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Impact of Corruption on Nigeria's Economy www.pwc.com/ng Contents Executive summary Introduction Corruption and its impact on the economy Methodology for creating scenarios Results demonstrating the economic cost of corruption in Nigeria Appendices Scenario 1 Scenario 2 Scenario 3 Country case studies Bibliography Contacts 2 Impact of Corruption on Nigeria's Economy 3 4 5 13 14 18 18 19 20 21 23 24 Executive summary Corruption is a pressing issue in Nigeria. President Muhammadu Buhari launched an anti-corruption drive after taking office in May, 2015. Corruption affects public finances, business investment as well as standard of living. Recent corruption scandals have highlighted the large sums that have been stolen and/or misappropriated. But little has been done to explore the dynamic effects of corruption that affect the long run capacity of the country to achieve its potential. Channels through which this may occur include: Lower governance effectiveness, especially through smaller tax base and inefficient government expenditure. PwC studies estimate Nigeria’s tax revenues at 8% of GDP, which is the lowest for comparison countries Weak investment, especially FDI, as it’s harder to predict and do business In this report we formulate the ways in which corruption impacts the Nigerian economy over time and estimate the impact of corruption on Nigerian GDP, using empirical literature and PwC analysis. We estimate the ‘foregone output’ in Nigeria since the onset of democracy in 1999 and the ‘output opportunity’ to be gained by 2030, from reducing corruption to comparison countries that are also rich in natural resources. The countries we have used for comparison are: Ghana, Colombia and Malaysia. Our results show that corruption in Nigeria could cost up to 37% of GDP by 2030 if it’s not dealt with immediately. This cost is equated to around $1,000 per person in 2014 and nearly $2,000 per person by 2030. The boost in average income that we estimate, given the current per capita income, can significantly improve the lives of many in Nigeria. We believe this work provides robust evidence and impetus for reducing corruption in Nigeria. Lower human capital as fewer people, especially the poor, are unable to access healthcare and education PwC 3 Introduction In this paper, we estimate the negative impact of corruption in Nigeria President Muhammadu Buhari launched an anti-corruption drive after taking office in May, 2015. This comes after a series of high profile corruption scandals in Nigeria that have highlighted the sheer size of the corruption problem. In this paper, we explore the negative impact of corruption on Nigeria’s GDP.1 To do this, we: • first, analyse how corruption affects the economy over time; • second, estimate the ‘foregone output’ in Nigeria by simulating lower corruption in the past 15 years; and • third, estimate the output that Nigeria can achieve by simulating lower corruption in the next 15 years. The lower corruption scenarios are simulated based on the corruption levels of benchmark countries. In the next paper, we will explore how anti-corruption policies affect corrupt behaviours and which policies are likely to have the biggest impact in Nigeria. Over a series of papers, we address the following questions: paper 1 what is the impact of corruption on the Nigerian economy what is the cost of corruption in Nigeria paper 2 which anti-corruption policies are most suitable to address corruption in Nigeria 4 Impact of Corruption on Nigeria's Economy what policies can be used to reduce corruption 1 Referred to as ‘economic cost of corruption’ or ‘cost of corruption’ for simplicity. Corruption and its impact on the economy We have undertaken five steps to estimate Nigeria’s cost of corruption 4 2 Reviewed the empirical literature on the impact of corruption on economic growth to inform our estimates of the link between the corruption perceptions index and GDP. Literature review Identifying impact of corruption on economic growth Created 3 scenarios that show the lower levels of corruption that Nigeria could have achieved in the past and can achieve in the future. Benchmark Nigeria Scenario building Estimating impact 1 3 5 Studied >30 papers that quantify the impact of corruption on economic outcomes. Identified the transmission channels of corruption on economic outcomes. Identified 3 comparator countries that meet the criteria for providing relevant benchmarks to Nigeria. Calculated the impact of corruption on economic growth and output for each scenario, using the coefficient identified in step 2. We examined over 30 studies to understand the way that corruption affects GDP in Nigeria We examined 32 studies in total; 20% sponsored by International organisations including the OECD, IMF, DFID and Transparency International; 22% published by Nigerian Academics affiliated with Nigerian Universities; 16% published by other Academics across mediums such as journals, articles and PhD publications among others; as well as 3% in-house studies assessing the health of the Nigerian economy such as the World in 2050 publication (please see bibliography for further details). Seventy percent (70%) of the 32 studies quantitatively evaluated the impact of corruption on economic growth through regression techniques whilst also exploring the qualitative links between corruption and economic outcomes. Of these 22 papers, we selected 3 studies that explicitly accounted for endogeneity.2 2 This means that the study is able to avoid overestimating the impact of corruption due to other factors that affect growth and are correlated with corruption. Of the shortlisted 3 studies, we selected the IMF study “Does Mother Nature corrupt? Natural Resources, Corruption and Economic Growth” by Leite and Weidman (1999) to estimate impact of corruption on economic growth. We chose this study because: It controls for endogeneity using the two stage least squares econometric regression. It accounts for Nigeria specific confounding factors such as the prevalence of natural resources rents, which are generally associated with higher levels of corruption in the literature. The data set encompasses a large number of countries, including Nigeria, therefore making the results highly applicable to Nigeria as well as other similar benchmark countries. PwC 5 After reviewing the literature, we chose the IMF study to estimate the impact of corruption on economic growth The IMF study estimates that the impact of 1 point change in the corruption index 3 results in a 1.2 percentage point change in economic growth per annum. We also use the study’s methodology - calculating impact on growth when a country moves from its own rank to another country’s rank on the corruption index. The study shows the impact from corruption, irrespective of the following which may also impact the growth of the economy: Initial level of income in the economy Natural resources Level of trade openness over the period and change in terms of trade over the period. Investment ratio to GDP average over the period Country-specific variability in commodity prices Geographic location i.e. Sub-Saharan Africa We do not attempt to capture the impact of corruption on growth through the interaction of corruption with other issues that may dampen economic growth. Therefore, the impact on economic growth from a simulated decrease in corruption will not capture the impact on growth from other factors that independently affect growth. Such factors include: political stability and strength of public institutions among others. Benchmarking to identify comparison countries for Nigeria Corruption Perceptions Index (CPI) ranking Natural resources rents and corruption perceptions share a positive correlation of 0.4 200 180 160 Nigeria 140 120 Colombia 100 80 Malaysia 60 Ghana 40 20 0 0 10 20 30 40 50 60 70 Total natural resources rents (% of GDP) average 2011 - 2013 3 The IMF uses the International Country Risk Guide (ICRG) index as a measure of corruption. This index is made up of political, financial and economic risk assessments produced by International Reports. We use the Corruption Perceptions Index (CPI) by Transparency International, see slide 10 for more details. The ICRG and CPI are strongly correlated with correlation coefficients greater than 0.8, depending on the years in the sample. ICRG ranges from 06 and CPI ranges from 0-10. Therefore, we assume that a 1 point change in ICRG = 10/6th point change in the CPI. 6 Impact of Corruption on Nigeria's Economy Source: Corruption: A Theoretical and Empirical Analysis, Christopher Tamina (2015) Ghana, Colombia and Malaysia fulfil the criteria. To calculate the cost of corruption in Nigeria, we will simulate that Nigeria faced lower corruption and therefore higher growth between 1999 and 2014. To build scenarios for the change in corruption in Nigeria, we’ve selected countries that meet the following criteria: natural resources rents greater than 10% of GDP i.e. a resource rich country 4 have faced corruption problems and rank better than Nigeria on the Corruption Perceptions Index have implemented anti-corruption policies before and have improved corruption and macro-outcomes To simulate lower corruption levels in Nigeria, we show that between 1999 and 2014 Nigerian corruption was as low as: Scenario 1: Ghana’s Scenario 2: Colombia’s Scenario 3: Malaysia’s We use the Transparency International measure and definition of corruption What is corruption? Corruption is defined and perceived across a spectrum of illegal payments and transactions such as bribes, embezzlement, and money laundering among others. Since corruption is illegal, capturing the amount of corruption is not possible, by analysing the amounts of corruption payments that have proven to be so in court. We use Transparency International’s Corruption Perceptions Index (CPI) as a proxy for corruption. This dataset defines corruption as the ‘abuse of public office for private gain’. 