Financial development and inclusion; a panacea to household level corruption? [An econometric Proposition]
University of Waikato Management School Dept. of Finance
Francis K. Agyekum
With Supervisors: Stuart Lock and Nirosha
ABSTRACT
The devastating consequence of corrupt practices has made most researchers focus on assessing the extent of corruption among public office-holders often to the neglect of the micro-level causes. Mostly limiting corruption to only the public officials has led to academic pursuit of the one of the fundamental causes of the phenomenon among non-public officials; what is being referred to as the ‘household-level corruption’. This study, contrary to the existing literature, attempts to find the linkage between corruption, poverty and financial exclusion by carefully formulating an econometric model to explain the incentive for the deficit spending household units to indulge in corrupt practices, even sometimes against their wishes. Hypothesis being postulated is that an aspect of corruption in the developing economies can be attributed to a missing or malfunctioning credit market which compels the household to engage in corrupt practices as a means to financing their deficits, in much the same way other economic agents (governments and business firms) do finance their budget deficit. Using generalised least square (GLS) method of estimation, the model conceptually hypothesized that an aspect of incentive to indulge in corruption among poverty-stricken households could be eliminated with a well functioning and more accessible credit market.
Key Words: heteroschedasticity, Corruption, Credit market, deficit spending household unit
A. BACKGROUND OF THE STUDY
Corruption has been around for a very long time. It is one subject that has socio-political as well as economic dimensions and interest. In recent times we hear of bribery and corruption scandals being alleged in the media: on radio, television and the print media, mostly against public officials or what Mauro (1997) referred to as the public sector corrupt practices. This indeed is not surprising in that it is a reflection of how it has been defined in most of the widely known corruption literature, focusing on public sector corruption to the neglect of the private one.
Corruption has been variously defined by different authors and writers depending mostly on their backgrounds and orientations. Kempner R.H. (1997) defined corruption as ‘the utilisations of official position or a title for personal or private gain at the expense of the public’s good in violation of established values and ethical considerations’.
Others have defined it as the use of public power in order to achieve private goals. In this regards, then corruption is specifically directed to public officials only, perhaps who are faced with the problem of conflict of interest. It can also be inferred from the definition given above that for one to be corrupt; he should have power and wield some kind of influence. But the question being put forth is that should one necessarily be an office holder before he could engage in corrupt practices? If the answer is NO, (as I think so), then something else must be able to explain why non-public office-holders or those who aren’t in any influential position can actually be corrupt.
This possible explanation is what this article seeks to explore.
The crust of this short but interesting article on corruption is that:
Corruption may be a good signal of a systemic failure and until such a failure is checked, then it would persist.
An aspect of individual levels-corruption could not be deliberate act; rather perhaps be a surviving strategy for those who engaged in it.
Based on the two related propositions the hypothesis below is being postulated for testing:
Ho: Part of the corruption in developing countries is as a result of either a missing or in some cases a failing credit market.
B. LITERATURE REVIEW
The corruption and its allegation is not a recent phenomenon. Theoretical research on it however dates back to the 1970s with Krueger (1974) and Rose-Ackerman (1975), who attempted to make pioneering contributions to the phenomenon of corruption and rent-seeking behavior.
In recent times Cadot (1987) has modeled corruption as a gamble for civil servants at every level and concluded among other things that the probability of punishment diminishes with the general level of corruption. Basu et al (1992) have also shown in their work how an individual’s choice of corruption level differs when he considers the possibility of corruption in the rest of society as compared to that when the choice is made in isolation. More recently, Barreto (2000) develops a neoclassical growth model of endogenous corruption as a result of competition between a public agent and a private agent.
Empirical study on the causes and consequences of corruption has also received attention in recent years. With regard to causes, Rijckeghem and Weder (1997) find negative correlation between civil service wage level and the level of corruption. Leite and Weidmann (1999) find support for their hypothesis that natural resource abundance promotes rent-seeking behavior or corruption.
