International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2017, 7(5), 204-215. Corruption and Bad Policies Repel Foreign Capital and Cause Domestic Capital to Flee: Is Jovanovic Right? Tyavambiza Takawira* Epsilon Research and Training, Harare, Zimbabwe. *Email: [email protected] ABSTRACT Corruption in Zimbabwe has made the country’s economic system too porous to handle investments of note while protecting and enriching those responsible for the damage. As a result, productive capital in the hands of foreign direct investors and also domestic capital has fled the country. In addition to the capital haemorrhage, corruption has also made it impossible for the country to attract new foreign direct investment as investors redirect their investments to other friendly destinations. Combating corruption is possible though eliminating it is not. The cost of corruption in repelled foreign capital and capital flight can never be quantified. The country is, however, counting the losses in cumulative amounts reported in various corruption cases, with the estimated US$ 15 billion loss on domestic resource in form of diamonds only being the highest. For a country with an annual fiscal budget of just about US$4 billion, such losses are substantial. The only recommendation from this discussion is that it all ends with the Government to start doing something as the ultimate centre of power in the land. Without a corrective and penalizing voice from the Government, which is backed by action, fighting corruption shall remain a life time dream for many sober Zimbabweans who have never tested the sweetness of discretionary power. Unless and until something about corruption is done at the highest level, Zimbabwe will remain a living testimony of Jovanovic’s assertion that corruption repels foreign capital and causes domestic capital to flee. Keywords: Corruption, Economic Growth, Capital Flight, Bureaucratic Power, Public Office, Zimbabwe JEL Classifications: D73, F21, F43 1. INTRODUCTION in Zimbabwe. The challenge, however, is that the corruption phenomenon is not easily observable and or measurable. This Corruption is a world-wide endemic that has been reported across is because acts of corruption often occur in absolute secrecy the globe, including in high income countries, and takes various or if it happens in public it is always embedded in authorised forms. The nature and occurrence of corruption differs across transactions, with no paper trail that could assist in making a geography, although there is some form of convergence which distinction between actual business and corruption premium. In makes it possible to broadly identify various types of corruption. addition, quantifying the extent of corruption is difficult - bribes Jain (2001) noted that broadly, corruption could be, grand, are paid in total secrecy and without invoice and therefore bureaucratic or legislative. In Zimbabwe the fact that government difficult to trace. Characterising an act as corruption is almost officials, law enforcement agents, captains of industry, church impossible in Zimbabwe worse still to separate a bribe from a leaders, political formations, civil rights groupings and the gift, a favour from usual assistance, asking for help and offering general public talk about corruption, both in private and public a bribe. Besides, people with power and influence are often places, means that corruption exists. Also, the establishment involved in most of the reported, alleged and or confirmed cases of institutions to deal with corruption, such as Zimbabwe of corruption. Not only so, the country’s law requires one to bring Anti-Corruption Commission (ZACC) further reinforces the evidence of corruption before any action is taken on accused fact that corruption indeed exists and an acknowledgement of people instead of the accused being asked to clear themselves on the challenges it poses to the nation’s economy and morality. any allegations. Furthermore, there is also no precise or scientific Against this background, it should therefore not be a problem way of certifying the exact amounts of bribes paid or prejudice or a criminal offence to discuss corruption, its forms and effects suffered; if so, the cases must be very few. 204 International Journal of Economics and Financial Issues | Vol 7 • Issue 5 • 2017 Tyavambiza: Corruption and Bad Policies Repel Foreign Capital and Cause Domestic Capital to Flee: Is Jovanovic Right? Literature including, Jovanovic (2000), Smarzynska and Wei the extent to which private firms and citizens must pay bribes to (2000), Habib and Zurawicki (2002) and Wei and Wu (2002) government officials for permits and licences (Wei, 2001) and or acknowledges that corruption has both economic, real and social abuse of authority by bureaucratic officials (Blackburn et al., 2006) costs to a country. Corruption and bad policies repel foreign to promote private gains. Blackburn et al. (2006) qualifies public capital and cause domestic capital to flee and the burden falls sector corruption as the abuse of authority through exploitation