4 Various academic literature attribute the likelihood of high corruption to high levels of natural resources in a country. The index categorises corruption into three parts: Grand corruption: ‘Acts committed at a high level of government that distort policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good’ Petty corruption: ‘Everyday abuse of entrusted power by low- and mid-level public officials in their interactions with ordinary citizens… often trying to access basic public goods and services’ Political corruption: ‘Manipulation of policies, institutions and rules of procedure in the allocation of resources and financing by political decision makers, who abuse their position to sustain their power, status and wealth’ PwC 7 The Global Corruption Barometer**: People's perceptions on Nigeria vary by institutions Businesses Judiciary Military Low Political parties Police Parliament & legislature Perception of corruption Score 4-5* Score 3-4* High Score 2-3* **The Global Corruption Barometer is a representative survey of more than 114,000 households in 107 countries. We use the Corruption Perceptions Index for our analysis as it is more commonly used in literature, making it easier for comparison and sensitivity analysis. The Corruption Perceptions Index measures perceptions rather than amounts of corruption each year Interpreting the Corruption Perceptions Index (CPI) The index measures the perception of corruption across big and small businesses, rich and poor citizens, country experts, local media and international organisations. These scores are amalgamated across surveys and standardised across countries every year so that the scores range from 0 to 10. The index is based on perceptions and does not reflect the actual amounts of corruption in countries. Unlike amounts of corruption, perceptions are subjective and may change drastically due to media attention and sudden expositions of corruption. The index predominantly focusses on corruption from the perspective of business welfare in general. Therefore, it lacks indepth information about where or which type of corruption is dominant. Perceptions are measured for: Experts interviewed range from: Accountability of the government to the public Success of the judicial system to prosecute Ease of access of information to the public Transparency of government actions, particularly spending The extent to which bribes are paid for favours The independence of government branches The strength of the country’s institutional framework in managing corruption 8 Impact of Corruption on Nigeria's Economy Global and local experts Multilateral lending institutions International organisations Local newspapers and magazines Country specialists who draw on opinions of in-country freelancers, clients and others Survey of business leaders who represent cross-section of nation’s corporate community Local and foreign enterprises Interviewees come from the following institutions at both the national-level and local level: Police and military Executive, legislative and judiciary Taxation, customs and licensing bodies Inspection bodies Corruption has a dynamic impact, which is felt more by poorer households and smaller firms The dynamic effect: corruption has a long run negative impact on growth, primarily through reduction in human capital and investment 04 01 Corruption Predictable corruption becomes a cost of ‘business as usual’, which businesses pass on to consumers Unpredictable corruption deters investment and innovation rr co n… tio up ng qu ti e l r in oo su es p , re s & ea y ns cr ert tio n i ov tu p sti in ... in … Factors affecting corruption Poverty Poor institutions Sudden surge of natural resources rent y, it Disproportionate impact self perpetuating cycle of corruption and poverty Households s gr er ic w lo om … on ec Rich pay lower proportion of income in tax Poor lack access to public goods t en th ow 03 Macroeconomic outcomes from corruption Lower labour productivity Lower capital formation Inequity and poverty Lower economic growth Source: Global Corruption Barometer and Transparency International 2013 tm es nv ity i v s ce cti du odu e …r d pr an Businesses Big corporates raise barriers to entry SMEs have more limited access to credit 02 Channels Lower human capital Higher leakage through money laundering Weak investment Poor fiscal revenue and expenditure Poor institutions PwC 9 Government Businesses Household Countries with higher corruption are associated with lower tax revenue and expenditure as a % of GDP Corruption is associated with poor public finance management and provision of public goods Corruption encourages tax avoidance, resulting in a lower tax base for government revenue collection. PwC studies estimate Nigeria’s tax revenues at 8% of GDP, which is the lowest for comparison countries. Corruption is associated with erosion of talent in public institutions and therefore, government effectiveness Corruption encourages hiring based on nepotism, cronyism and patronage, not merit. Therefore, reducing the quality of the public institutions. There is unnecessary bureaucracy, Corruption allows for government expenditure creating further opportunities for bribes. in vested interest rather than public interest. Therefore, enforcement of contracts and Therefore, resulting in a lack of provision for property rights is weak. public goods such as infrastructure for businesses; and education and healthcare for households. 