CHAPTER 5 - Shodhgangashodhganga.inflibnet.ac.in/bitstream/10603/2032/12/12...corruption is getting...

Political and Socio-economic Issues…

CHAPTER 5

POLITICAL AND SOCIO-ECONOMIC ISSUES-AN

ANALYTICAL PERSPECTIVE OF CORRUPTION

5-1. CORUUPTION IN IRAN: PAST AND PRESENT

The Political structure of Iran has been shaped during the

centuries so that officials have been able to abuse the power for

private gain. The political and administrative structure of Iran

was ruled by Monarchs from 1501 until 1979. Therefore, the

king was able to abuse the power for own benefit or for the

benefit of his family or close colleagues.

During the era of Qajar dynasty in the eighteenth and

nineteenth centuries, particularly in the period of Naser Al-Din

Shah Qajar (1848-1896), and after the government of Mirza

Tagi Khan Amir Kabir (prime Minster) corrupt practices reached

the peak. As a result, nothing was done without giving bribery.

According to the suggestions of foreigners and Iranian

governors, the king paved the way and initiated economical and

business activities of the foreigners in Iran. At the same time,

the king surrendered percentage of national sovereignty to

foreign companies. Instead, the cost of his travel to Europe was

paid.

In the initial stages, special privileges were given to

foreign companies directly through foreign embassies. This

practice continued under the so called business companies of

foreign embassies. There was a competition among Iranian

officials in order to gain personal profits for creating suitable

opportunities for plundering the resources. During this era,

Chapter Five

121

Mirza Aga Khan Nory received two million Liras and allowed

Britain to establish the bank of Reuter in Iran1. After the

‗Sanction of Tobacco‘2 and threatening to holy war (Jihad) by

Mirzai Shirazi, a religious leader, the Reuter contract was

cancelled. The owner of the company (Major Talbot) not only

got back the compensation for cancelling the contract, but also

got back a huge amount of money (nearly 500 thousand Liras)

he had already paid to influential people in the throne such as

Mirza Hassan Khan; Kamran Mirza; Zelalsoltan; AminAlsoltan,

and the others. Furthermore for the oil contracts with British

companies a large amount of money was paid to the influential

members who facilitated this agreement.

In 1920 Reza Shah captured the throne and established

the Pahlavi dynasty. Later, he was forced to abdicate the throne

in 1941, and his son Mohammad Reza Shah started reigning till

1979. During this period, ―the Political power was also highly

centralized in the person of the Shah and bureaucracy that

served the regime was significantly affected by the political

system‖3.

In the era of Pahlavi dynasty (1925-1979), corruption was

also in the highest level in Iran. William H. Sullivan, the last US

ambassador to Iran observed ‗the high level of corruption

among the officials of Monarchy as an important factor of

collapsing Shah‘s regime in 1979‘4. After the Second World War

(1946), corruption was so pervasive and contagious in Iran so

1 -Hassan Vafaei. “Bribery in the Administrative System of Iran”, Journal of Zamineh, No. 57&58, 1996,

p.29. 2 - Mirzai Shirazi was a clergyman (Ayat-allah) who asked the people to boycott and not to buy and use

the Britain tobacco in order to cancel the Reuter contract in Iran. 3 - Bill, James A. "The Politics of Iran: Groups, Classes and Modernization". Columbus: Bell and Howell

Company, 1972, pp. 133-156. 4 - William H. Sullivan. “Mission to Iran”. Tehran: Hafteh Publication, 1982, p.47.


122

that the regime announced some plans of fighting corruption for

softening the people‘s anger during 1949-1977 in the country.

According to a study, during the 1975-1977, 3 billion US dollars

that was laid as commission for purchasing of foreign products

divided between the officials of the Monarchy in Iran5. Studies in

this connection also show that billions of dollars had been

transferred by the officials of Monarchy to foreign countries.

Social inequality, dictatorship, pro-western government,

which ignored the values and religious beliefs of Muslim people,

rejected Pahlavi dynasty and brought about the Islamic

Revolution. With the victory of the Islamic Revolution, the

system of previous regime, which was based on dependent

capitalism, shifted to values based on Islamic teachings. These

values were based on justice, unity, devotion, and seeking the

right.

The values of previous regime had their roots not only

among individuals, but also in all levels of Iranian society. These

values persuaded the key members of the society to become

over-ambitious, and to have the feeling of superiority over

others. These two values faced each other. As a result, the

dominant values of society changed to Islamic values.

Minimizing the inequalities; discrimination; corruption and

autocracy became the main objectives. On the basis of continual

restructuring of the values, the previous ones changed to paying

more attention to religious activities, and less intention to use

luxurious items and foreign goods.

5 -Feraidoun Adamiat. “Lessons of Political History of Iran”, Tehran: Islamic Republic Party

Publications, 1984, p.73.

Chapter Five

123

During the war years of 1980-1988, the Islamic values

were manifested in all aspects of people‘s life. Beginning the

reconstruction programme in 1988 and the Five Year

Development Plan in the country, diverted the Islamic values to

comfort, luxurious life, monetary issues, wealth accumulation,

and so on. This resulted into the new movement of technocrats

in offices and organizations. Technocrats did not pay attention

to inequality and corruption. Suddenly wealth became a value

and poverty as a shame.

Demonstrating wealth has become order of day. While the

real income of the people decreased because of inflation, much

money was spent to advertise foreign merchandise. Having

foreign products and luxurious goods became a norm of life.

However, values of the people were changed from spirituality to

materiality.

Gradually corruption came into existence. The First

Development Plan which was approved by parliament forced the

government to follow policy of financial independence. The rules

were incomprehensive for the new policy. Therefore,

government was able to approve new rules and regulations for

self-financing of ministries and other public organizations. The

new policy pushed public organizations into economic activities

and reconstructing programme of the ruined areas remained

from Iran and Iraq war. However, the policy of financial

independence of public sector increased the corrupt practices in

the society.

One of the consequences of this movement was that some

ministries and organizations became business and trade offices.


124

They spent a lot of money based on political or cultural

tendencies of the managers. Even some of the managers

established new political parties.

Although in the first decade of revolution and during the

eight years war between Iraq and Iran there was some narrow

news about corruption in the country, ‗but officials waived to

disclose it for prevention of disappointing the people from

revolution and government‘6.

Unfortunately, with distancing from the first decade of

revolution and fading out the Islamic and revolutionary values

and culture, corruption became more contagious in the country.

According to Rabiei (2004)7, ―corruption among the top level

officials is available in a inconsecutive form, but in the

administrative, judiciary and police systems, a ragged form of

corruption has preoccupied the daily life of the people in Iran‖.

During 1989-93 because of the increase in price of crude

oil and foreign loans, the budget of government increased and

as a result the number of corruption cases increased too. The

number of corruption cases moved from 1200 to 5020. It has

400 percent growth8. Figure 5-1 shows the number of closed

corrupt practices cases in the general courts of Iran during

1994-20019:

6 -Hosein Rafiei. “Report of Corruption; Embezzlement in Banks”. Journal of Iran Farda, No.33, 1997,

p.36. 7 - Ali Rabiei. “Long Live corruption”. Tehran: Ministry of Culture and Islamic Guidance, 2004, p.130.

8 - Statistics Centre of Iran. “Annual Statistical Reports for Different Years”.

9 - Statistics Centre of Iran. “Annual Statistical Reports for Different Years”.

Chapter Five

125

Figure 5-1: Number of closed corrupt practices in the

ge neral courts during 1994-2001

0

50000

100000

150000

200000

250000

1994 1995 1996 1997 1998 1999 2000 2001

Ye ar

Nu

mb

er

Corruption has penetrated to all organizations, companies,

banks, ministries, offices, and other institutions. Issues such as

giving and taking bribes in contracts and internal and external

trading; rampant social fraud, systemic smuggling; purchasing

huge amount of foreign goods in order to receive commission;

establishing private companies by public officials and abusing of

public facilities for these companies; unnecessary and costly

foreign trips; giving contracts to friends; relatives and members

of political parties, and luxurious life have become usual.