on the average citizen who has to pay high taxes, tariffs, licence of discretionary powers by bureaucrats delegated to them by fees (Jovanovic 2000). Smarzynska and Wei (2000) observe that the government to gain personally by indulging in illegal or corruption reduces inward foreign direct investment (FDI) and unauthorized rent seeking activities. Wei (2001) uses corruption shifts the ownership structure towards joint ventures. Habib and and crony capitalism interchangeably. By crony capitalism, Wei Zurawicki (2002) also document that corruption does not provide (2001) describes it as an economic environment in which friends an open and equal market access to competitors, making it difficult and relatives of government officials are placed in positions of for the foreign direct investor to get around the system. Wei and power and government decisions on resource allocation. Crony Wu (2002) and Wei (2000), report that corruption is bad for both capitalism almost always implies widespread corruption as international direct investors and creditors. private players and the general public find it impossible to avoid the payment of bribes to government officials in order to achieve On the strength of the view that corruption is an undesirable anything (Wei, 2001). For this reason, Wei (2001) uses crony activity and that it is indeed the sand or rust that slows the capitalism and corruption to refer to one and the same. Others economic mechanism, this papers aims to confirm whether or not have described corruption by using such words as unethical, Jovanovic (2000) is right to say corruption repel foreign capital dishonest, unscrupulous, mendacious and or criminal behaviour and causes domestic capital to flee. In Zimbabwe, in as much by an individual usually in position of authority, power and as there is acknowledgement of existence of corruption in the influence to promote personal benefits. For bureaucrats to abuse country, there are institutions to try and curb corruption, there is discretionary power and authority, Del Monte and Papagni (2001) an information gap in terms of impact of corruption, particularly made an assumption that there must be information asymmetry on capital flows. This study attempts to unravel the direct and between the government (state) and the bureaucrats (agents). Due indirect impact of corruption on capital flows, particularly on to this asymmetry, the state therefore is unable to fully ascertain repelling FDI and domestic capital flight. what the agents buy and the actual price they pay. It would appear from the above definitions that the general view is that corruption In order to accomplish this, high profile cases of corruption in is undesirable. Shar (2015) sums up by saying that corruption is Zimbabwe that happened and slipped into the public domain will undesired by all and practised by majority. This is especially true be chronicled paying attention where possible to the magnitude of from the crony capitalism perspective where a system is created prejudice suffered by the government, the nature of the corruption, such that private players find it almost impossible to avoid bribes the timing and also the people who were implicated. In addition, if they are to achieve anything and the citizens if they are to access the actions taken if any would be highlighted. Inferences are made certain government services. on the basis of the presumed effects of each case on both foreign and domestic capital. In view of the sensitive nature of the data on While corruption does not always involve the payment of corruption cases, diversity of corruption acts and the subjectivity bribes, bribes constitute the most convenient way through which around them, no attempt is made to econometrically model the perpetrators of corruption gain personally. Acts of corruption range relationship between corruption and capital flows. Inferences are from as little things like a security guard facilitating someone therefore restricted to intuitive economic reasoning on and about to jump the queue in a bank to mega acts like offering a mining the effects of identified cases of corruption on both foreign and concession or a contract knowingly to undeserving bidders. The domestic capital in Zimbabwe. scale and appetite for corruption differ across countries and also with circumstances. For instance, Ades and Di Tella (1999) The primary aim of this discussion paper is to unpack the costs of suggest that in countries with large endowments of valuable raw corruption and possibly invoke debate that will save Zimbabwe materials fuels, minerals, and metals corruption may offer greater from the menacing phenomenon of corruption. As such, in this potential gain to officials who allocate rights to exploit such discussion, emotions have no place and readers are reminded to be resources. Zimbabwe, Nigeria, Sudan and Mozambique qualify open and objective. It is only through objective and professional in this category. analysis of such sensitive issues that Zimbabwe could be saved from the damming effects of corruption. 2.1.