30 Countries with higher corruption are associated with lower tax revenue Correlation coefficient = -0.39 Tax revenue (% GDP) 25 20 15 10 Malaysia Colombia Ghana 5 Nigeria 0 Low -------------------------------------> High Corruption Perceptions Index (CPI) 30 Government expenditure (% GDP) Countries with higher corruption are associated with lower tax revenue Correlation coefficient = -0.21 25 20 Colombia 15 Malaysia Ghana 10 Nigeria 5 0 Low 10 Impact of Corruption on Nigeria's Economy ---------------------------------------> High Corruption Perceptions Index (CPI) Sources: World Bank Development Indicators and PwC analysis Government Businesses Household Corruption is associated with lower investment; and higher prices and barriers to entry for businesses Corruption is associated with an increase in barriers to doing business Big companies are able to access public goods by leveraging their balance sheets. These include stable electricity and water pipes among others. Smaller firms cannot afford these and rely on the government for provision but corruption weakens public fund management and public goods provision. Therefore, it makes it more difficult for SMEs to compete. Countries with higher corruption are associated with higher prices 20 16 Correlation coefficient = 0.40 Ghana 14 12 Nigeria 10 8 6 Colombia 4 2 0 Corruption is associated with lower technological transfers as foreign companies are unable to protect intellectual property. Countries with higher corruption are associated with lower investment Malaysia Low -------------------------------------------- > High Corruption Perceptions Index (CPI) Correlation coefficient = -0.45 12 Foreign Direct Investment (logUS$ inflow) Inflation (CPI % change) 18 Corruption is associated with lower property rights and investment, especially FDI Corruption threatens property rights, discouraging investment that requires high capital expenditure as businesses are unwilling to place high capital at risk. 11 Colombia 10 9 8 Malaysia Nigeria Ghana 7 6 5 4 Low -------------------------------------------> High Corruption Perceptions Index (CPI) PwC 11 Government Businesses Household Corruption is associated with lower average standard of living, education levels and greater inequality 50 45 GDP per Capita in ‘000s Countries with higher corruption are associated with lower income per capita and standard of living Correlation coefficient = -0.62 40 35 30 25 20 Malaysia 15 10 5 0 Colombia Nigeria Ghana Low --------------------------------------------> High Corruption Perceptions Index (CPI) 124 Secondary enrolment (% gross) Countries with higher corruption are associated with lower education levels Correlation coefficient = -0.66 104 Colombia 84 64 44 Malaysia Ghana Nigeria 24 4 Low --------------------------------------------> High Corruption Perceptions Index (CPI) 60 SWID Gini Index (0-100) Countries with higher corruption are associated with higher income inequality Correlation coefficient = 0.35 55 50 45 40 Colombia Nigeria Malaysia Ghana 35 30 25 20 Low --------------------------------------------> High Corruption Perceptions Index (CPI) 12 Impact of Corruption on Nigeria's Economy Sources: World Bank Development Indicators, The Standardized World Income Inequality Database and PwC analysis Methodology for creating scenarios We created three scenarios to simulate the ‘foregone output’ and the ‘output opportunity’ for Nigeria We estimate the ‘foregone output’ in Nigeria since the onset of democracy in 1999 up to 2014 and the ‘output opportunity’ to be gained by 2030. We do this based on 3 scenarios that simulate; Nigeria catches up with Ghanaian, Colombian and Malaysian Corruption Perceptions Index scores respectively, within five years of introducing anti-corruption policies, and gains from these lower levels of corruption for ten years. The cost of corruption estimation is based on the dampening effects of corruption on Nigerian GDP from using the IMF paper calculations. Our simulations have a twofold effect on Nigeria’s corruption perceptions index scores and GDP: a. A gradual increase in the Nigerian CPI score over 5 years so that the Nigerian CPI score is equal to that of the comparison country’s by year 5. During this time period, Nigerian GDP slowly gains from gradual improvements in CPI. b. An average increase in Nigerian CPI by the average annual difference between Nigeria and the comparison country’s CPI scores between year 5 and year 15. During this time period, Nigerian GDP gains from an average annual enhancement due to lower corruption. See pages 18 - 20 for further explanation and illustrations of each scenario. PwC 13 Results demonstrating the economic cost of corruption in Nigeria - Scenario 1 (Ghana) Nigeria’s 2014 GDP could have been USD 113 bn higher if it had reduced corruption to Ghana’s levels Nigeria’s GDP could have been 22% higher in 2014 if it had reduced corruption to Ghana’s levels 22% Losses from corruption per person, USD 2000 2001 2002 2003 2004 2005 2 7 15 27 42 81 2006 125 14% 12% 10% 10% 2009 291 4% 2010 364 2011 428 2012 494 2014 2013 2011 2012 2010 2009 2007 2013 567 2008 2% 2006 1999 2008 229 6% 