The effects of corruption have received no less attention. Mauro (1995), Campo et al (1999) and;
Tanzi and Davoodi (1997) find that corruption adversely affects growth by discouraging investment. Al-Marhubi (2000) in his study finds positive association between corruption and inflation.
The above listing of recent theoretical and empirical research in corruption, though not exhaustive, clearly indicates that not much has been written about poverty as a cause of corruption.
Poverty as a possible consequence of corruption has been explored some how by Gupta et al (1998) who demonstrated that corruption reduces economic growth, makes the tax system less progressive, reduces the level and effectiveness of social spending and human capital formation, perpetuates an unequal distribution of asset ownership and unequal access to education, and consequently raises income inequality and poverty.
The question “Why is corruption more widespread in the developing countries than in the industrial nations?” has not be completely been answered. An answer this paper seeks to explore.
Moreover, what is also missing is a study either theoretical or empirical on poverty as a cause of corruption; a gap this paper seeks to fill.
C. FORMS AND LEVELS OF CORRUPTION
Corruption can take various forms and shapes. There is a horizontal form in which people of the same status, class or level attempt to unduly influence a colleague to do something unwillingly.
The opposite of the above is the vertical (which could either be upward or downward) case, in which case people of different levels or status attempt to influence the other to do him an undeserved favour or consideration. This is also known as the clientele form of corruption.
Corruption can also be categorised as ex-post and ex-ante. The latter occurs when somebody after receiving the favour, returns gratitude in the form of a ‘gift’. This is quite subtle, and hardly would someone know the corrupt intention. However, the receiving official might be aware of the reward that awaits him at the time of rendering the favour. It is for this reason that Dr Busia, once Prime Minister of Ghana, cautioned his ministers not to accept ‘gifts’ because they are bribes in disguised. The latter on the other hand is given to the recipient before a favour is rendered.
Besides these two different forms of corruptions that do exist, the writer has also classified corruption into two main groups, specifically, for the purpose of this paper.
A particular form of corruption that is being discussed here actually depends on who is involved other than what is being done. Of course, there are various forms of corruption but two that the writer has personally identified are: i) the corruption of necessity (I refer to it as type-1 corruption, out of convenience) and ii): the corruption of choice/greed or balanced budget corruption (also refer to as the type-2 corruption)
Corruption of Necessity (type-1; hereinafter refer to as T1-C): With this kind, those who indulge in it have to do that because they have to survive as humans. Such people do that unwillingly and are forced to do so by circumstances, mostly economical in nature. Most of these people perhaps are consequentialists who see the end justifying the means.
Corruption out of Greediness (type-2; here in after referred to as T2-C): this type of corruption is that which is usually alleged against public officials.
D. ECONOMIC INCENTIVE AND MOTIVE FOR INDULGING IN CORRUPTION The question of why do people indulge in corrupt practices has been partially answered above; to satisfy their selfish desire to get rich at society’s expense (greediness) and as the only option to survival when there isn’t any other option left (necessity).
No one should misunderstand the writer as being justifying one form of corruption. On the contrary, the purpose of this article, after the model that would be built in the next section, would come out clearly that the latter form can be solve when certain economic measures are in place.
This is to say that when corruption is not deliberate, you don’t condone it, you nonetheless take deliberate measures to solve it.
No form of corruption is right and justifiable. However, whether some action is wrong or right is not the issue when it comes to the domain of positive economics, which addresses the question-
‘what is’ instead of ‘what ought to be’-a normative economics. Perhaps moralists should hold on
for a while, in that for the T1-C the issue of right or wrong (subjectivity or value judgment) does not come in here. Until it is approached positively and objectively, the problem would not be eradicated. In deed as have already been said earlier, those who indulge in T1-C do so out of real constrain and as a survival strategy as is going to be shown in the next sub-section.
