The effects of corruption on the Nigerian economy

The set up of rotting on the Nigerian economyTo evaluate the effects of rotting on the Nigerian economy, we utilise the estimated size of the hidden economy (a proxy for corruption) in effect to Nigerian economy growth, (Salisu, 2006). A MIMIC is a structural econometric model for estimating an equation in which the dependent variable is unobservable (latent). (Frey Weck-Hannemann, 1984) pioneered the use of MIMIC modelling in the context of the hidden economy. Since whence, a number of former(a) studies have employed this technique, (Aigner et al. 1986 Schneider 1997 Giles 1997, 1999 Tedds, 1998). It is a powerful technique for estimating the underground economy, as it allows for simultaneous interaction between six-fold explanatory variables and multiple indicators of the hidden economy. The latent variable is linked, on the one hand, to a number of observable indicators (reflecting changes in the size of the unreported economy) and on the other hand to a set of observed caus al variables, which be considered to be important determinants of the unreported economic activity.4.4 Discussion of Empirical Results for ModelBased on the reasoning we get word to model the embodyence and the effect of corruption on Nigerian economy (FDI) based on the model by Johnson and Dahlstrom which depicts the picture of what we applying. The model is based on assumption that the bureaucrat has monopoly in providing government receiptss that the MNE needs in order to operate in the host county,( Dahlstrom and Johnson, 2004)4.4.1equating 1Corruption if c ( i)No corruption if Where is an agents evaluate payoff from corruption and c is the expected constitute. For corruption to take place c for all involved agents.4.4.2 tolerableity 2 equality two down the stairs presents payoff functions for the two types of agents.Payoff for MNE mne = ( ii)Payoff for bureaucrat off = Where is the probability that the bureaucrat indeed delivers the government service, signifie s the foster of that government service for the MNE and signifies the size of the bribe.The payoff of corruption is exactly the monetary value an agent can earn by realising the action. For an MNE the payoff of engaging in corruption could for practice session be the approaching cash flow connected to a building contract granted by the bureaucrat. For a bureaucrat the payoff of corruption is simply the size of the bribe (Dahlstrom and Johnson,2004).The probability variable has been discussed by (Shleifer and Vishny ,1993) among others and can be used to distinguish bribes from taxes. As discussed earlier, (Shleifer and Vishny, 1993) distinguish between centralised corruption where a single agent (bureaucrat) collects the bribe. Decentralised corruption implies that several individual bureaucrats can demand bribes. Therefore, even when having paid a bribe in that location is still a possibility that the MNE does not get access to the government service that it wants. This woul d force the MNE to pay yet another bribe to get the demanded service. Under a decentralized system of corruption it is more likely that additional bureaucrats would put up demands for bribes. This is one example of how corruption introduces an element of hesitation for the MNE. For an economy where centralised corruption dominates we would expect to be close to one while decentralised corruption would imply a smaller value of (Dahlstrom and Johnson,2004). They went further citing that the cost of corruption for the bribed is normally the penalization that can be imposed on him if he is found guilty, while for the briber it is the expected cost of punishment as well as the size of the bribe that composes the cost.The culture in the host- acres can be assumed to influence the willingness of the agents to engage in corrupt practices. In economies where corruption is frowned upon there should, ceteris paribus, exist less corruption than in an economy that accepts corruption. The ge neral cost function shown in equation 3 below tries to take all of the in a higher place into account.4.4.3 Equation 3The general cost function cj= ((+)) p)+ (iii)Where c j is the cost of the jth bribe with j going from 1 to n, p signifies the perceive jeopardy of being caught, the expected punishment is denoted , while represents the companionable cost of being revealed as engaging in corrupt behaviour and is the monetary value of the bribe.For the bribed =0 while 0 for the briber. The loving cost of corruption goes from to infinity where a low value signifies that corrupt behaviour is widely accepted and a uplifted value signify a culture with a strong aversion against corruption. Similar cost components of corruption for the individuals can be found in (Sen,2002,).The risk of being caught is dependent on the effectiveness of the police as well as the legal system. (La Porta et al, 1999) argues that countries having common law are better protect against corruption sinc e the legal system has stronger property rights. But the enforcement of the laws is of equal importance. Triesman, finds that is perhaps not only the use of common law that decreases the amount of corruption notwithstanding also whether or not a uncouth has been under British rule, consequently having had a strong influence on the legal culture not only the legal system. By taking the first derivative of equation 3 with respect to we get the sensitivity of punishment. As can be seen the punishment depicted in law is highly dependent on surveillance and enforcement to have a deterrent effect on corruption in a solid ground. Many ontogenesis countries have all the laws and regulations demanded from the international society regarding corruption but suffer from a severe lack of enforcement of the laws. Thus those laws have infinitesimal effect besides working as cosmetics for an ugly economy in need of aid and trade relations with developed countries (Triesman,1999).4.5 Social co st of corruptionThe social cost of corruption may be lower in countries with more hierarchal religions as Islam and Catholicism since it is less accepted to challenge those above you in the hierarchy than in religions such as Protestantism (Triesman, 1999). Furthermore, countries with hierarchical religions tend to have stronger family ties, than countries that practice Protestantism (Triesman, 1999) It can also be the case that in cultures where the trait between the officials private and official power is less distinct bribery may have lower social cost. All these things tend to affect the social stigma attached to corruption thus increasing or decreasing the cost.According to (Dahlstrom and Johnson,2004) in order to develop the model we have to combine the cost and payoff functions described above in order to