0.5%1% 1% 0.1% 0% 2007 174 8% introduction of anti-corruption 5% policies 2014 2012 2013 2008 2009 2006 2007 2004 2005 1999 2000 2001 2002 2003 100 2010 2011 Baseline Levels Scenario Levels 200 16% 15% 2005 300 18% 2004 400 20% 2002 513 20% 2003 500 Cost of Corruption (% GDP) -113 2001 600 USD bn at 2013 prices 25% 626 2000 700 2014 651 We use average Naira to USD exchange rate over the 15 year period between 1999 - 2014 to convert corruption losses and GDP. This is to avoid skewing results from currency fluctuations. Nigeria’s 2030 GDP can be USD 327 bn higher if it reduces corruption to Ghana’s levels Nigeria’s 2030 GDP can be 22% higher if it reduces corruption to Ghana’s levels 2000 25% 1,783 1800 22% 20% 1,456 1400 1200 1000 Baseline Scenario 800 20% Cost of Corruption (% GDP) 1600 18% 16% 15% 14% 12% 10% 10% Scenario:introduction ofanti-corruption 5% policies 8% 6% 4% Losses from corruption per person, USD 2016 2017 2018 2019 2020 2021 5 16 34 58 91 170 2022 257 2023 350 2024 450 2025 558 2026 671 2027 793 2028 924 2029 1065 2030 2029 2028 2027 2025 2026 2024 2023 2022 2021 2020 2019 2018 2017 2016 2030 2029 2027 2025 2026 2024 2023 2021 2020 2019 2017 2018 2016 2015 2022 0% 600 2015 1% 2% 2% 0.2%0.5% 2028 USD bn at 2013 prices +327 2030 1217 For projecting Nigerian GDP, we use the PwC World in 2050 macroeconomic model. For projecting Nigerian population growth, we use IMF forecasts and PwC analysis. 14 Impact of Corruption on Nigeria's Economy Sources: PwC analysis, IMF WEO and Transparency International Scenario 2 (Colombia) Nigeria’s 2014 GDP could have been USD 93 bn higher if it had reduced corruption to Colombia’s levels Nigeria’s 2014 GDP could have been 18% higher if it had reduced corruption to Colombia’s levels 20% 10% 2013 2012 2011 2009 2010 2008 2007 2006 2005 Scenario: introduction 5% of anti-corruption 4% policies 2% 2% 1% 0.2%0.5% 2003 2013 0% 7% 2004 6% 4% 2014 2011 2012 2009 2010 2007 2008 2005 2006 2003 2004 2001 2002 1999 2000 8% 8% 2% 100 12% 10% 12% 2002 200 13% 14% 2001 Baseline Levels Scenario Levels 15% 2000 300 17% 16% 1999 400 Losses from corruption per person, USD 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 3 8 16 29 47 79 114 155 199 250 309 360 412 471 537 We use average Naira to USD exchange rate over the 15 year period between 1999 - 2014 to convert corruption losses and GDP. This is to avoid skewing results from currency fluctuations. Nigeria’s 2030 GDP can be 19% higher if it reduces corruption to Colombia’s levels Nigeria’s 2030 GDP can be USD 270 bn higher if it reduces corruption to Colombia’s levels 20% 10% 2027 667 2028 772 2029 884 2030 2029 2028 2027 2026 2030 2029 2027 2028 2026 2025 2024 2022 2023 2021 2020 2019 2018 2017 2016 2015 Losses from corruption per person, USD 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 6 18 37 64 100 165 236 311 392 479 570 For projecting Nigerian GDP, we use the PwC World in 2050 macroeconomic model. For projecting Nigerian population growth, we use IMF forecasts and PwC analysis. 2025 2% 2024 4% 7% Scenario: introduction 6% of anti-corruption 4% policies 3% 2% 1% 1% 0.2% 2023 6% 0% 600 9% 8% 2022 800 10% 2021 Basline levels Scenario levels 12% 12% 2020 1000 14% 2019 1200 15% 13% 2017 1,457 16% 2018 +270 17% 2015 1600 19% 18% 2016 1,726 Cost of Corruption (% GDP) 1800 1400 USD bn at 2013 prices USD bn at 2013 prices 513 500 Cost of Corruption (% GDP) -93 600 18% 18% 2014 606 700 2030 1004 PwC 15 Scenario 3 (Malaysia) Nigeria’s 2014 GDP could have been USD 185 bn higher if it had reduced corruption to Malaysia’s levels Nigeria’s 2014 GDP could have been 36% higher if it had reduced corruption to Malaysia’s levels 40% 36% 698 35% -185 30% 32% 2013 2014 2011 2010 2009 2008 2007 1999 2014 2012 2013 2011 2010 2009 2007 2008 2005 2006 2004 2002 2003 2001 1999 2000 0 Scenario Levels 2005 Baseline Levels 100 2006 200 12% Scenario:introduction 10% 10% of anti-corruption policies 7% 4% 5% 3% 2% 0% 1% 0% 2004 300 16% 15% 2002 400 22% 19% 20% 2003 513 25% 2001 500 29% 25% 2000 600 Cost of Corruption (% GDP) USD bn at 2013 prices 700 2012 800 Losses from corruption per person, USD 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 4 12 25 45 73 133 202 281 368 468 586 692 800 923 1064 We use average Naira to USD exchange rate over the 15 year period between 1999 - 2014 to convert corruption losses and GDP. This is to avoid skewing results from currency fluctuations. Nigeria’s 2030 GDP can be 37% higher if it reduces corruption to Malaysia’s levels Nigeria’s 2030 GDP can be USD 534 bn higher if it reduces corruption to Malaysia’s levels 40% 26% 25% 22% 19% 20% 16% Losses from corruption per person, USD 2016 2017 2018 2019 2020 2021 9 28 57 99 156 280 2022 416 2024 725 2025 898 2026 1083 For projecting Nigerian GDP, we use the PwC World in 2050 macroeconomic model. For projecting Nigerian population growth, we use IMF forecasts and PwC analysis. 