Generally, corruption has become so widespread in Iran

that the government's anti-corruption efforts have been

criticised as being insufficient to stop it. Many Iranians say that

corruption is getting worse by the day. In this connection, the

head of General Organisation for Inspection in Iran believes

that, ―the public organisations don‘t give public services to the

citizens without receiving bribe‖10. According to a poll conducted

by National Youths Organisation in Iran, 82 percent of boys and

85 percent of girls believe that favouritism is endemic in the

10

- http://www.baztab.com (13/02/05)-( Solar: 03/11/1384).


126

country and 68 percent of boys and 62 percent of girls believe

that nepotism is dominated in the public organisations11.

Another report reveals that, 64000 cases of smuggling have

been recorded during the year 2005 in the customs offices in

Iran12. The corruption case of Karbaschi, the powerful mayor of

Tehran and a key ally of former Presidents Khatami and

Rafsanjani, who was convicted to five years jail in 1998, is a

distinguished case of corruption in Iran. The corruption case of

Shahram Jazayeri who had paid bribery to a large number of

officials for his business purposes and was convicted to 25 years

jail in 2003, is another well-known case of corruption in the

country.

On the other hand, the place of Iran in the international

corruption ranking shows that corruption is it a high level in

Iran. According to evaluations conducted by Transparency

International, the rankings and scores of Iran on the levels of

corruption is placed in a group of countries with a high index of

corruption. On a descending scale of 10 to 0 (with 0

representing total corruption and 10 total lack of it), Iran scored

3 in 2003, 2.9 in 2004, and 2.9 in 2005. According to this scale,

in 2003 Iran is placed on the 79th among 133 countries, 88th in

2004 among 145 countries and 93rd in 2005 among 159

countries. Table 5-1 shows the rank and scores of Iran among

five countries before and five countries after Iran during last

three years13.

11

- http://news.iran-emrooz.de/index.php (30/01/05)- ( Solar: 17/10/1384).

12 -http://www.baztab.com (02/04/06)-( Solar: 25/01/1385).

13 - Transparency International (TI) has added Iran to Corruption Perception Index from 2003.

http://news.iran-emrooz.de/index.php

Chapter Five

127

Table 5-1: Corruption Scores of Iran among the countries during last three years14

Country Score 2003 Score 2004 Score 2005

Armenia 3.0 3.1 2.9

Benin N.A 3.2 2.9

Bosnia and Herzegovina 3.3 3.1 2.9

Gabon N.A 3.3 2.9

India 2.8 2.8 2.9

Iran 3.0 2.9 2.9

Mali 3.0 3.2 2.9

Moldova 2.4 3.2 2.9

Tanzania 2.5 2.8 2.9

Algeria 2.6 2.7 2.8

Argentina 2.5 2.5 2.8

Accordingly, table 5-1 shows the high level of corruption in

Iran. Based on international corruption rankings in 2005, place

of Iran is after India, and followed by Mali, Moldova and

Tanzania.

14

- Source: Transparency International Corruption Indexes, 2003-2005.


128

5-2. CAUSES OF CORRUPTION

Corruption is a phenomenon that takes place due to the

presence of a number of factors. An understanding of such

factors requires, among other things, a kind of general

framework for a clearer understanding of the causes of

corruption.

The analysis of corruption factors is also a prerequisite for

an effective strategy for fighting corruption, as the strategy

should take into account and address the main sources of

corruption. Therefore, the causes of corruption are useful to

discuss because they give clues for strategies of successful

reform.

On the causes of corruption, Halayya (1985)15 believes ―it

is very difficult to analyse the causes and sources of corruption

because many of them are subjective and open to challenge.

Besides, their relative importance varies from society to society

and time to time‖.

However, the incidence of corruption is a result of the

strength of incentives, the range and scale of opportunities, the

availability of means and the risks of punishment. Corruption

thrives on bad governance where controls are weak and

decision-making is opaque, arbitrary and lacking in

accountability mechanisms. It is therefore more likely to flourish

in dictatorships than democracies and where there are extreme

inequalities of wealth and power.

15

-M. Halayya, “Corruption in India”. New Delhi: Affiliated East-West Press, 1985, p.85.

Chapter Five

129

In this connection, Klitgaard et al. (1996)16 argue,

"corruption is a crime of calculation, not of passion. People will

tend to engage in corruption when the risks are low, the

penalties mild and the rewards great". Based on this

assessment, they propose a simple formula for analysing the

tendency for corruption to exist:

C = M + D - A

Corruption = Monopoly + Discretion - Accountability

In explaining this formula, they state that corruption tends

to flourish "where officials have a monopoly power over a good

or service, unlimited discretion in deciding who gets that good

or service or how much they get, and there is no accountability

whereby others can see what that person is deciding"17.

Accordingly, they advocate; ―improving the positive incentives

for municipal officials, including reforming civil service salary

structures to make them competitive with their counterparts in

the private sector; promoting competition in the public and

private sectors, which would include privatisation, contracting

out and, where necessary, the elimination of corrupt municipal

programmes; simplifying rules and regulations and informing

citizens of their rights and the service standards to which they

are entitled; enhancing accountability and transparency through

clear standards of conduct, openness in bidding and contracting,

and institutional reforms18‖.

16

- Klitgaard, MacLean-Abaroa, and Parris. “A practical Approach to Dealing with Municipal

Malfeasance”. Urban Management Programme Working Paper Series 7, Nairobi: UNDP, 1996, p. 11.

17 - Ibid, p. 10.

18 - Ibid, pp. 14-15.


130

According to Manzetti and Blake (1996)19, ―although

corruption is omnipresent, but it is most pervasive where: (1)

the institutional mechanisms to combat corruption are weak or

not used; (2) extensive government control and regulation of

economic Corruption and Economic Development resources

provide ample opportunity for corrupt exchanges; and (3)

corruption is so generalized at all societal levels that it is

accepted and tolerated."

Corruption also results from the presence of a number of

factors. These include: rapid economic and social change, strong

kinship and ethnic ties, new institutions, overlapping and

sometimes conflicting views about what is proper public

behaviour, governmental monopoly over economic activities,

political softness, widespread poverty and socio-economic

inequalities, ignorance, lack of knowledge about individual

entitlements, communal bonds, ambivalence towards legitimacy

of governmental organizations, asymmetric relationship

favouring those in control of state power, economic shortages in

which public officials assume extraordinary control over scarce

goods and services, greed, patronage and systematic

maladministration.

Consequently, corruption can grow in a variety of political

and economic environments but it thrives when bad government

makes it impossible to control. While the importance of different

factors can vary from place to place and from time to time, it

seems that, for corruption to flourish, certain key pre-conditions

are necessary:

19

- L. Manzetti, and C.H. Blake. “Market Reforms and Corruption in Latin America: New Means for Old Ways”. Review of International Political Economy, 3(4), 1996, pp. 662-697.

Chapter Five

131

A set of imperatives and incentives which encourage

politicians and officials to engage in corrupt transactions, which

include low and irregular salaries for officials with large

dependent families. Such officials may feel compelled to become

corrupt, and political instability and economic uncertainty

encourages politicians to exploit current opportunities.

The availability of multiple opportunities for personal

enrichment. Some economic environments are much more

conducive to corruption, in particular mineral and oil rich

environments which are more fertile territories than subsistence

agriculture. The size and growth of public spending will help

define the possibilities for corruption. Where there is extensive

discretion over the allocation of economic costs and benefits.

Access to and control over the means of corruption. Motive

and opportunity create the possibility but there have to be ways

of actually engaging in corruption. These might include control

over an administrative process such as tendering or having

access to offshore accounts and the techniques of money

laundering.

Limited risks of exposure and punishment. Corruption will

thrive where there are inadequate and ineffective controls (both

internal and external). Policing, detection and prosecution

encourages corruption. Where the media is controlled and

censored, corrupt politicians and officials have less to fear.

In sum, the causes and sources of corruption are not only

varying from country to country, but also from one time to

another in the same country. The causes and sources of

corruption in Iran are also many and varied. However, for the

sake of convenience and clarity, they will be classified and


132

studied under the following broad heads, namely,

administrative, socio-economic and political.

