Introduction

The impact of corruption on the interface of private and public sector dealings on economic growth is by now well established in the economic literature. According to Tanzi, corruption results in a reduction in the flow of foreign direct investment (FDI). This decrease is attributable to increases in costs for the investor, and to the undermining of the productivity of public investment, infrastructure and investment generally. This inevitably impacts on a nation's economic growth and infrastructural development. In Tanzi's view, neither does corruption contribute to raising living standards of the poor. Shleifer and Vishny, the World Bank (WB), and Kaufmann and Wei also arrived at similar conclusions. However, according to Wheeler and Mody the relationship between corruption and FDI is not that significant. The problem with the Wheeler and Mody study, as Wei states, is that they ‘combined corruption with twelve other variables to form a composite indicator’, which therefore is not helpful in exposing the link. More recent studies still seem to support the commonly held view that corruption does affect inward investment. Al-Sadig's study sought to test the link between corruption and FDI flows by employing data covering the period 1984–2004 from 117 states. Employing two econometric methodologies – different panel data sets and control variables – the study found that corruption does deter foreign investors, but also highlighted that the negative impacts of corruption are not present where there are high-quality institutions. Recent evidence is also supportive of such a view. To illustrate, India had a reduction in FDI due to widespread allegations of corruption, especially during the preparation for the Commonwealth Games and the anti-corruption campaign carried out by activists after the furore over these Games. It has also seen a reduction in economic growth. By comparison, FDI in Singapore, perceived as a state with low levels of corruption and good institutions, has gone up. According to a WB survey measuring bribery from the private sector to the public sector the cost of bribery worldwide is estimated to be US$1 trillion per annum. As Kaufmann has observed, ‘the main point is that [bribery] is not a relatively small phenomenon of a few billion dollars – far from it’. This figure relates to bribery alone. Losses from other forms of corrupt activities, such as embezzlement, informal arrangements relating to bid manipulation and over-invoicing to accommodate kickbacks are not included. Inclusion of these losses would raise the estimation considerably.