt? management 1.9 (2011): 278-292. Natural resources, corruption, and economic growth." Natural Resources, Corruption, and Economic Growth (June 1999). IMF Aidt, Toke S., and Jayasri Dutta. "Policy compromises: corruption Working Paper 99/85 (1999). and regulation in a democracy." Economics & Politics 20.3 (2008): 335-360. Mauro, Paolo. "The effects of corruption on growth, investment, and government expenditure." (1996): 1-28. Ajide, Kazeem Bello. "The Role of Governance on Private Investment in Nigeria: A Preliminary Analysis.” Mo, Pak Hung. "Corruption and economic growth." Journal of comparative economics 29.1 (2001): 66-79. Ajie, H. A., and O. E. Wokekoro. "The impact of corruption on sustainable economic growth and development in Nwaobi, Godwin Chukwudum. "Corruption and Bribery in the Nigeria." International Journal of Economic Development Nigerian Economy: An empirical investigation." Available at SSRN Research and Investment 3.1 (2012). 531402 (2004).

Aliyu, Shehu Usman Rano, and Akanni Oludele Elijah. "Corruption Nwankwo, Odi. “Impact of Corruption on Economic Growth in and economic growth in Nigeria: 1986-2007." (2008). Nigeria.” Department of Banking and Finance, Kogi State University. (2014) Anticorruption Working Group. "Issues Paper on Corruption and http://www.mcser.org/journal/index.php/mjss/article/viewFile/2 Economic Growth." St. Petersburg, Russia. Available at 389/2363 http://www. oecd. org/g20/topics/anti-corruption/Issue-Paper- Corruption-and-Economic-Growth. pdf. activities, development Pellegrini, Lorenzo, and Reyer Gerlagh. "Corruption's effect on agencies will support the main recommendations of the report growth and its transmission channels." Kyklos 57.3 (2004): 429-456. outlined below (2013). Pellegrini, Lorenzo. "Causes of corruption: a survey of cross-country Armstrong, David et al. “Does lower corruption boost foreign analyses and extended results." Corruption, development and the inward investment for developing countries”. PwC (2013) environment. Springer Netherlands, 2011. 29-51. Bakare, Adewale Stephen. "The crowding-out effects of corruption in Nigeria: An empirical study." E3 Journal of Business Robinson, A. D., & Acemoglu, R. (2012). Why nations fail. The Management and Economics 2.2 (2011): 059-068. Origins of Power, Prosperity and Poverty, Nueva York. Campos, Nauro F., Ralitza D. Dimova, and Ahmad Saleh. "Whither corruption? A quantitative survey of the literature on corruption Rose-Ackerman, S. (Ed.). (2007). International handbook on the and growth." (2010). economics of corruption. Edward Elgar Publishing. http://www.amazon.co.uk/International-Handbook-Economics- Chêne, Marie. "The impact of corruption on growth and Corruption-Reference/dp/1847207456 inequality."Transparency International, Anti-Corruption Helpdesk (2014). Rothstein, B., and SÖREN HOLMBERG. "Correlates of Corruption." (2011). Dreher, Axel, and Thomas Herzfeld. "The economic costs of Rotini, E. M., et al. "Analysis of Corruption and Economic Growth in corruption: A survey and new evidence." Available at SSRN Nigeria."Afro Asian Journal of Social Sciences 4.4.2 (2013): 1-19. 734184 (2005). Subair, Kola. "On the Consistency of Economic Growth with Dridi, Mohamed. "Corruption and economic growth: the Corruption in Nigeria." (2013). transmission channels." (2013): 121-152. Ugur, Mehmet, and Nandini Dasgupta. "Evidence on the economic Egunjobi, T. Adenike. "An econometric analysis of the impact of growth impacts of corruption in low-income countries and Corruption on economic growth in Nigeria." E3 Journal of beyond." London: EPPI-Centre, Social Science Research Unit, Business Management and Economics. 4.3 (2013): 054-065. Institute of Education, University of London (2011): 2.

Gupta, Sanjeev, Hamid Davoodi, and Rosa Alonso-Terme. "Does corruption affect income inequality and poverty?." Economics of governance 3.1 (2002): 23-45.

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