5-2-1. Scio-Economic Causes

Corruption is widespread in developing countries like Iran,

because conditions are congenial for it. The motivation to earn

income is extremely high, which is being increased by poverty

and low salaries. Furthermore, risks of all kinds of illness,

accidents, and unemployment are also high, and people

generally lack the many risk-spreading mechanisms like

insurance, etc, which is available in wealthier countries.

Therefore, the phenomenon of corruption is very often the result

of prevailing socio-economic and governance conditions in a

country. Factors such as poverty, hunger, lack of access to basic

services, lack of information, overly bureaucratic institutions and

low incentives for civil servants give rise to corruption.

Resultantly, the socio-economic causes of corruption in Iran

may be listed and explained as follows:

1) Government involvement in economy and private markets:

Government involvement in economy and private markets in

Iran dates back to centuries gone by and is commonly seen as a

source of corruption. It has been suggested that the overall size

of the government budget relative to GDP may therefore be

positively correlated with levels of corruption. In this

connection, Farajpour (2004)20 and Hamdami (2004)21, suggest

that the government involvement in economy and private

20

- Majid Farajpour. “Poverty, Corruption and Discrimination; Barriers of Development in Iran”. Tehran: Rassa Institute of Cultural Services Publications, 2004, p.275. 21

- Aboulfazl Hamdami Khotbahsara. “Financial Corruption: Causes and Combating Ways”. Tehran: Research Bureau of Strategic Studies, 2004, p.147.

Chapter Five

133

markets has always been the main economic cause of corruption

in the country.

The role of government involvement in economy and

private markets as the cause of corruption is also shown by

LaPalombara (1994)22 who used a sample of countries in which

Scandinavian countries were regarded as the exceptions. A

better measure for a government's interference into private

markets may be depicted by its total redistributive activity. This

may be better captured by the total government transfers and

subsidies. La Porta et al. (1999)23 show a positive correlation of

this variable with corruption. But Rose-Ackerman (1999)24

argues that such simple correlations may be misleading. It

therefore does not come by surprise that the opposite

correlation is presented by Elliott (1997)25 for a sample of 83

countries, in which she reports that the size of the government

budget relative to GDP decreases with levels of corruption. She

concludes that types of activities may be more important than a

government's size in causing corruption.

However, simple conclusions with respect to government

involvement and corruption are hard to find. While some studies

hint at decentralization as a means to reduce corruption, the

overall government budget cannot convincingly be related to the

level of corruption. But even the significant result that

22

-J. LaPalombara. "Structural and Institutional Aspects of Corruption". Social Research, LXI, 1994, pp.

325-350. 23 -R. La Porta, F. Lopez-De-Silanes, A. Shleifer and R.W. Vishny. "The Quality of Government". Journal of Law, Economics and Organization, XV (1), 1999, pp. 222-79. 24 -Susan Rose-Ackerman. “Corruption and Government: Causes, Consequences, and Reform”. Cambridge: University Press, 1999, p.41. 25

-K. A. Elliott. “Corruption as an International Policy Problem: Overview and Recommendations”. in K. A.

Elliott (ed.). “Corruption and the Global Economy”. Washington DC: Institute for International Economics.

1997, p. 182-183.

http://searchmiracle.com/text/search.php?qq=MBA


134

decentralization lowers corruption does not clearly suggest

policy reform, one cannot exclude that certain cultural

determinants drive both variables. Countries characterized by

civic cooperation and trust among people as well as those with

well-developed subnational units may be in a position to

decentralize and lower structure corruption at the same time.

2) Rent-seeking26 structure of economy in Iran: Rent-

seeking and corruption amongst the public officials and powerful

individuals has been a serious problem in the country during the

last two decades. Sources of rent- seeking in Iran are

numerous, which make a large part of income and payments of

the government in the economy. Table 5-2 shows the share of

rent-seeking sources and taxes from total income and total

payments of government during last two decades:

26

- (1) Rent-seeking in international trade contexts refers to the economically unproductive practice of individuals, firms, and industries investing significant resources in lobbying activities to obtain protection from foreign competition. (2) The phenomenon of rent-seeking was first identified in connection with monopolies by Gordon Tullock, in a paper in 1967. It takes place when an entity seeks to extract uncompensated value from others by manipulation of the economic environment -- often including regulations or other government decisions.

Chapter Five

135

Table 5-2: Share of rent-seeking sources and taxes from total income and total

payments of government during last two decades (%)27

Sources of rents are numerous. The following are some

well known sources of rents in Iran:

Trade restrictions are the prime example of a

government-induced source of rents. If importing a certain good

is subject to quantitative restriction, the necessary import

27

- Statistics Centre of Iran. Annual Statistical Reports for Different Years.

Year Share of rent-

seeking sources

from total

public incomes

Share of taxes

from total

public incomes

Share of rent-

seeking sources

from total public

payments

Share of taxes

from total

public

payments

1981 55.1 32.5 32.8 19.4

1982 65.4 25.7 46.4 13.6

1983 61.2 30.6 40.8 20.4

1984 50.0 34.1 36.3 24.7

1985 47.5 38.4 38.6 31.2

1986 24.4 57.5 13.8 32.5

1987 38.6 46.6 23.4 28.3

1988 38.6 47.0 19.2 23.4

1989 47.6 37.3 31.8 24.9

1990 59.9 30.1 50.5 25.4

1991 50.7 39.5 43.9 34.2

1992 51.9 38.1 47.8 35.1

1993 72.1 19.9 70.3 19.4

1994 73.2 18.7 72.6 18.6

1995 70.3 17.5 70.1 17.4

1996 66.5 21.9 79.9 26.3

1997 53.0 25.4 52.8 25.3

1998 43.8 29.0 35.3 23.4

1999 47.0 27.3 42.4 24.6

2000 53.2 30.8 46.0 26.6


136

licenses become very valuable and importers will consider

bribing the officials who control their issue. More generally,

protecting a home industry from foreign competition through

tariffs creates a semi-monopoly for the local industry. Local

manufacturers will lobby for the establishment and maintenance

of these tariffs and some may be willing to corrupt influential

politicians to keep the monopoly going. Studies have shown that

a very open economy is significantly associated with lower

corruption. In other words, countries tend to be less corrupt

when their trade is relatively free of government restrictions

that corrupt officials can abuse.

Government subsidies can constitute a source of rents.

Studies show corruption can thrive under industrial policies that

allow poorly targeted subsidies to be appropriated by firms for

which they are not intended. The more such subsidies are

available to industries, the higher the corruption index.

Price controls, whose purpose is to lower the price of

some good below its market value (usually for social or political

reasons), are also a source of rents and of ensuing rent-seeking

behaviour. Price controls create incentives for individuals or

groups to bribe officials to maintain the flow of such goods or to

acquire an unfair share at the below-market price.

Multiple exchange rate practices and foreign exchange

allocation schemes lead to rents. There were several exchange

rates during past years in Iran. One for importers, one for

tourists, one for students, one for investors, for example.

Differentials among these rates can lead to attempts to obtain

the most advantageous rate, although this rate might not apply

to the intended use of the exchange. Multiple exchange rate

systems are often associated with anti-competitive banking

Chapter Five

137

systems in which a key bank with government ties can make

huge profits by arbitraging between markets.

Natural resource endowments (oil and gas) constitute

a textbook example of a source of rents, since they can typically

be sold at a price that far exceeds their cost of extraction and

their sale is usually subject to stringent government regulation,

to which corrupt officials can turn a blind eye. Resource-rich

economies may be more likely to be subject to extreme rent-

seeking behaviour than are resource-poor countries.

3) Governmental Monopoly: Monopoly management of

government over the 140 big and important companies in the

country has enabled the government to interfere in the market

and giving possibility to public officials to abuse the public

power for own benefit. These State Companies which have

employed half of the public servants, are mostly suffering loss

and cause corruption in the society. Table 5-3 shows the loss of

State Companies during years 1993-1998.

Table 5-3: Loss of State Companies during years 1993-199828

Year Loss (million dollar)

1993 187.7

1994 328.3

1995 309.3

1996 815.4

1997 497.0

1998 631.2

28

- “Eghtesad-Iran Publication”. 2000, No. 22, p.17.


