In this video we will look at the impact of corruption on an economy and seek to understand
the general importance of the legal framework in an economy.
You should also understand that these two topics involve much more than is going to
be covered in this video.
However, for the context of what we’re discussing, this video should provide you with a sufficient
introductory understanding.
Political corruption can severely limit the growth of an economy and hinder its ability
to perform efficiently.
If government officials act in their own best interest and not that of their constituents,
this behavior will restrict growth and break down public trust.
To understand why, let’s look at a few examples of corruption and analyse their impact.
Some examples of corruption include bribery, nepotism, electoral fraud, kickbacks and graft.
If you’re watching from a place where you’ve read or heard about this, leave a
comment below.
It will be interesting to see the global experiences with this.
Let’s continue with the explanations.
Bribery is when money is given to a government official in exchange for access to their power.
Suppose a businessman bribes a politician to enact legislation in their favor.
This could undermine the efficiency of the market by misallocating resources.
Nepotism occurs when those in power use their influence to benefit their friends and family.
Nepotism is rife in many countries in which senior leaders appoint their unqualified relatives
into positions of high responsibility.
Electoral fraud undermines the democratic process and essentially illegally alters the
outcome of elections.
If a head of state or any official can alter the outcome of an election in their favor,
this invariably leaves the economy worse off.
Kickbacks are negotiated bribes.
A private firm may offer to kick back a percentage of the amount of a contract to the awarding
government official.
This is illegal but could incentivize politicians to award contracts to firms that are not the
best suited to the task.
And finally, graft occurs when public funds are intentionally misdirected in order to
benefit private individuals at the expense of the public.
Suppose a corrupt official directs funding towards a private company hired to build a
bridge.
This company may charge rates above the competitive market level and return some of the excess
to the corrupt official.
From these examples it is quite clear why corruption can undermine the efficiency of
an economy.
Now let’s look at why a legal framework is so important.
A country’s legal framework is imperative to its progress.
It encompasses all of the systems pertaining to the law.
Some key parts of the legal framework of a country include: Intellectual property law,
Financial law, Business regulation, Tax law, Anti-corruption measures, Court systems and
enforcement mechanisms
With regards to intellectual property law, these laws help protect entrepreneurs, creators
and inventors when they develop new ideas and products.
They can apply for intellectual property protection through copyrights, patents and trademarks.
This allows the creator to benefit from the research and development of new products and
protects their idea from being copied by another business or individual.
If it is unjustly copied, the rights and protections exist to protect the original creator.
Business regulations limit what businesses can do.
In countries where regulations are limited, relaxed or lightly enforced – businesses
are able to operate in ways that can harm social welfare.
An example of this would be firms getting away with breaking regulations around pollution.
Tax laws ensure that firms are paying adequate taxes and that punishments can be mete out
if they are not paid in accordance to the law.
Anti-corruption measures aim to control government officials who are in positions that could
be abused for personal gain.
Court systems and enforcement mechanisms are the teeth of the legal framework.
Laws alone are clearly not enough.
The courts must be fair and powerful and able to enforce the law.
If officials, firms and individuals respect the power of the judicial system – it is
more likely that they will abide by the laws set forth in the country.
After watching this video, you should have a better understanding how corruption and
a country’s legal framework impact an economy.
If you have any questions or comments, leave them below.
That’s us done for now and I will see you in the next one!