E. CONCEPTUAL FRAMEWORK Background
When government are voted into office, they are expected to undertake certain infrastructural projects which usually involve huge financial outlays, if they are to survive in power. Some governments also spend on infrastructure not necessarily because of votes but because they are poised to improve the living standards of their people. But whatever their motives are, they spend, and sometimes beyond the available tax revenue they receive.
Robert Eisner (1986) and Robert Heilbroner & Peter Bernstein (1989) have argued that to be able to know where the huge budget deficit comes from, we need to split the government budget into two separate budgets- ‘operating’ budget and ‘capital’ budget just as the corporate businesses have. The operating budget would then contain the day-to-day costs of providing goods services and transfer payments; while the capital budget would include expenditure on improving the roads and highways, schools, provision of portable water, hospitals and other capital intensive infrastructural and social amenities.
When government’s expenditure exceeds its tax revenue, then the government’s budget is said to be in deficit, and this occurs when the government could not operate within it budget constraint.
What does the government do when in a deficit? Throw the hand in despair? No, the government must find a way of financing the deficit.
Deficit Financing as a Surviving Strategy
Government budget deficit is inevitable whether the economy is developed or developing. In thirty (30) years the US government had only one (1) budget surplus (Slavin, 1998; pp 260). It is indeed not in the interest of any country to force itself to balanced its budget or even have surplus. What that would mean is that expenditure would be restrained such that certain social and economic infrastructure would be sacrificed.
What really matters is how these deficits are financed. Government has three ways by which its budget deficit could be reduced: thus, by a) Borrowing from the Loanable Fund Market, (public borrowing using securities) b) From the International Financial Institutions and c) Printing of Currencies. Let’s have a look at how government does that in each of the above cases.
a) Borrowing from the Loanable Fund Market
Whenever government is experiencing a budget deficit, one surest way to finance it is by issuing securities like bonds and treasury bills to the public. When the public responds to this offer and purchases these securities, it affords the government funds to finance its deficit. The argument here is that government when in need of funds to finance deficit, would go to a market known as the loanable funds market where the public (especially surplus spending units) have made funds available in the form of savings.
According to monetarist economist, the funds on the market are solely for private investment purposes and therefore government’s intrusion in the market would definitely have a negative consequence on the private investment. Thus, it would crowd-out† private investment. This argument has been counteracted by the neo-Keynesians who believe that there is also the possibility of crowding-in effect of deficit financing which could eradicate or minimise the
† Crowding out describes a situation where funds meant for private investment are taken over by the government as it borrows from the public to finance its budget deficit.
impact of the crowding-out. This platform would be a wrong space to discuss the crowding-in and out argument. The only point of reference here is that government has the opportunity to finance its budget deficit from a credit or loanable fund market.
When government keeps over borrowing from the domestic credit market and the public, the time comes when the national debt has swollen to the extent that pressure is put on the government to reduce its domestic borrowing. When this opportunity is exhausted, then the government does not stop borrowing, it rather looks elsewhere. Where?
b) Credit from International Financial Institutions
As said earlier on, the government does not throw it hand in despair simply because it has exhausted it limit of domestic borrowing. What it rather does is to turn to the larger world to borrow. Aside from the bilateral loan and other credit agreement with certain countries, governments, especially of developing nation, turns to the international financial institutions like the World Bank and the International Monetary Fund (IMF) for concessionary loans and other credit facilities. For instance Ghana’s foreign debt alone stood trillions of cedis as at 2001 and that necessitated the need to declare herself a highly indebted poor country (HIPC), which saw most of her bilateral debt being cancelled completely.
What then should the government do when it needs to spend on huge infrastructural projects but tax revenue is inadequate, domestic national debt has reached it unbearable limit and the foreign source of hope has also been completely exhausted? In order words, when the government has no other approved means of financing it budget deficit, how does it survive in the face of a soaring deficit? That leaves us with the third option that economist are not too comfortable to talk about or hear of.
c) The government’s Print house
Under unusual circumstances, a desperate government resorts to the printing of currencies as a deficit-financing strategy. This last option is considered the cheap option by many economists and they discourage this practice. That perhaps could be described as a ‘corrupt means of financing one’s deficit. But what if that is the only surviving option left?