138

The principle of rotation and the system of promotion

driven by motivation are not applied in these companies;

internal and external audit systems are underdeveloped; the

process of decision-making is not transparent enough; the

factors of corruption have not been eliminated in the

appointment procedure of managers in the companies where

the state has a majority share; and the responsibility of such

managers has not been established. Therefore, when the

economy is not competitive and monopolism is dominated over

the market, there will be no transparency in the supply and

demand of the goods and services in the society and

consequently society will be more prone to be corrupted.

4) Lack of clearness in the financial position of the public

officials: One of the existing problems which cause the

corruption in the country is the lack of the clearness in the

financial position of the public officials when they are

possessing a job and changing in their financial position

during possessing the job. Clearness in the financial position

of the public officials can help the controlling over their

properties to prevent corruption.

5) High rate of inflation and unemployment and mistrust to

future: The high rate of unemployment and inflation has also

been a cause of corruption in the country during past

decades. Table 5-4 shows the rate of inflation and

unemployment during the last two decades.

Chapter Five

139

Table 5-4: Rate of inflation and unemployment during last two decades29

6) Unfair and improper distribution of incomes and subsidies:

Increase in poverty and inequality in community which are

the causes of corruption are consequences of unfair and

improper distribution of incomes and subsidies in the country.

Table 5-5 shows the incomes‘ distribution between

householders during the years 1982-2004 and table 5-6

shows the rate of subsidies which have been used by rich and

poor people in Iran during 1982-91.

29

- Central Bank of Iran. “Economic Trends for Different Years”, Economic Research and Policy

Department (These statistics are adopted from formal reports, informal statistics show that the rates are

higher than these).

Year Rate of inflation Rate of unemployment

1976 15.9 10.2

1986 23.7 14.2

1991 20.7 11.1

1996 23.2 9.1

1997 17.3 11.0

1998 20.0 14.1

1999 22.1 16.3

2000 12.6 18.2

2001 11.4 14.2

2002 15.8 12.8

2003 16.5 17.4

2004 14.6 12.8

2005 17.6 14.6


140

Table 5-5: Income distribution inequality index during the years 1982-200430

1982 1984 1986 1989 1990 1991 2002 2003 2004

Share of 40% of low-

income households

(percent)

13.92 13.26 12.71 14.05 14.39 13.43 15.94 14.98 15.05

Share of 40% of medium-

income households

(percent)

37.35 37.00 36.51 37.42 38.05 36.64 37.14 36.07 36.54

Share of 20% of high -

income households

(percent)

48.73 49.74 50.78 48.52 47.56 49.92 46.92 48.95 48.42

Ratio of richest 10% of

households to poorest

10%

22.22 26.08 29.78 23.18 23.51 27.31 14.7 17.1 16.0

Table 5-6: Rate of subsidies which have been used by rich and poor people during the

years 1982-91 (%)31

Type of goods Share of well to do people

(10% High income people)

Share of vulnerable people

(10% low income people)

Rice 18.0 3.4

Meat 23.0 2.9

Bread 12.5 6.2

Medicine 17.5 3.8

Electricity 26.0 3.5

Kerosene 16.1 4.4

Petrol 41.8 1.3

Although the aim of subsidies is to help the poor and

vulnerable people, table 5-6 shows that the well to do people

30

- Statistics Centre of Iran. Annual Statistical Reports for Different Years. 31

-Planning and Management Organisation, “Proposed Plan for Subsidies”, Department of Social Affairs,

1998.

Chapter Five

141

have used the subsidies much more than vulnerable and poor

people in the country.

7) Inequality in income and expenditure: Inequality in income

and expenditure of the public servants and lower income

householders is another cause of corruption in Iran. When

officials are unable to meet their minimal living costs from

their salaries, corruption will always be prevalent. But the

relationship between salary levels and corruption is complex.

Low salaries can provide a powerful incentive for officials to

become corrupt but they only form part of the environment in

which corruption flourishes. The incidence of corruption

depends more crucially on the wider economic, political and

social context.

8) Weakness in laws and regulations: One of the causes of

corrupt behaviour is improper and weak laws and regulations

particularly in the financial and economic policies. Improper

economic policies in Iran have pushed the economy towards

the black market and unofficial economy, so that ―the 30

percent of Iran‘s economy is unofficial‖32.

9) Changing in values: After the Islamic revolution in 1979

and dominating the Islamic values in society, corruption fell

down for a decade. After finishing the Iran-Iraq war and

starting the reconstruction and development programmes in

the country, people moved towards luxurious life and Islamic

values faded out and corruption reappeared in the society

and became contagious.

10) Level of economic development: Levels of economic

development do affect the forms and sectors where corrupt

32

- Habib Chini. “ Smuggling is downfall of economy”. Chamber of Commerce Letter, No.10, 1998,

p.19.


142

transactions take place. Petty corruption is particularly

prevalent in developing countries where it is necessary to pay

a small bribe to secure services that ought to be provided

free of charge. While this practice has largely disappeared

from many developed countries, their greater public

resources and higher incomes mean that corrupt transactions

tend to be grand rather than petty.

11) International corporations: Corruption in international

corporations particularly arises from mining and oil/gas

concessions and construction projects in Iran. International

corporations are the supply side of grand corruption. If they

do not offer bribes to gain contracts, concessions and

exemptions, there would be a dramatic fall in corruption. The

need of international corporations to enhance their

profitability drives them to seek new markets and new

opportunities. Competition with other international

corporations means there is always a search for competitive

advantage and corruption is often seen as an important and

necessary method of enhancing or securing profits.

12) Foreign direct investment (FDI): Although, FDI is widely

believed to be an essential and important ingredient of

economic growth that, in turn, is seen as vital to poverty

reduction and also adds to total investment in a country and

provides a means of transferring production technology,

skills, innovation and 'best practice' to the recipient country.

Nevertheless, it often flourishes only because of the special

privileges extracted from the government and frequently

these privileges are the result of corruption. In this sense,

FDI sometimes comes at the high price of undermining

democratic processes. This is particularly true for FDI in

Chapter Five

143

minerals, oil, gas and other natural resources where foreign

investors offer huge bribes to obtain the concessions at below

market prices.

13) Money laundering: Money laundering is the process

whereby the identity of dishonest and/or illegally obtained

money (corruption proceeds) is transformed so that it

appears to have originated from a legitimate source

(legitimate businesses). The forms of money laundering are

inexhaustible, but drug traffickers, parties involved in

organised crime, and white-collar criminals can be considered

the main users of money laundering. Bank secrecy and tax

havens facilitates money laundering. As already mentioned,

about 30 percent of Iran‘s economy is unofficial and money

laundering is a source of corruption in the country.

14) Inefficient tax system: Inefficient tax system and tax

evasion constitute another cause of corruption in Iran.

15) Discrimination: Discrimination is also a significant cause of

corruption in Iran. According to Tavakoli a member of

parliament and economist in Iran, ―discrimination is the main

barrier to fight corruption and is also a cause of corruption in

Iran‖33.

16) Lack of strategy and seriousness in fighting corruption:

Fighting against corruption that has been announced for

some times by top officials during recent years in Iran, and

so many plans and committees were established to combat it,

lack of seriousness made fighting against corruption

ineffective and corrupt activities became more contagious in

the country.

33

-http://www.baztab.com/news/Tavakoli/ (01/03/2004)-(Solar: 09/12/84).


144

17) Lack of civic awareness: The public‘s stance on corruption

is vague and controversial, often resulting in their passivity to

counter corrupt civil servants or get involved in anti-

corruption initiatives.

18) Influence of external factors: Emergence of international

corruption, failure to provide proper conditions for a fair

competition of individual economic entities, specific nature of

cross-border smuggling and corruption, etc.

19) Weakness in ethics and religious beliefs.