16 Impact of Corruption on Nigeria's Economy 2027 1283 2028 1500 2029 1735 2030 1990 2029 2030 2028 2027 2020 2019 2018 2017 2015 2023 564 2016 2030 2029 2027 2025 2026 2023 2024 2022 2021 2020 2019 2018 2017 2015 2016 0% 2026 5% 2025 10% 13% Scenario: introduction 10% of anti-corruption 7% policies 4% 3% 2% 0% 1% 2023 15% Basline levels Scenario levels 800 29% 30% 2024 1000 33% 2021 1200 Cost of Corruption (% GDP) 1,457 1400 2028 USD bn at 2013 prices +534 1600 600 35% 1,991 1800 37% 2022 2000 If corruption is addressed, Nigeria’s GDP could be USD 534 bn higher in 2030 The Graph below summarises the three scenarios Sources: PwC analysis, IMF WEO and Transparency International Nigeria’s 2030 GDP can be up to USD 534 bn higher if it reduces corruption 2500 Impact from reducing corruption 2000 534 2030 GDP 327 Scenario: Colombia Scenario: Ghana USD bn 1500 270 1000 1457 500 0 Baseline Scenario: Malaysia We use average Naira to USD exchange rate over the 15 year period between 1999 - 2014 to convert corruption losses and GDP. This is to avoid skewing results from currency fluctuations. For projecting Nigerian GDP, we use the PwC World in 2050 macroeconomic model. Abbreviations CPI - Corruption Perceptions Index ICRG - International Country Risk Guide GDP - Gross Domestic Product IMF - International Monetary Fund IMF WEO - International Monetary Fund World Economic Outlook FDI - Foreign Direct Investment DFID - Department for International Development OECD - Organisation for Economic Co-operation and Development Sources: PwC analysis, IMF WEO and Transparency International PwC 17 Appendices Scenarios used to simulate the cost of corruption in Nigeria Scenario 1: Nigeria reduces corruption to Ghana’s levels 100 80 60 40 Nigeria Ghana 2013 2014 2011 2012 2010 2009 2008 2007 2006 2005 2003 2004 2001 1999 0 2002 20 2000 CPI ranking, normalised Nigeria reduces CPI ranking to 44 by 2004 and 35 by 2014 Scenario 1 Nigeria baseline CPI scores and Ghana CPI scores CPI scores, normalised 6 5 4 3 2 1 0 1999 2004 Nigeria 2009 2014 Ghana Nigeria reduces CPI ranking to 44 by 2004 and 35 by 2014 CPI scores, normalised 5 4 3 2 1 0 Year 1 Year 5 Year 10 Year 15 Nigeria, scenario 1 Nigeria We estimated the foregone output due to corruption for Nigeria between 1999 and 2014 and between 2015 and 2030 based on the scenario that Nigeria catches up with Ghana’s corruption levels within five years of introducing anti-corruption policies and gains from lower levels of corruption for ten years. The cost of corruption estimation is based on the dampening effects of corruption on output in Nigeria from: A gradual increase in the Nigerian CPI score by 2 points over 5 years so that the Nigerian CPI score is equal to that of Ghana by year 5. An average increase in Nigerian CPI by 1.59 points per annum, which is the average annual difference between Nigeria and Ghana CPI scores between year 5 and year 15. 18 Impact of Corruption on Nigeria's Economy Scenario 2: Nigeria reduces corruption to Colombia’s levels CPI ranking, normalised Nigeria reduces CPI ranking to 41 by 2004 and 54 by 2014 Nigeria Colombia 2013 2014 2012 2011 2009 2010 2007 2008 2005 2006 2004 2002 2003 2001 1999 2000 100 90 80 70 60 50 40 30 20 10 0 Scenario 2 Nigeria baseline CPI scores and Colombia CPI scores CPI scores, normalised 6 5 4 3 2 1 0 1999 2004 Nigeria 2009 2014 Colombia Nigeria CPI scenario scores CPI scores, normalised 5 4 3 2 1 0 Year 1 Year 5 Year 10 Nigeria, scenario 2 Year 15 Nigeria We estimated the foregone output due to corruption for Nigeria between 1999 and 2014 and between 2015 and 2030 based on the scenario that Nigeria catches up with Colombia’s corruption levels within five years of introducing anti-corruption policies and gains from lower levels of corruption for ten years. The cost of corruption estimation is based on the dampening effects of corruption on output in Nigeria from: A gradual increase in the Nigerian CPI score by 2.2 points over 5 years so that the Nigerian CPI score is equal to that of Colombia’s by year 5. An average increase in Nigerian CPI by 1.28 points per annum, which is the average annual difference between Nigeria and Colombia CPI scores between year 5 and year 15. PwC 19 Scenario 3: Nigeria reduces corruption to Malaysia’s levels 120 100 80 60 40 2014 2013 2011 2012 2009 2010 2007 Malaysia 2008 2005 Nigeria 2006 2003 2004 2001 1999 0 2002 20 2000 CPI ranking, normalised Nigeria reduces CPI ranking to 27 by 2004 and 29 by 2014 Scenario 3 Nigeria baseline CPI scores and Malaysia CPI scores CPI scores, normalised 6 5 4 3 2 1 0 1999 2004 2009 Nigeria Malaysia Year 5 Year 10 2014 Nigeria CPI scenario scores CPI scores, normalised 6 5 4 3 2 1 0 Year 1 Nigeria, scenario 2 Year 15 Nigeria We estimated the foregone output due to corruption for Nigeria between 1999 and 2014 and between 2015 and 2030 based on the scenario that Nigeria catches up with Malaysia’s corruption levels within five years of introducing anti-corruption policies and gains from lower levels of corruption for ten years. The cost of corruption estimation is based on the dampening effects of corruption on output in Nigeria from: A gradual increase in the Nigerian CPI score by 3.4 points over 5 years so that the Nigerian CPI score is equal to that of Malaysia’s by year 5. An average increase in Nigerian CPI by 2.43 points per annum, which is the average annual difference between Nigeria and Malaysia CPI scores between year 5 and year 15. 