This practice has so many negative consequences which include inflationary pressures.
Reducing the Budget Deficit?
Eisner, Heilbroner et al, (1986) have pointed out that budget deficit stimulates the economy, especially in times of economic recessions. On that score alone, deficit per se isn’t a bad thing.
However just as too much of everything is bad, so is too much of fiscal budget deficit.
How then can the government reduce its deficit?
Given the simple equation for budget deficit:BD = G - T ; (where BD is budget deficit, G, government’s expenditure and T, government’s tax revenue), it is obvious that the only way the deficit could be reduced is either i) there is a cut in the government’s expenditure, ii) an increase in the tax revenue and finally an increase in the growth rate of the economy. If the government’s spending cannot be reduced because there is the need to embark on capital and social projects to help improve the lots of the citizenry, and that tax increase would be impossible since the public would resist such an attempt, and the economy is not growing as it aught to, then deficit becomes inevitable and hence it’s financing.
It has to be noted that according to Keynesian prescription, increase in fiscal spending in times of economic recession or depression will stimulate aggregate demand (AD) and results in economic growth.
F. HOUSEHOLD UNIT’S DEFICIT FINANCING STRATEGY
In the previous section, the fiscal budget deficit financing strategies were discussed. In this section however, analogy is being drawn between the fiscal deficit-financing strategies and that of
a household as economic agent, which we argue that the household’s deficit financing strategy is not entirely different from that of the government.
The household sector (consumption expenditure) which is one of the three most important domestic economic agents aside from the government and the private business firm accounts for two-third of the GDP in most economies (Slavin, 1998 pp.81). Just as the government operates within a budget constraint, so does the household sector. The budget of the individual could also be sub-divided into two separate budgets: operating budget and capital budget, as observed by Eisner et al (1986).
The operating budget for the household, in this case represents the expenditure on the non- durables including the day-to-day items that the individual consumes such as food, clothes, groceries, transport services and any commodity or service whose benefit does not last beyond one calendar year. The capital budget could also be thought of as the consumer durables such as vehicles, household appliances and a residential building, though technically, economists consider building as investment expenditure.
According to the theory of consumer behaviour, an individual is assumed to maximise his utility subject to a given budget constraint. Given the utility to be maximised as below:U f D C( , ) ………(1); subject to a given budget constraint as
d
d c
DP CP Y ………….(2) ; where the D is a composite of all the consumer durables and C representing the consumables, DPd represents the consumption expenditure incurred on consumer durables and CPc representing the consumption expenditure on the consumables. The constraint function given above in equation two (2) indicates a balanced budget situation where expenditure exactly equals income. It therefore implies that the individual does neither save, nor borrow, (thus, has no access to any form of credit).
In reality however, expenditure is not exactly equal to income, such that the equation (2a) below, then becomes more realistic. DPd CPc Yd...(2 )a Under such instances, there is the possibility of either savings or borrowing. If we however relax the assumption one (1), then the constraint function would not assume equality condition and would rather look as equation three (3) below:
(DPd CP)c Yd...(2b).
The rationale for the relaxation of the above assumption (i) is that in reality people can either consume less than what they earn and save or consume all and save nothing. This is usually the case when the disposable income is high such that the individual would have both propensities to save and to consume. In that case the marginal propensity to save is not zero as equation (2) implies. But in developing countries where take-home-pay is not enough to actually take people home, then equation (2b) would obviously not be realistic one to reflect what pertains in reality.
This indeed doesn’t suggest that people don’t save in the developing countries; what it rather implies is that on the average, savings would be low in low-income economies as compared to the high-income ones. For people in the developing countries where poverty is a way of life, and where survival is a daily struggle, then there is the possibility that marginal propensity to consume be unity (1), suggesting that people would consume all their income on the assumption that they would operate within their constraint.