5-2-2. Political Causes

As already mentioned, political corruption is the abuse of

entrusted power by political leaders for private gain, with the

objective of increasing power or wealth. Political corruption need

not involve money changing hands; it may take the form of

‗trading in influence‘ or granting favours that poison politics and

threaten democracy. Political corruption involves a wide range

of crimes and illicit acts committed by political leaders before,

during and after leaving office. It is distinct from petty or

bureaucratic corruption in so far as it is perpetrated by political

leaders or elected officials who have been vested with public

authority and who bear the responsibility of representing the

public interest. Therefore, the political causes of corruption are

also varied and complex and may be listed as follows:

1) Immature democracy: The Corruption Perception Indexes

consistently show that the countries, which appear to be the

least corrupt, are all long established democracies. (Appendix

1). Young and immature democracy in Iran not only is not able

to prevent corruption, but also is a cause of corruption. In a

Chapter Five

145

democracy, opposition groups and parties will monitor the

conduct of office-holders, expose corruption in government and

generally hold the government accountable for its performance.

But the prospects of having orderly, structured and open

political competition in an environment where corruption is

deeply entrenched and pervasive are poor. In such

circumstances, the office holders seek to buy off opponents,

bribe voters and electoral officials and generally corrupt the

democratic process. However, the persistence of differing

degrees of corruption in established democracies shows that no

particular set of political arrangements is a panacea for

eliminating corruption. But established democracies usually

have an underlying consensus on the values, rules and

processes of political change.

2) Political parties and groups: The legal, but irregular

political parties and groups which appear only the time of

elections, are one of the sources of corruption in the country.

Such parties and groups are not active regularly and have no

control over the activities of the government. If their candidate

comes to power they will be the governmental political parties

and abuse the power for own benefit and in the eve of a new

election will change the name and will be active again.

3) Lack of a strong civil society in Iran: Johnston (1998)34

argues that social empowerment is an essential element to

preventing corruption. Social empowerment includes the

strengthening of ―groups and interests which make up civil

society—that is organizations, enterprises, and informal social

networks active in the realm between individuals and

34

-M. Johnston. “Fighting Systemic Corruption: Social Foundations for Institutional Reform”. The European Journal of Development Research, 1998, 10 (1), pp: 85-104.


146

government‖. Where civil society is weak, citizens become

vulnerable to exploitation and are unable to construct the

coordination mechanisms necessary to police, and where civil

society is strong, citizens are able to build coordination

mechanisms. Therefore, the strength of mass political

participation, specifically the strength of a state‘s civil society, is

the key mechanism for preventing corruption.

4) The role of culture as a cause of corruption: Huntington

(1968)35 highlights culture as a cause of political corruption

when he states that corruption is higher in states where ―the

interests of the individual, the family, the clique, or the clan

predominate‖. Similarly, other corruption scholars like Scott

(1972)36; Johnston (1983)37; and Klitgaard (1988)38 look at

culture in relation to kinship, traditional societies, senses of

community, etc.; and offer that it is a significant variable in

explaining corruption. Iran has also a traditional society and

culture where clan, kinship and senses of community are

predominated in it and can be listed as a cause of corruption.

5) Lack of free press: The Press is owned or controlled by the

state in Iran, and will report only information which is

acceptable to the state. The press is handicapped, because

there is no Freedom of Information law that can secure access

to government decision-making processes. Lack of the free

press opens multiple opportunities for corruption by officials,

politicians and bureaucrats. Therefore, curbing press freedom is

35 -S. P. Huntington. “Political Order In Changing Societies”. New Haven: Yale University Press, 1968, p. 71. 36

- J.C. Scott. “Comparative Political Corruption”. New Jersey: Englewood Cliffs, Prentice-Hall, 1972, pp: 11&12. 37 - M.Johnston. “Corruption and Political Culture in America: An Empirical Perspective”. Publics (Winter), 1993, pp: 19-39. 38

- R. Klitgaard. “Controlling Corruption”. Berkeley, CA: University of California Press, 1988, pp: 62-64.

Chapter Five

147

an important means of ensuring that corrupt officials are not

held accountable.

6) Lack of transparency in financing and activities of the

political parties and groups: There is no obligation for the

political parties and groups to declare their financial circles and

informing the public opinion about their activities in the

community.

7) Expediency in the political system: Expediency in

investigating the corrupt practices of politicians and top

officials39.

8) Giving discretionary power to the political and

administrative officials and lack of their accountability to the

community40.

b) Bad legislation in the field of fighting and preventing

corruption.

5-2-3. Administrative Causes

The administrative causes of corruption in Iran are varied

and complex and rooted in the country's bureaucratic traditions

and social history. Corruption tends to flourish when standards

are lax or poorly defined, regulatory institutions and

enforcement practices weak, and government policies generate

economic rents. The opportunity for corruption is a function of

the size of the rents under the control of a public official, the

discretion that official has in allocating those rents and the

practical accountability that official faces for his or her decisions.

Generally, the administrative causes of corruption in Iran may

be listed as follows:

39

- Majid Farajpour. “Poverty, Corruption and Discrimination; Barriers of Development in Iran”. Tehran: Rassa Institute of Cultural Services Publications, 2004, p.276. 40

-Ibid, p.276.


148

1) The weakness and inefficiency of administrative structure:

Parallel organisations and lack of logical relations between

them to present the services to the citizens.

2) The wide and complicated bureaucracy which encourages

the illegal ways of doing work in the administrative system.

3) Vague, interpretability, complex, deficient and consecutively

changing rules and regulations cause the corruption in the

administrative system.

4) Lack of effective and sufficient control over the bureaucracy.

5) Appointing the unskilled and unspecialised people to

significant jobs through nepotism in the organisations.

6) Existence of unofficial groups and networks in organisations

because of poor management.

7) Lack of transparency and responsibility of the top officials

against community, citizens and public opinion.

8) Lack of job security and possessing more than one job by

managers and employees and resultantly lowering the

useful working times in organisations.

9) Lack of participatory management system and domination

of the unscientific management methods in organisations.

10) Lack of effective and continuous assessing of the

organisations‘ performances in the country.

11) Lack of effective and well developed system of punishment

and encouragement in the organisations which discourages

the entrepreneurship and encourages the corruption.

12) The public goals and functions are not well defined.

13) Instability and weakness in policy making.

14) Increase in employees.

15) Lack of effective social security system.

Chapter Five

149

16) Citizens‘ unawareness towards their own legal rights and

the services which organisations have to present.

17) Weakness and inefficiency of inspective units in

organisations.

18) Lack of an independent organization to fight corruption.

19) Inefficiency and weakness of judiciary system.

20) Inadequacy of current rules for preventing corruption and

also supporting the corrupt officials by political parties.

21) Discretionary power of public managers: Monopoly power

of officials over goods and services, discretionary power in

deciding who gets the goods or services or how much they

get, and lack of accountability.

22) Lack of mechanised systems and information technology in

organisations.

23) Weak and inefficient salary system in the country so that

the deference between salaries in public and private sector

are very high.

24) Inadequacy of the law-enforcement system and judiciary

in detecting corruption crimes and punishing corrupt

entities, as well as breaches of the principle of inevitability

of punishment.

25) Inadequacy of mechanisms to protect human and citizen

rights, the legislation, and social justice.

26) Poor oversight and scrutiny over the performance of public

administration.


150

5-3. CONSEQUENCES OF CORRUPTION

Identifying the consequences of corruption is very

important for analyses. There have also been claims that not

everything is bad about corruption. Its effects can be positive

too. According to Theobald (1990)41, ―corruption among other

things, assists in capital formation; fosters entrepreneurial

abilities, allows business interest to penetrate bureaucracy and

permits the logic of market to insinuate itself into transactions

from which public controls exclude it‖. The efficient grease

hypothesis also argues that corruption could increase economic

growth because it acts as grease money, which enables firms to

avoid bureaucratic red tape. But the opposite second view

refuses the notion that corruption could be efficiency enhancing.

Shleifer and Vishny (1993)42, Kaufman and Wei (1999)43

believe that, the crucial assumption of the efficient grease

model is that the red tape and regulatory burden can be taken

as exogenous, independent of the incentive for officials to take

bribes. The opposite view asserts that because the bureaucrats

have discretionary power with given regulation, regulatory

burden may be endogenously set by corrupt officials such that

they customize the nature and amount of harassment on firms

to extract maximum bribe possible. In this model firms that pay

more bribes could still face higher, and not lower effective red

tape. Consequently, corruption could lower economic efficiency

instead of improving it.