determine whether corruption takes place. We have rewritten equation 1 by incorporating equation 2 and 3 resulting in one set of equations for the MNE, Equation 4, and one set for the bureaucrat, Equation 5, below.4.5.1Equation 4MNENo corruption if ((+ ) p) - Corruption if ((+ ) p) -0 (ii)Expected profit MNE= ((+ ) p) - (iii)4.5.2Equation 5bureaucratNo corruption if - ((+ ) p) Corruption if ((+ ) p) 0Expected profit off = - ((+ ) p) (iii)They went further, using 4.i and 5.i to solve for the expected profit of corruption for the MNE yields =2 . This is only legal if we assume that all of the cost variables ,, p are identical for both(prenominal) the MNE and the bureaucrat. This is a strong assumption since both the fines as well as the social cost probably are higher for the MNE than for the bureaucrat. If we assume that the value of the bribe, , is the reservation price for the bureaucrat due to the fact that the MNE has more bargaining power.4.5.3Equation 6Equation 6 below show the total monetary value of the bribes paid in an economy. This could be seen as the actual cost for the economy when we disregard the uncertainty of corruption. Thi s uncertainty comes in two shapes, the one of getting caught and the one of fulfilling ones obligation. If the service would have been delivered as a tax service equation 6 would equal the tax cost the MNE would have paid.n summation monetary value of corruption (6) V= v j1Where is the monetary value of the jth bribe with j going from 1 to n, with n being the number of transactions where it may be possible to offer a bribe, vj = j if both 0 j -(( j+ j)* p j) j -( j+ j)* p j for all other cases vj=0 . In a developing economy n can be assumed to be higher under decentralised corruption than under centralised corruption since there are probably a greater number of different bureaucrats that demand bribes in the former case than in the latter.4.5.4 Equation 7Equation 7 below gives an account for the total cost of corruption that MNEs experience in a unpolished. Here we include the cost of uncertainty unlike equation 6.nTotal corruption cost for the MNE (7) CMNE = c j1Where cj i s the expected cost of the jth bribe with cj=( j+ j)* p j )+ jif both 0 j j (( j+ j)* p j ) j and 0 j( j+ j)* p j .If 0 j j (( j+ j)* p j ) j but 0 j( j+ j)* p j then cj=( j+ j)* p j ) butfor all other cases cj=0Cost of corruption for the MNEIF off c offthen official chooses corruptionIF off then official chooses no corruptionIF CMNEthen MNE chooses corruptioncj=( j+ j)* p j )+ jcj=( j+ j)* p jIF MNE then MNE chooses no corruption00 (Source Dahlstrom and Johnson,2004)It is evident from the above equations 6 and 7 that, i.e. the actual cost of corruption for theMNE is greater than just the size of the bribe thus it would have been less costly for the MNE to invest in a country where the services would have been supplied as a tax service. Further corruption as opposed to a tax does not realize the government but the individual bureaucrat. The tax income could, if used efficiently by the government, promote growth of direct investment through increasing the stock of benignant capital or improving market economy institutions. This tax income could also be used to combat corruption through the legal system or by raising the salaries of the government officials. But for taxes to be less damaging than corruption this does not have to be the case. The only necessary condition is that there is less uncertainty involved. Furthermore, companies seldom have the choice whether to pay tax or not so the corruption cost will be something that has to be paid in addition to taxes, ( Dahlstrom and Johnson,2004).4. 6 Effect of the host country corruption from the analysisThe resulting effect of host-country corruption is that the actual cost of conducting business activities in the country is higher than what could be expected based on observable costs such as wages or transport costs. Based on this reasoning, corruption gives rise to extra costs that the MNE has to operate in the host-economy.If MNE presence does reduce corruption while corruption has a ne gative effect on FDI there might exist virtuous or vicious circles. If there is little FDI in a country the corruption stays high which discourages the MNE to invest, thus decreasing the FDI. Here we have a vicious circle but the opposite is also possible. If an MNE invests in a country the corruption decreases this further improves the incentives for future investments. If one also assumes that both FDI and low corruption encourages growth the country who finds itself in a virtuous circle will have a some(prenominal) higher probability of development than one that finds itself in a vicious circle.We now proceed to try to develop an expression that describes the effect of host country bureaucratic corruption on FDI inflows. We start by introducing a profit function for the MNE(,w,)= max y c(w,y, CMNE )where p indicates the world market price of the proceeds y of the MNE, w is the cost of production factors and CMNE represents the MNE cost of corruption as earlierUse of the expre ssion py implies that demand for the good in the host country is too small to have an effect on the price that the MNE receives for its output. This assumption is most suitable for an export-platform type of FDI as described in (Ekholm et al, 2003) where the MNE production in the host-country is exported to third country markets. This type of FDI is most likely to appear in developing economies where small domestic markets exclude market-seeking motivated FDI but with low toil costs. This implies that the profit function is most suitable for MNEs that operate in developing economies.It might be argued that the MNE only starts production in the host country if the expected profit from doing so is larger than some minimum level of profitsE()= E(p)E(y) -c(E(w),E (y),E(CMNE )) E()where is the minimum profit necessary for entry.Therefore, a rise in CMNE, the costs caused by corruption, should decrease the amount of FDI inflows that a host-country receives. It is also possible that MNE s that are already established in the host country decide to close down facilities if the costs of corruption become too high. (Cuervo-Cazurra , 2006) Although corruption has a negative impact on FDI because of the additional uncertainty and costs, such costs vary depending on the country of origin of the FDI. With respect to this topic, more FDI is gotten from OECD countries which are the rationale behind a corrupt country like Nigeria decreasing the quantity of its inward FDI because of the costs which the orthogonal MNC will have to incur to establish business in Nigeria. So therefore results show that the relationship between corruption and FDI is modified by the country of origin of the FDI.