If we relax the assumption two (ii) above, then we would have the constraint function becoming (DPd CP)c Yd...(2 )c
Equation (2c) suggests a deficit –consumption situation where the individual’s consumption expenditure exceeds his disposable income. Although Keynes in his absolute income hypothesis of consumption theory recognizes that consumption expenditure function is not directly proportional income due to the presence of the intercept in his consumption function formulation (see Froyen, 2002 pp. 464). The consumption function is then given as:
...
E d
C
Y (3); the intercept term () is what Keynes refers to as the autonomous consumption. Though Keynes recognized that consumption expenditure depends on the current disposable income, there is an aspect of the expenditure that doesn’t depend on the current income. He however did not give much attention to that regarding how the individual could finance the autonomous consumption expenditure. Maybe he had in mind the possibility of one borrowing to augment his consumption or perhaps a remittance from a relative abroad. This autonomous consumption is indeed consistent with the consumption-income gap such that in (6)
in (3 or 3a). Assuming that the marginal propensity to consume is equal to unity [MPC ( 1); meaning the individual doesn’t save], then the above equation thee (3) can be re-arranged as
(CE Yd)...(3a) to become consistent with the equation six (6) below.Another consumption theory that gives credence to this new hypothesis is the life cycle hypothesis developed by Franco Modigliani, Albert Ando and Richard Brumerg. As stated by Modigliani (1966): “the point of departure of the life model is the hypothesis that consumption and savings decisions of household at each point of time reflect a more or less conscious attempt at achieving the preferred distribution of consumption over the life cycle, subject to the constraint imposed by the resources accruing to the household over its lifetime”. The assumption that the household would smoothen their lifetime consumption overtime is very important, not only to their model but also to this new model. Consequently, people would not compromise their basic consumption level even when the current income is low! To make this happen then the model assumes that the household would dis-save (thus, borrow) in order to smoothen out lifetime consumption, so that later in their working life, they pay off the debt out of the accumulated savings.
What their model however ignored was that the dissavings through borrowing could be possible only when there is a well functioning credit market. In as much as I totally agree with their assumption that household seeks to smooth out lifetime consumption regardless of the level of one’s current disposable income, the household in the developing economies where there is a missing or malfunctioning credit market, would smoothen out their consumption through other means possible which includes the-corrupt means we called type one (T1-C).
Credit availability has been recognized as one of the key determinants of consumption. “You can’t borrow money if you don’t have borrowing credit such as Visa and Master Cards. Bank loans home mortgage, home equity loans and auto loans are other ways of borrowing” (Slavin 1998, pp. 96)
Ironically, the credit is usually available in the developed economies where income is already higher. For instance, when someone arrives in USA especially and other developed economies;
he is offered right at the airport a whole lot of credit packages ranging from mortgage loans, educational loan facilities to hire purchase.
The reality of deficit-consumption has been confirmed by Murray Weidenbaum, (who served as President Reagan’s first chief economic advisor) when he was speaking about the spending habit of US citizens: “As citizens of US, we are consuming more than we are producing, borrowing more than we are saving and spending more than we are earning…..” (Weidenbaum, 1988 pp. 4 in Slavin 1998 pp. 99)
Unarguably so, these credit facilities exist in the developed market economies instead of the developing economies. The question is that how can people living in these developing countries finance their deficit if there isn’t a well functioning credit market? In the next section then postulates what has been termed as a ‘credit market hypothesis to attempt to explain why a poverty-stricken (low income) households have a higher tendency to indulge in a corrupt (TC-1) practices overtly or covertly than a high income earner.
G. CREDIT MARKET HYPOTHESIS
Equation (3) in the preceding paragraph indicated that individuals can actually spend more that they earn as income, and all things being equal, it should only be possible where there is a well- functioning credit market in which there is an opportunity to borrow. The same also describes the situation where income isn’t high enough to finance one’s consumption expenditure.