41

- R.Theobald. “Corruption Development and Underdevelopment”. London: Macmillan, 1990, p.59. 42

- Andrei Shleifer, and Robert W. Vishny. “Corruption”. Quarterly Journal of Economics, 108(3), 1993, pp. 599-617. 43

- Daniel Kaufmann, and S.J. Wei. "Does 'Grease Money' Speed up the Wheels of Commerce?”

National Bureau of Economic Research, 1999, Working Paper No. 7093.

Chapter Five

151

In sum, overwhelming evidence in recent decades

suggests that the impact of corruption has been and continues

to be negative on all fronts. Ouma (1991)44 believes ―corruption

reinforces political instability and underdevelopment. Theobald

(1990)45 also concludes, ―in short, corruption impedes economic

growth, stifles entrepreneurial, misuses scarce national

resources, weakens administrative capacity, contributes to

serious political decay, and undermines stability, democracy and

national integration.

Therefore, corruption is an omnipresent and serious

problem in communities and hinders the economic, political and

socio-cultural aspects of life. It is also a daunting obstacle to

sustainable development, and results in a major loss of public

funds needed for education, healthcare and poverty alleviation,

both in developed and developing countries.

However, the major costs induced by corrupt practices

may be listed as follow:46

A corrupt act represents a failure to achieve the objectives

which government seeks (e.g. corruption in appointments

induces inefficiency and waste; corruption in the allocation of

scarce university places results in best use not being made of a

scarce opportunity, etc.);

Corruption pollutes the environment in which the private

sector has to operate, leading either to quick (and excessive)

profit-taking in circumstances of unpredictability, or to inward

investment being discouraged;

44

- O. A. Ouma. "Corruption in Public Policy and its Impact on Development: The Case of Uganda since

1979". PAD, Vol.11, No.5, 1991, pp: 473-489. 45

- R.Theobald. “Corruption Development and Underdevelopment”. London: Macmillan, 1990, p.56. 46

- Adopted from: The Transparency International (TI) Source Book, 2nd

Edition, 1999.


152

Corruption represents a rise in the price of administration

(the taxpayer must submit to bribery as well, thereby having to

pay several times over for the same service);

If corruption takes the form of a kickback, it serves to

diminish the total amount available for public purposes;

Corruption exerts a corrupting influence on the

administrative apparatus, eroding the courage necessary to

adhere to high standards of probity ("morale declines, each man

asking himself why he should be the sole custodian of

morality");

Corruption in government, perceived by the people, lowers

respect for constituted authority and therefore the legitimacy of

government;

If the elite politicians and senior civil servants are widely

believed to be corrupt, the public will see little reason why they,

too, should not help themselves;

A barrier to development has been an unwillingness at the

political level to take unpopular decisions ("a corrupt official or

politician is a self-Centred individual [unlikely] to jeopardize his

prospects for the sake of prosperity for the whole country in the

remote future");

Corruption results in a substantial loss in productive effort

as time and energy are devoted to making contacts to outdo the

system rather than to enhancing credentials and strengthening

one's case objectively;

Corruption, as it represents institutionalised unfairness,

inevitably leads to litigation and calumnious charges with which

even the honest official may be blackmailed; and,

Chapter Five

153

The most ubiquitous form of corruption in some countries-

"speed money" or "grease payments"-causes decisions to be

weighed in terms of money, not human need.

Accordingly, consequences of corruption are also many

and numerous in countries. The effects of corruption on the

socio-economic and political issues of Iran are also varying:

5-3-1. Socio-Economic Consequences

1) Effects on domestic and foreign investment: The first

investigation on the impact of corruption on investment in a

cross-section of countries was undertaken by Mauro (1995)47.

He makes use of an older corruption index provided by Business

International (BI), a private firm that sold this and related

indicators of country risks to banks, multinational companies,

and other investors. The author finds that in a sample of 67

countries, corruption negatively impacts on the ratio of

investment to GDP. Similar results were obtained by Keefer and

Knack (1996)48, who incorporate corruption among other

explanatory variables into one single index of ‗institutional

quality‘. Brunetti et al. (1997)49 also reinforce the Mauro results

with a sample of 41 countries. They find that corruption

significantly reduces the ratio of investment to GDP. Mauro

(1997)50 provides further backing for his results by presenting a

larger sample of 94 countries and also by making use of the

47 - Paolo Mauro. “Corruption and Growth”. Quarterly Journal of Economics, 110 (3), 1995, pp. 681- 712. 48 -P. Keefer, and St. Knack. "Institutions and Economic Performance: Cross- Country Tests Using Alternative

Institutional Measures". Economics and Politics, VII, 1996, pp: 207-27. 49 -A. G. Brunetti, Kisunko and B. Weder. "Credibility of Rules and Economic Growth - Evidence from a World Wide Private Sector Survey". Background paper for the World Development Report 1997, Washington: The

World Bank, 1997, pp: 23&25. 50 -P. Mauro. "The Effects of Corruption on Growth, Investment, and Government Expenditure: A Cross-Country Analysis". Corruption and the Global Economy, Washington D.C.: Institute for International

Economics, 1997, pp: 83-107.

http://searchmiracle.com/text/search.php?qq=anal


154

corruption data by PRS (Political Risk Services). The same

source was used by Brunetti and Weder (1998)51 to show that

corruption has a significant negative impact on the ratio of

investment to GDP in a sample of 60 countries. In this

connection, Wei (1997)52 in examining a data set of bilateral

foreign direct investment in the early 1990s from fourteen

major source countries to 41 host countries, found clear

evidence that corruption in host countries discourages foreign

investment.

An empirical analysis of transition economies in Eastern

Europe and Central Asia showed that investment levels in

countries with high levels of corruption were 6% lower on

average than in countries with medium levels of corruption

(21% and 27% respectively)53. The same survey revealed that

firms operating in environments with high levels of

administrative corruption performed significantly poorer than

firms in countries with moderate levels of corruption.

According to World Development Report (2002)54, a study

examining the impact of corruption on foreign direct investment

found that an increase in corruption comparable to the

difference between Singapore (which is widely perceived to have

low corruption) and Mexico (which typically ranks around the

middle of countries in the world in rankings of corruption

perceptions) would have the same negative effect on foreign

51 -A. Brunetti, and B. Weder. "Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures". Weltwirtschaftliches Archiv, CXXXIV, 1998, pp. 513-33. 52 -S. J. Wei. "How Taxing is Corruption on International Investors". National Bureau of Economic Research, 1997, Working Paper 6030. 53

- http://www1.worldbank.org/publicsector/anticorrupt/readings.htm 54

- World Development Report. Washington: The World Bank, 2002.

Chapter Five

155

direct investment as a 50 percentage point increase in marginal

tax rates on foreign investment income.‖

Some observers have also investigated that corruption can

have positive effects on public investment. Tanzi and Davoodi

(1997)55 show that corruption significantly increases public

investment. They were able to establish this correlation

empirically using data on the quality of roads, power outages

and railway diesels. In contrast, sectors which offer less

opportunities for bribes tend to attract less public spending.

Overwhelming evidences show that corruption deters

investment and undermines competition in an economy and

therefore affects its productivity. As corruption increases the

risks associated with making investments, e.g. by lowering the

security of property rights, theory predicts that corruption will

have a clear negative impact on the ratio of investment to GDP.

As mentioned above, although corruption according to Tanzi and

Davoodi increases public investment, but decreases its quality

and productivity. Construction companies mark up their bids in

order to include kickbacks for public officials presiding over

procurement decisions and other counterparts demanding bribes

throughout the construction process. Or the contractor uses

materials of inferior quality or in reduced quantity to reduce cost

on the assignment. Since everyone involved in the project

benefits from kickbacks no one speaks up, at the cost of the

beneficiaries who have to bear the cost of poor quality

infrastructure.

55

- V. Tanzi, and Hamid Davoodi. “Corruption, Public Investment and Growth”. Washington DC: International Monetary Fund (IMF), 1997, Working Paper No. WP/97/139.


156

Corruption has also affected the investment during the last

three decades in Iran. According to Tavakoli (2004)56, the

investment has been deviated by corruption in Iran, so that

during the years 1991-2001, 67 percent of investment has been

deviated towards wrong investment in the country.