20 Impact of Corruption on Nigeria's Economy Country case studies Nigeria Nigeria is a natural resources rich and populous country with high inequality and low foreign direct investment. GDP (current US$) - $568.5bn Total Population - 177.5mn Primary school enrolment (% gross) - 85% Poverty headcount ratio at national poverty lines (% pop.) - 46.0% Life expectancy at birth (years) - 52 GNI per capita (current US$) - $2,970 Exports (% GDP) - 16.1% FDI (% GDP) - 1.1% Gini coefficient - 43 Nigeria has introduced policies to reduce corruption and crime, since the introduction of democracy in 1999. Examples include: The Money Laundering Act 1995 2000, President Olusegun Obasanjo inaugurated an anti-graft body, christened The Independent Corrupt Practices and Other Related Offences Commission (ICPC) Economic and Financial Crimes commission Establishment act (2004) The Money Laundering (Prohibition) act 2004 Sub-Saharan Africa Criteria for scenario country selection: 16% High natural resources exports (% of GDP) 2.7 Relatively low CPI score (high corruption) 136 High CPI rank (high corruption) Previous history of anticorruption policies Ghana Ghana is a natural resources rich country that ranks better than Nigeria on the CPI and sees higher FDI. Sub-Saharan Africa GDP (current US$) - $38.65bn Total Population - 26.79mn Primary school enrolment (% gross) - 107% Poverty headcount ratio at national poverty lines (% pop.) - 24.2% Life expectancy at birth (years) - 61 GNI per capita (current US$) - $1,600 Exports (% GDP) - 38.9% FDI (% GDP) - 6.6% Gini coefficient - 41 Ghana has implemented anti-corruption policies over the past 25 years, significantly reducing corruption. Examples of policies include: Commission on Human Rights and Administrative Justice (1992) investigated all instances of suspected corruption The Serious Fraud Office Act (1993) - a specialized agency to monitor, investigate and prosecute any offence involving serious financial or economic loss to the State The Ghana Anti-Corruption Coalition (1999) The anti-money laundering act 2008 The Whistleblowers Act 2006 Criteria for scenario country selection: 18% High natural resources exports (% of GDP) 4.8 Higher CPI score than Nigeria’s (lower corruption) 61 Lower CPI rank than Nigeria’s (lower corruption) Previous history of anticorruption policies PwC 21 Colombia Colombia is a natural resources rich country that ranks better than Nigeria on the CPI and sees higher life expectancy at birth. GDP (current US$) - $377.7bn Total Population - 47.79mn Primary school enrolment (% gross) - 115% Poverty headcount ratio at national poverty lines (% pop.) - 30.6% Life expectancy at birth (years) - 74 GNI per capita (current US$) - $7,970 Exports (% GDP) - 16% FDI (% GDP) - 4.2% Gini coefficient - 50 Colombia drastically reduced corruption between 1999 and 2004, introducing anti corruption policies such as: 1998 ratified the Inter-American Latin America & Caribbean Criteria for scenario country selection: 10% High natural resources exports (% of GDP) 3.7 Higher CPI score than Nigeria’s (lower corruption) Convention Against Corruption Commitment to e-government in 2000 and 2001 allowing greater public access to information, government plans, legal frameworks and other services Anti-money laundering regulation: setting up of financial intelligence unit of Colombia 1999 and Committee for Coordination of Measures against Money Laundering 2004 94 Lower CPI rank than Nigeria’s (lower corruption) Previous history of anticorruption policies Malaysia Asia Malaysia is a natural resources rich country that ranks higher on the CPI than Nigeria, and has better standard of living indicators: GDP (current US$) - $326.9bn Total Population - 29.90mn Primary school enrolment (% gross) - 101% Poverty headcount ratio at national poverty lines (% pop.) - 1.7% Life expectancy at birth (years) - 75 GNI per capita (current US$) - $10,760 Exports (% GDP) - 80% FDI (% GDP) - 4% Gini coefficient - 39 Malaysia has introduced anti-corruption policies within the last 5 years (2009-14). Examples of policies include: Criteria for scenario country selection: 10% High natural resources exports (% of GDP) 5.2 Higher CPI score than Nigeria’s (lower corruption) 50 Lower CPI rank than Nigeria’s (lower corruption) 2013 Prime Minister signed Election Integrity Pledge and website launched Malaysian Anti-Corruption Commission Act 2009 (MACCA) Financial Services Act and Islamic Financial Services Act 2013 Whistle-blower Protection Act 2010 (WPA) Personal Data Protection Act 2010 22 Impact of Corruption on Nigeria's Economy Previous history of anticorruption policies Bibliography Acemoglu, D., Gallego, F., & Robinson, J. A. (2014). Institutions, human capital and development (No. w19933). National Bureau of Economic Research. http://economics.mit.edu/files/9940 Acemoglu, D., Johnson, S., & Robinson, J. A. (2000). The colonial origins of comparative development: An empirical investigation (No. w7771). National bureau of economic research. http://economics.mit.edu/files/4123 Ade, O. Babatunde H., and M. Awoniyi. "Corruption, Foreign Direct