This constraint is resolved where credit facilities are available at reasonable conditions as it is the case in the developed (market) economies. The conflict however arises where in the developing economies incomes are generally low that it is not enough to meet consumption spending, and at the same time, there are missing market for credits. If in emerging economies like Ghana where the credit markets are partially available, they aren’t accessible and the facilities are not attractive.
As to why income is generally low in the developing countries is a topic which is beyond our discussion here. However, as to why the credit market is either non-existence or not functioning efficiently, could be speculated.
For those developing countries where the market is completely unavailable, it could be attributed to certain factors which include though not limited to lack of political will on the part of the authorities, absence of good policy frameworks and other structural and environmental rigidities that are inhibiting to a smooth operation of such markets.
In such economies like Ghana and elsewhere, there appear to be policies to encouraging these credit markets to emerge. Though these markets are emerging gradually, their facilities are however not easily accessible especially to the many households. The operators prefer to lend to the corporate bodies other than the private individuals. Certain factors could account for this and prominent among which are the high default risk and lack of confidence that are perceived to be existing in the system. The existing financial and other credit institutions perceive the public especially the individuals as too risky to do business with. For instance, there are no valid residential addresses to be able to effectively trace somebody who has been given a loan facility.
Because of this perception of high default risk among the populace, the few existing markets tread but cautiously. This partly could accounts for the high collateral security these institutions demand before granting a credit facility, and also the high lending rate as high as above 22.5 % they charge, though the prime rate of the central Bank of Ghana is 12.5 % as at May, 2007.
Assumptions
For the reasons cited in the previous section among others, the model (being built to explain why certain group of people indulge in corrupt practises) is base on the following assumptions:
A1) there are two forms of corruption-type-1 and type-2 also known as the balanced budget corruption.
A2) there exist a missing market for credit facilities in the developing economies
A3) individuals living in these developing economies are generally low incomes earners and therefore spend more than they earn, ie,
CEYd
1 that given the two assumptions, they indulge in (type-1) corrupt practices as a deficit- financing (survival) strategy, just as government is ‘forced’ to print currency to finance its deficit when it is unable to access credit either from the home or abroad market.
This should not be misinterpreted as an attempt to justify a wrong doing, as moralist critic may be conceiving. It is rather an attempt to realistically understand why the canker of corruption is endemic in developing countries as compared to the developed ones, so that policy measures could be fashion out and implemented with the aim of reducing it, if not eliminating the type-1 corruption in our societies.
The corruption in general and the type-1 especially may be a good signal of a systemic failure (such as s missing or a failing credit market) and when such failures are addressed then it would vanish automatically.
Types of Corruptions
This model has identified two forms of corruption namely the type-1 corruption and the type-2 corruption.
The type-1 corruption occurs only when the strictest form equation (3) prevails, thus, when consumption expenditure exceeds the disposable income. The model assumes that holding all other factors constant, the type-1 form of corruption will occur when we have the equation (3) situation prevailing, and there is no other opportunity for the household to finance its deficit due to the absence of the a responsive and efficient credit market. In such condition,
CE d
1 ...Y (4a), implying that the current disposable income falls short of the current consumption. For that matter, corruption would not only be a deficit-financing strategy, it also becomes surviving strategy. It is widely acknowledged that in economies where there exists scarcity of basic goods and resources, and everything is in a mess, the people within the economy fight for survival, and that in itself gives root (if not rise) to corruption.
To this end, it is assumed that the individual would NOT engage in corrupt practices (at least type-1) when
CE d
1 ...Y (4b), meaning that expenditure is less than or equal to the disposable income.