According to Mehr News Agency (2005)57 Iran‘s Judiciary

Head in a speech to MPs and judicial officials in the parliament

of Iran stated that, ―corruption has caused the flight of almost

$600 billion of Iranian investments to foreign countries.‖ He also

observed ―the fact that almost 10,000 Iranian companies are

based in Persian Gulf littoral states can only be described as

allotting part of Iranian territory to a foreign country‖. Shahrudi

also stated that, this is not corruption, but rather a major

economic catastrophe. In this connection, Shahrudi also

believed that ―today, countries all over the world enjoy

transparent, simple, regular, and precise economic regulations.

Due to the extensive red tape in our economic system, investors

either prefer not to enter the system or to cut through the

complexities by way of illegal methods, like giving bribes‖.

According to a research conducted by Iran‘s Industrial

Management Organisation, ―the most significant barrier to

investment in Iran is corruption. This study shows that Iran in

comparison with 53 countries is placed at the bottom of the

table‖. Table 5-7 shows the most significant barriers of

investment in Iran in comparison with 53 countries:

56

-Ahamad Tavakoli is an economist and MP in Iran. Available at: http://www.baztab.com/links.php

(16/03/04)-(Solar: 25/12/83) 57

- http://www.mehrnews.com/en/ (01/11/2005)-(Solar: 10/07/84)

http://www.baztab.com/links.php

Chapter Five

157

Table 5-7: The most significance barriers of investment in Iran in comparison with 53 countries58

Topics Iran’s

Rank and

Score

Top

Country

Bottom

Country

1 Corruption 54 1.64 Luxembourg Iran

2 Government monopoly over market 50 2.37 China Cambodia

3 Risk of expropriation 54 2.08 Luxembourg Iran

4 Efficient judicial system 54 2.32 Canada Iran

5 Power of private sector to sue

government

52 2.81 Hong Kong Venezuela

6 Quality of social services 42 4.54 Norway Cambodia

7 Stability of political and juristic

institutions

49 4.36 Luxembourg Russia

8 Peaceful transition of government 53 3.67 Finland Jordan

9 Efficiency of police 41 4.05 Finland Ukraine

10 Efficient international relations 50 4.63 Canada Cambodia

11 Existing of organised crimes in the

country

40 4.53 Singapore Cambodia

12 Existing of democratic institutions 48 3.69 Belize Portugal

According to table 5-7, on a descending scale of 7 to 0

(with 0 representing total corruption and 7 total lack of it), Iran

scored 1.64 and is placed on 54th place amongst 54 countries

and this reveals that corruption as a barrier for investment is

acute in Iran.

Results of a study also show that corruption is a big

problem in Iran. According to this study, more than 40 percent

of the managers in Iran had to pay bribery for doing their

58

- Seyasat-Rooz Newspaper”, (24/11/2000)-(Solar: 03/09/79).


158

business. These payments are 15 percent in industrial countries

and 30 percent in Asia59. However, the rate of investment shows

that corruption has affected the investment in Iran. Table 5-8

shows the investment as a share of GDP for years 1980-2000 in

Iran:

Table 5-8: Investment as a share of GDP for years 1980-2000 in Iran60

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

GDFI/GDP 21.7 19.1 17.5 21.5 20.9 17.5 15.4 13.3 13.3 13.3 15.8

Private I/GDP 11.4 9.3 7.4 12.0 12.4 10.6 8.6 7.8 7.9 8.2 8.5

Public I/GDP 10.4 9.8 10.0 9.4 9.4 6.9 6.7 5.5 5.4 5.1 7.3

Table 5-8: Investment as a share of GDP for years 1980-2000 in Iran (Continued)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

GDFI/GDP 22.3 22.7 22.1 23.1 23.0 25.7 24.9 22.1 22.2 27.6

Private I/GDP 13.6 13.4 11.4 12.8 12.6 14.2 14.2 13.4 13.0 19.0

Public I/GDP 8.7 9.3 10.7 10.3 10.4 11.5 10.7 8.7 9.2 8.6

While the developing countries have attracted a

considerable amount of foreign direct investment (FDI), Iran in

spite of having a good potential has been able to receive only a

small amount (less than 1 billion dollar) of FDI during last two

decades61. On the other hand, during the years 1988-1998, the

annually flight of an average of $4 billion of Iranian investments

have been reported62. Table 5-9 shows the entering of FDI in

59 - Eghtesad-Iran Publication, 1999, 2(18). 60 -Source: S. Stephen Everhart and A. Mariusz Sumlinski. “Trends in private investment in developing countries-

Statistic for 1970-2000”. Discussion paper No. 44, Washington D.C: The World Bank, 2001. Gross Domestic Fix Investment 61

- Commercial Surveys Publication of Iran, No. 149, 1999, p.5 62

-Eghtesad-Iran Publication, “$40 billion flight of investment”. 1(4), 1998, p.39.

Chapter Five

159

Iran and its comparison with developing countries and the world

during 1988-1997.

Table 5-9: Entering of Foreign Direct investment (FDI) in Iran and its comparison with developing

countries and world during 1988-1997 63

(Million Dollar)

Area 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

Iran 61 -19 -362 23 -170 -50 2 17 26 50

Developing

Countries

27772 27376 31266 39060 51100 72500 96000 10600 129800 148900

World 159101 196132 207962 162124 175800 217600 243000 321200 327600 400500

Share of

Iran in

Developing

countries

0.22 -0.07 -0.01 0.06 -0.23 -0.07 0.002 0.02 0.02 0.03

Share of

Iran in the

World

0.04 -0.01 -0.17 0.01 -0.09 -0.02 0.0 0.005 0.001 0.01

2) Effects on economic growth: Corruption as a

significant barrier for investment in Iran has also caused low

economic growth in the country. The economic growth in Iran

during the years 1978-2002 has been 1.6 percent (table 5-10).

―The birth rate has been 2.7 during mentioned period. While

reaching an average of 6 percent economic growth, and

decreasing the unemployment an amount of $14.5 billion

investment is necessary in the country‖64. Table 5-10 shows the

63

-Source: World Investment Report. “in Majid Farajpour. “Poverty, Corruption and Discrimination;

Barriers of Development in Iran”. Tehran: Rassa Institute of Cultural Services Publications, 2004, p.200. 64

-Amirhoshang Shahidi. “The ways for removing the barrier of investment and developing the private

sector”.Journal of Investment, 1(1), 2001. p.8.


160

economic growth, national income and per capita income of Iran

during the 25 years after Islamic revolution of 1979:

Table 5-10: Economic growth, national income and per capita income of

Iran during the 25 years after Islamic revolution of 197965

Period Economic

Growth

National

Income

Per Capita

Income

Revolution and War

(1978-1988)

-2.4 -7.0 -10.3

First Development Plan

(1989-1993)

7.4 13.0 10.7

Second Development Plan

(1995-1999)

3.2 2.5 1.0

Third Development Plan

(2000-2004)

5.2 7.0 5.5

1978-2002

Quarter of Century

1.6 0.4 -1.2

On the relationship between corruption and economic

growth, there is an increasing volume of literature and the

general conclusion is that corruption slows down the long-term

growth of an economy through a wide range of channels. Mauro

(1995)66 presents some strong empirical evidence to help prove

the negative relationship between corruption and long-term

growth. Wei (1997)67 also argues that corruption is much more

costly than ordinary taxes because it generates uncertainty in

addition to the tax burden. In the presence of corruption,

businessmen are often made aware that a bribe is required

65

-Report of Quarter of Century Functions of Islamic Republic of Iran (1977-2002). Management and

Planning Organisation, 2004, p.31 66 -Paolo Mauro. “Corruption and Growth”. Quarterly Journal of Economics, 110 (3), 1995, pp. 681- 712. 67 -S. J. Wei. "How Taxing is Corruption on International Investors". National Bureau of Economic Research, 1997, Working Paper 6030.

Chapter Five

161

before an enterprise can be started and, in addition, corrupt

officials may also lay claims to one part of the proceeds from

the investment. Therefore, businessmen interpret corruption as

a species of tax. In addition, they also face secrecy and the

uncertainty that the bribe-taker may not fulfil his part of the

bargain. Both the tax and the uncertainty will diminish

incentives to invest.

