EFFECT OF CORRUPTION ON INFLATION ON DEVELOPING COUNTRIES
Introduction
Decreased productivity in developing countries is a prevalent problem that has existed for ages. According to Bryan and Morten (2019), the reduced output is mainly responsible for higher unit costs, diminishing wages, stunted economic growth, and decreased profits and trade performance. Productivity is a financial term used as a performance measurement by countries or firms. Without productivity, business entities and firms would make losses, which is not one of the organization’s strategic goals.
Perhaps the most crucial question that should provide insights into this study is why developing countries have continued lagging behind productivity. Rampant corruption is one of the reasons for the problem above. Economic crimes take away resources designated for boosting various financial sectors. For instance, if financial resources set aside for expanding a company’s capital expenditure are stolen, the company will not have any access to these funds. The company will continue experiencing low productivity. This time, their returns will be diminishing at a higher rate because the fixed costs of running an entity will eat into the little gains achieved (Tran et al., 2016). Therefore, this process becomes a cycle for many companies in developing countries, and soon enough, they are unable to pay their employees, fulfill tax obligations, and eventually, they close down.
Unfortunately, corruption has found its way in all sectors that have a direct contribution to the economic development of developing countries. The impact of rampant corruption is experienced across these nations, with the young age bearing the blunt. The young people lack good jobs, thus increasing poverty levels in these nations. They are also unable to advance their skills as a result of meager incomes that are barely enough for themselves and their families. Therefore, decreased productivity is a deep-rooted challenge in developing countries, whose solution requires a multi-faceted approach.
Objectives of the Study
The primary purpose of this study is to investigate the effect of corruption on developing countries’ general welfare. The research question accompanying this study includes; 1) to what extent does corruption affect a country’s productivity? 2) How does corruption affect a country’s demand and supply? 3) How does corruption affect price signals? 4) How does corruption affect income distribution externalities?
Literature Review
Findings from previous studies (Ogun 2018), on the impact of corruption on productivity have explored the leading causes of economic crimes, ranging from the political-economic environment to morals and the demography. These studies have also attempted to link corruption to the broad spectrum productivity. While others have succeeded in doing so, others are yet to establish the actual connection between the two terms. The critical drawback experienced in the study was the lack of a single favorable corruption indicator to determine corruption levels and the broadness of the terms’ corruption and productivity, which hindered easy access to data.
Williams and Kedir (2016) looked into the same topic employed panel data statistics involving a large number of countries.
The data obtained from secondary sources were then compared to a small sample size, randomly selected from many subjects of about 132 countries. Comparison between the states and the data findings sought to determine the levels of corruption on platforms such as legal justice, ease of economic resources, and equality. The results highlighted that all the countries chosen had high corruption levels on the financial platforms, suggesting that corruption is rampant in the nations’ economic sector. Such corruption has led to massive embezzlement of funds, raised inflation levels to uncontrolled levels, and has generally left the citizens of those countries in abject vulnerability and poverty. The findings highlighted success in establishing the right connection between the two economic variables and a drawback in finding specific data on the variables.
Methodology
A case study of Kenya
Kenya is a country located in the eastern part of Africa and bordering Ethiopia to the north, Tanzania to the south, Uganda to the east, and Somalia to the west. Kenya has a current population of 47 million citizens and a gross domestic product of about $ 99. Two hundred forty-six billion in 2019, with an increasing average annual GDP of 6% for the last four years. The sole source of data is secondary sources such as World Bank data and peer-viewed journals and articles on the impact of corruption on developing countries’ productivity.
Corruption can be devastating to inflation rates in any country. Corruption levels reflect through cost-pull Cost-push inflation. Cost-push inflation occurs when general prices increase as a result of an increase in wages and raw materials costs. The primary assumption in this study is that corruption is the factor responsible for increased wage and raw materials costs. The output demand remains constant before and after a price increase. Therefore, cost-pull inflation pushes the general products of outputs to levels that become unbearable for consumers. The figure below shows a cost-push inflation example.