Type-2 corruption is committed regardless of what happens to the fellow’s budget. It is also known as the balanced-budget corruption in that even if
CEYd
1 ………(4c) meaning that there is neither savings nor borrowing, the individual would engage in the practice.This kind of corruption then tends to be attitudinal and therefore occurs where there are institutional weaknesses so that people in influential positions use it to their advantage. This is what also been referred to as corruption due to greediness. Such rotten public officials only take advantages of the loopholes in the system and amass wealth for themselves. They actually abuse the trust of the people who placed them there. This is usually found among politicians and a few bureaucrats.
H. ECONOMETRIC MODEL SPECIFICATION
Following the above assumptions, and with a special reference to (A3), there exist income- consumption gap given as:
, whichln CE d lnCE lnYd
Y ( the income-consumption gap)
with the inequalities (4a,b) and the equation (4c) the dependent variable () in absolute sense takes on the values of <,> or = 1, depending on the consumption expenditure and the disposable income values of the individual household surveyed. It can also be seen that the dependent variable is the rate of change in the average propensity to consume (APC), and it is consistent with earlier theories that higher income groups have lower APC and hence the gap; and the lower income groups tend to have higher APC, and hence a more wider gap. This also suggests that the poor or low income groups would have the APC greater than unity (1), and therefore higher absolute value of the dependent variable; and vice versa.
The level of this deficit depends on the certain factors, indicated in the next equation:
=f E( ( ) ,Yd( ) ,C( ) f, ),
……….. (5);
whereE,the consumption expenditure level, Yd , the disposable income, Cf , the credit facilities available and
is the stochastic error term.The econometric function to be estimated then becomes: o EYd Cf ……….
(6)
The Expected signs BUT
'( )E 0; '( )E
0 ; '(Yd)0 THEN 0
'(Cf) 0 0
The is expected to be positive in that when the expenditure increases, then the gap will also widen up and vice versa.
The income coefficient ( ) is expected to have a negative sign because when disposable income or the national productivity increases, then all things being equal, we expect the gap to reduce.
is expected to have a negative sign to indicate that when there are a lot of credit facilities then that alone can bridge the income-consumption disparity, and vice versa.
One vital term of reference as far as this model is concerned is the error term
. The error term accounts for the changes in the gap which is NOT explained by the explanatory variables. This represents the corruption element in the individual’s deficit-financing model.A higher R2indicates that the three variables CE, Yd and the Cf S jointly explain any change that occurs to the deficit. However, a low of R2is an indication of corruption. Another interesting assumption of this model is that, the error term is expected to have a strong relationship with the
Cf -the credit facilities available.
Thus,
f C( f)and the specific equation becomes:0 1Cf Ai
……… (7)
It must be noted that (6) can’t be estimated using OLS method in that it doesn’t obey all the assumptions of the classical linear regression model. The variance of the error term is assumed not to be constant, thus, heteroschedasticity. The CLRM assumes that the variance of the error term must be homoschedastic, thus, constant, and must not depend on any of the regressors. Here we are assuming that the error term depends on one of the regressors, i.e., the credit facilities (Cf).
In view of this aberration detected, a generalized least square (GLS) method of estimation would be appropriate for the estimation of the (6).