Accordingly, corruption is disincentive to investment, both

foreign and domestic and slows down the economic growth. It

does so because potential investors perceive it as an

unwarranted and pernicious tax. It raises the cost of investing

without providing any guarantee of producing the required

results. Corruption therefore increases the uncertainty and risk

attached to investment as well as reducing the incentive for

entrepreneurs.

3) Effects on privatisation and private sector

development: In developing and transition economies, much

private sector activity arises from the privatisation processes,

which transferred state assets into private hands and turned

pubic monopolies into private monopolies. These transfers are

frequently associated with large-scale corruption and the newly

enriched business leaders are able to exploit illegitimately

acquired power at the expense of their business rivals.

According to the literature in this connection, corruption

has a negative impact on the scale, form and growth rate of

private sector development. It has both direct and indirect

consequences for the conduct of business. At the macro

economic level, the consequences include:


162

Corruption helps distort the market by redirecting economic

activity from one sector to another. In so doing, corruption

destroys the structure and pattern of economic development

and reduces the efficiency of economic activity.

Corruption has fiscal, budgetary and debt effects which

collectively damage the economy and make private sector

development very difficult. In its extreme form, corruption

destroys economies and makes business activity impossible.

At the level of the individual business or corporation

corruption is damaging in the following ways:

It raises the costs of doing business.

It increases the risks and uncertainties of doing business.

It discourages and reduces investment in general and capital

investment in particular.

It creates unfair competition.

It diverts resources away from productive investment.

It complicates and delays business transactions.

It deters entrepreneurs from starting up business.

Therefore, corruption undermines the efficiency of markets

and the competitiveness of producers and suppliers. Where

corruption occurs in international trade, it can undermine local

companies by encouraging governments to buy from overseas.

Where there is corruption, which enables importers to avoid

customs duties and import taxes, the competitiveness of

domestic companies is thereby eroded and they are likely to fail.

In sum, although reducing the role of the government in

economic activities and transferring discretionary government

actions to competitive market choices is the aim of the

http://searchmiracle.com/text/search.php?qq=Business

Chapter Five

163

privatisation to reduce the opportunities for corruption in the

countries, but lack of an efficient control over the process of

privatisation programs provides numerous incentives for

corruption.

Privatisation program in Iran which has been started by

assigning the State Companies to private sector from 1990s has

seen the different ups and downs during the past years. In Iran,

lack of an efficient control over the process of privatisation

programs caused some problems in the process of privatisation

so that after about two decades the privatisation programs are

also incomplete and inefficient in the country.

In this connection, chief of the General Inspection

Organisation of Iran believes that, ―a big number of State

Companies have been assigned to the private sector with

ignoring the regulations during the past years‖68. According to

the Deputy Chief of General Inspection Organisation, ―there are

also 20 reports about the colluding in public dealings for

assigning the State Companies in the ministry of industries and

mines‖69. Another report says that, ―a large part of the stocks of

some big public firms have been recorded for the families of the

employees of Organisation for Privatisation which is responsible

for the privatisation in the country‖70. General Inspection

Organisation of the Country which is the main organisation for

fighting corruption in Iran also reports that, ―during the process

of the privatisation in the country, a big number of State

Companies have been assigned to the public sector with

68

- Kayhan Newspaper, (12/07/2000)-(Solar: 29/02/79), p.2 69

- The Country General Inspection Organisation (Iran), Dideh Publication, No.10, 2001. p.67. 70

- Abrar Edgtesadi Newspaper, (12/02/2001)-(Solar: 02/11/80), p.12


164

negotiation instead of tender‖71. Table 5-11 shows the terms of

assigning the public firms to private sector based on period of

assigning:

Table 5-11: Terms of assigning the public firms to private sector based on

period of assigning72

Period of

assignment

Terms of assignment Percent of

assignment

1991-1994

Assignment through stock exchange

Assignment through tender

Assignment through negotiation

9.50

2.77

8.34

Total 20.60

1995-1997




16.54

0.35

4.58

Total 21.38

1998-2000




52.39

5.64

0.00

Total 58.02

Total of periods 100.00

In sum, the strategy of privatisation as a way for

increasing the efficiency and productivity, decreasing the

governmental monopoly, economic liberalisation, encouraging

the citizens for participating in the economic and social

71

- Kayhan Newspaper, 10/08/2000-(Solar: 17/05/79), p.5. 72

- Majid Farajpour. “Poverty, Corruption and Discrimination; Barriers of Development in Iran”. Tehran: Rassa Institute of Cultural Services Publications, 2004, p.217.

Chapter Five

165

activities, and finally decreasing the corruption in the country

have not succeeded.

4) Effects on poverty and unemployment: A review of

literature reveals that corruption disrupts governance practices,

destabilizes governance institutions, reduces the provision of

services by government, reduces respect for the rule of law, and

reduces public trust in government and its institutions. Impaired

governance, in turn, reduces social capital and public trust in

governance institutions; this reduces the public funds available

to support effective economic growth programs and reduces the

capability of government to help its citizens and the poor, in

particular. According to Peter Eigen (2005), Transparency

International Chairman, ―Corruption is a major cause of poverty

as well as a barrier to overcoming it, and the two scourges feed

off each other, locking their populations in a cycle of misery”73.

Studies in this connection also show that, eradicating

poverty requires macroeconomic stability, economic growth,

improving institutional capacity, and investing in services such

as education and health that particularly benefit the poor. High

levels of corruption can threaten economic stability, slow down

growth, weaken institutional capacity and reduce the resources

available for social programmes. If macroeconomic stability can

be maintained, inflation will be low which is of benefit to the

poor and such stability provides a platform for economic growth.

High inflation can erode the tax base and affect the

government's ability to maintain social spending. High inflation

is often a result of excessive government borrowing and, in

highly corrupt countries; politicians have personal incentives to

73

-Transparency International (TI) Corruption Index 2005: {http://www.transparency.org/surveys/index.html1}


166

encourage high spending levels because it provides more

opportunities for corruption.

As in the third chapter mentioned, corruption by itself does

not produce poverty. Rather, corruption has direct

consequences on economic factors, intermediaries that in turn

produce poverty. Figure 5-2 shows the indirect affects of

corruption on poverty:

However, economic growth expands the capital and

employment base and provides opportunities for the

unemployed to find work and encourages the creation of small

businesses. But as already mentioned, corruption has a

significant impact on lowering investment and growth because it

is perceived as an illegitimate tax and because it creates an

uncertain investment climate.

Where institutional capacity is weak, governments are

unable to implement effectively their poverty eradication policies

and also employment programmes. If, for example, the

government cannot make reasonably accurate budget forecasts,

it is hard to see how appropriate spending decisions can be

made. Reducing poverty requires strong financial, administrative

and regulatory institutions. But corruption undermines

Figure 5-2: Relationship of corruption and poverty (Economic Model)

Chapter Five

167

institutions and distracts public officials from their duties. Figure

5-3 shows the relationship between corruption and poverty

through governance model:

Pioneering research on the relationship among corruption,

governance and poverty has been conducted at the World Bank

by the team of Kaufmann, Kraay and Zoido-Lobaton. Their

studies suggest an association between good governance (with

control of corruption as an important component) and poverty

alleviation. Kaufmann et al. (1999)74 studied the effect of

governance on per capita income in 173 countries, treating

―control of corruption‖ as one of the components of good

governance. Using a database of over 300 indicators of

governance taken from a wide variety of cross-country studies

for the years 1997-98, the team constructed aggregate

indicators corresponding to six governance concepts. Analysis

showed a strong positive causal relationship running from

improved governance to better development outcomes as

measured by per capita income.

However, helping the poor requires a reallocation of public

expenditures. Resources need to be moved to activities that

promote growth, such as universal primary education and basic

healthcare provision. But because large bribes can be earned

74

-Daniel Kaufmann, Aart Kraay and Pablo Zoido- Lobaton. "Governance Matters". Washington D.C.: World Bank, 1999, World Bank Policy Research Working Paper No. 2196.

Figure 5-3: Relationship of corruption and poverty (Governance Model)

Increased

Corruption Reduced

Government

Capacity

Increased Poverty


168

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