Investment and Economic Growth in Nigeria: An Empirical Investigation." Journal of research in international business management 1.9 (2011): 278-292. Aidt, Toke S., and Jayasri Dutta. "Policy compromises: corruption and regulation in a democracy." Economics & Politics 20.3 (2008): 335-360. Ajide, Kazeem Bello. "The Role of Governance on Private Investment in Nigeria: A Preliminary Analysis.” Ajie, H. A., and O. E. Wokekoro. "The impact of corruption on sustainable economic growth and development in Nigeria." International Journal of Economic Development Research and Investment 3.1 (2012). Aliyu, Shehu Usman Rano, and Akanni Oludele Elijah. "Corruption and economic growth in Nigeria: 1986-2007." (2008). Anticorruption Working Group. "Issues Paper on Corruption and Economic Growth." St. Petersburg, Russia. Available at http://www. oecd. org/g20/topics/anti-corruption/Issue-PaperCorruption-and-Economic-Growth. pdf. activities, development agencies will support the main recommendations of the report outlined below (2013). Armstrong, David et al. “Does lower corruption boost foreign inward investment for developing countries”. PwC (2013) Bakare, Adewale Stephen. "The crowding-out effects of corruption in Nigeria: An empirical study." E3 Journal of Business Management and Economics 2.2 (2011): 059-068. Campos, Nauro F., Ralitza D. Dimova, and Ahmad Saleh. "Whither corruption? A quantitative survey of the literature on corruption and growth." (2010). Chêne, Marie. "The impact of corruption on growth and inequality."Transparency International, Anti-Corruption Helpdesk (2014). Dreher, Axel, and Thomas Herzfeld. "The economic costs of corruption: A survey and new evidence." Available at SSRN 734184 (2005). Dridi, Mohamed. "Corruption and economic growth: the transmission channels." (2013): 121-152. Egunjobi, T. Adenike. "An econometric analysis of the impact of Corruption on economic growth in Nigeria." E3 Journal of Business Management and Economics. 4.3 (2013): 054-065. Gupta, Sanjeev, Hamid Reza Davoodi, and Erwin Tiongson. Corruption and the provision of health care and education services. No. 2000-2116. International Monetary Fund, 2000. Hodge, Andrew, et al. "Exploring the links between corruption and growth."Review of Development Economics 15.3 (2011): 474-490. Lambsdorff, Johann Graf. "How corruption affects productivity." Kyklos 56.4 (2003): 457-474. Leite, Carlos A., and Jens Weidmann. "Does mother nature corrupt? Natural resources, corruption, and economic growth." Natural Resources, Corruption, and Economic Growth (June 1999). IMF Working Paper 99/85 (1999). Mauro, Paolo. "The effects of corruption on growth, investment, and government expenditure." (1996): 1-28. Mo, Pak Hung. "Corruption and economic growth." Journal of comparative economics 29.1 (2001): 66-79. Nwaobi, Godwin Chukwudum. "Corruption and Bribery in the Nigerian Economy: An empirical investigation." Available at SSRN 531402 (2004). Nwankwo, Odi. “Impact of Corruption on Economic Growth in Nigeria.” Department of Banking and Finance, Kogi State University. (2014) http://www.mcser.org/journal/index.php/mjss/article/viewFile/2 389/2363 Pellegrini, Lorenzo, and Reyer Gerlagh. "Corruption's effect on growth and its transmission channels." Kyklos 57.3 (2004): 429-456. Pellegrini, Lorenzo. "Causes of corruption: a survey of cross-country analyses and extended results." Corruption, development and the environment. Springer Netherlands, 2011. 29-51. Robinson, A. D., & Acemoglu, R. (2012). Why nations fail. The Origins of Power, Prosperity and Poverty, Nueva York. Rose-Ackerman, S. (Ed.). (2007). International handbook on the economics of corruption. Edward Elgar Publishing. http://www.amazon.co.uk/International-Handbook-EconomicsCorruption-Reference/dp/1847207456 Rothstein, B., and SÖREN HOLMBERG. "Correlates of Corruption." (2011). Rotini, E. M., et al. "Analysis of Corruption and Economic Growth in Nigeria."Afro Asian Journal of Social Sciences 4.4.2 (2013): 1-19. Subair, Kola. "On the Consistency of Economic Growth with Corruption in Nigeria." (2013). Ugur, Mehmet, and Nandini Dasgupta. "Evidence on the economic growth impacts of corruption in low-income countries and beyond." London: EPPI-Centre, Social Science Research Unit, Institute of Education, University of London (2011): 2. Gupta, Sanjeev, Hamid Davoodi, and Rosa Alonso-Terme. "Does corruption affect income inequality and poverty?." Economics of governance 3.1 (2002): 23-45. PwC 23 Contacts Uyi Akpata Pedro Omontuemhen Taiwo Oyedele Country and Regional Senior Partner West Market Area +234 1 271 1700 [email protected] Partner PwC Nigeria +234 1 271 1700 [email protected] Partner PwC Nigeria +234 1 271 1700 [email protected] Andrew S. Nevin (PhD) Richard Boxshall Srishti Chhabra Partner & Chief Economist PwC Nigeria +234 1 271 1700 [email protected] Head of Macroeconomics Consulting PwC UK +44 207 213 2079 [email protected] Senior Economist PwC UK +44 780 265 9455 [email protected] Adedayo Akinbiyi Economist PwC Nigeria +234 1 271 1700 [email protected] This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. 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