The above equation (7) relates the error term
(which as indicated earlier on is the extent of the corruption) and the credit availability /accessibility variable (Cf ) and one other factor I will explain shortly. Ai-variable is an indication of the presence of the type-2 corruption, which primarily depends on the individuals attitude. It is assumed that both Ai and Cf are not in any way related. Consequently, the variance of the error term (2) for the (
) is assumed to be constant, and therefore homoschedastic.Ai is a dummy variable such that it can assume both 1 and 0. Ai=1 when the individual is engaged in the type-2 corruption, and Ai=0 if otherwise. What this means is that if the fellow is not engaged in the type-2 corruption, then the value of error term
will solely be determined by (Cf)factor. However, they are inversely related, meaning that the expected sign for theCf coefficient in (6) i.e., is negative. This implies that holding the attitudinal influence, an increase in the(Cf)variable (which is an indication of a well functioning credit system) would reduce the error term
(an indication of a low or no type-1 corruption). In such a case, then we would observe a higher R-squared.It must be borne in mind that the emphasis is not on the Aifactor. The only thing it seeks to do in the (7) is to show that an individual committing the type-1 corruption may as well be suffering from the type-2. So, in such an instance, the extent of the corruption measured by the value of the(1R2), would be high-thus, the type-1 is further exacerbated by the type-2. This submission has a very important implication for this model; and that is, if that credit market is functioning efficiently such that facilities are available and accessible at the same time, then (1R2)is expected to be low. However, if (1R2)is still high, in the face of a significant (Cf) and a higher disposable income (Yd) then, we could suspect the presence of type-2. This indeed is consistent with the earlier definition of the type-2 corruption-that is, ‘the type of corruption which is committed regardless of the degree of the availability of the credit facilities and or the level of the disposable income (Yd)’.
I. EMPIRICAL RELEVANCE AND INFERENCES FROM THE MODEL
The basis of this model will make enough sense if an attempt is empirically made to prove or disprove it; an attempt which is beyond the scope of this article though. Notwithstanding, a guide could be outlined here to facilitate the testability of this hypothesis:
i. A worker will not indulge in T1-C purposely to finance capital budget like purchasing of a vehicle or putting up a residential accommodation, if there is an opportunity of hire- purchasing (in the case of the car, even for a whole year) or mortgaging a house and pay with her life time income as she works.
ii. Why would one engage in T1-C with the aim of paying off utility bills and school fees of wards or even of his own, if loans or credit facilities are readily accessible so that as the fellow start working, he pays them back?
iii. Why is corruption more widespread in the developing countries than in the industrial nations?
J. POLICY RELEVANCE OF THE MODEL
The following ‘policy recommendations’ (PR) are made out of the model built which is the rationale for postulating this hypothesis:
PR1: the effective and successful fight against corruptions requires that authorities recognize these two types of the menace exist, and that it; the type-1 and the type-2; and that each requires different approach in fighting it.
PR2: the type-1(T1-C) is due to constraint imposed by inadequate disposable income (poverty) and the absence of a well-functioning, efficient and accessible credit market (facilities).
PR3: that given that basic or minimum consumption are not reducible, the T1-C can also be reduced if efforts are carefully made to increase national productivity and hence household’s disposable income.
PR4: that the T1-C can be reduced drastically to its barest minimum, if not eradicated completely, should the credit facilities such as loans, hire purchases, mortgage facilities,
rental facilities among others be made available and at the same time accessible in the developing economies.
PR5: the type-2 (T2-C) is purely attitudinal and that is also due to the greediness of certain group of people (especially those in high public offices of trust) taking advantage of a weak anti-corruption system.
PR6: that T2-C is not easy to eradicate, but can drastically be reduced or checked if laws are enacted and are strictly enforced, anti-corruption institutions are strengthened, and harsh punishment meted out to any official found to be culpable of this offence. Put another way, there should be policies to ensure effective institutional reforms so that the cost of committing the T-2 C exceeds the benefit of it.
CONCLUSION
The final word is that corruption (at least as aspect of it) can effectively be reduced if not completely eradicated, when there exist an opportunity for a household to finance its budget deficits. This indeed would be possible only when there is a well functioning credit market (facilities) that are at the same time accessible to the household so as to enable them meet certain minimum living standard, below which survival could be threatened.
In sum, the high level of corruption found in every facet of life in the developing, low income economies could partly be attributed to a missing market for accessible credit; in which case the indulgence in corrupt practices wouldn’t be a matter of choice but rather a necessity and a surviving strategy for the individual concerned.
DIRECTION FOR FURTHER AND FUTURE RESEARCH
It has to be acknowledged that this study is only a conceptual formulation. However, due to its predictability potential, others or the authors need to perform empirical test to establish the model in the annals of finance and economics literature.
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