Corruption Is An Economic Lubricant And Hence May Not Be All That Bad - Online Article

This citation attests to the ancient nature of corruption, which amounts to the abuse of public office for private gain. Yet it also illustrates that even then corruption was regarded as corrosive to the development of the state and that specific measures were therefore needed in response. The king's adviser perceptively hinted at the link between illiberal trade, bureaucratic harassment at the border, and corruption. And he understood that corruption encompassed far more than bribery: The theft of public revenues was
explicitly addressed.

By contrast, in more recent times a revisionist view has held that corruption may not be inconsistent with development and at times may even foster it. In the late 1970s, Nathaniel Leff of Columbia University argued, for example, that "corruption may introduce an element of competition into what is otherwise a comfortably monopolistic industry....[and] payment of the highest bribes [becomes] one of the principal criteria for allocation....Hence, a tendency toward efficiency is introduced into the system." Likewise economist Francis Lui, in a 1985 issue of the Journal of Political Economy, asserted that "bribing strategies...minimize the average value of the time costs of the queue....[and the official]...could choose to speed up the service when bribery is allowed."

While this coarse variant of the revisionist view is less frequently proposed today, more subtle versions still abound. These contemporary versions wrap corruption in a cloud of ambiguity. Ambiguity, for example, is said to cloud corruption's meaning in differentcultures, implying that what is viewed as corruption in the West would be interpreted differently within the customs of emerging economies. Ambiguity also characterizes the revisionist assessment of corruption's effects on economic growth, fueled by the fact that some of the Asian tigers have both phenomenal growth and high levels of corruption. Then there is ambiguity about the "true commitment" of élites to root out corruption in their country, as well as about whether anything can really be done to eliminate corruption. Finally, ambiguity emerges in discussions of the effects of market reforms on corruption.

Nobody disputes the ethical failings associated with corruption. Yet the ambiguities about corruption, its causes, its effects, and its cures cause many to wonder whether fighting it should be a true priority or merely a rhetorical one. Not in dispute is the fact that fighting corruption has become a rhetorical priority. In recent years, an explosion of papers, conferences, and newspaper articles has covered this topic. Many writings suggest that corruption has acquired epidemic proportions in a vast number of countries. Civic society is clamoring to address the issue in many places.

Transparency International provide Web sites full of information on cross-country corruption indices. Yet important questions remain unanswered. Is corruption good, bad, or irrelevant for economic growth? Are market-oriented reforms a cure for or a cause of corruption? Should an economy achieve a certain level of affluence before widespread corruption can be contained? What does the most recent research and data reveal about possible answers to these questions?

Corruption: Curse or Blessing?

Central theme of the "grease-the-wheels" argument is that bribery can be an efficient way of getting around burdensome regulations and ineffective legal systems. This rationale has not only inspired sophisticated academic models but has legitimized the behavior of private companies that are willing to pay bribes to get business. On closer examination this argument is full of holes. First, it ignores the enormous degree of discretion that many politicians and bureaucrats can have, particularly in corruptsocieties. They have discretion over the creation, proliferation, and interpretation of counterproductive regulations. Thus, instead of corruption being the grease for the squeaky wheels of a rigid administration, it becomes the fuel for excessive and discretionary regulations. This is one mechanism whereby corruption feeds on itself.

In addition to some academic writings, one school of "corruption apologists" argues that bribery can enhance efficiency by cutting the considerable time needed to process permits and paperwork. The problem with this "speed money" argument lies in the presumption that both sides will actually stick with the deal, and there will be no further demands for bribes. In India, one high-level civil servant who had been bribed could not process an approval any faster given the multiple bureaucrats involved in the process, yet he willingly offered his services to slow the approval process for rival companies.

Even in societies where myriad counterproductive regulations have been created in order to extract bribes, there should be a core of laws and regulations that serve productive social objectives. Simple and transparent building codes, sensible environmental regulations, clear regulations to assure the soundness of the banking system, and stringent regulations on the trading of nuclear materials are necessary in any society. The corruption "grease" argument is particularly insidious in this context, since bribes willserve to override such regulations and harm social aims. For instance, illegal logging in tropical rainforests can be the result of illicit payments to officials. Another factor that contributes to bribery is politicians' discretion in limiting the access of potential competitors to the market of the briber—as in the recent scandals in the gas and telecommunications sectors in Russia and Ukraine. Unprecedented amounts of "grease" in these cases strengthen gigantic monopolistic structures. The corrupt practices inherentto unsupervised financial systems have contributed to the recent macroeconomic crises in Albania and Bulgaria.

A sophisticated economic variation of the "grease-is-positive" argument is the notion that bribery allows supply and demand to operate. This rigorously held view maintains that under competitive bidding for a government procurement contract the highest briber will win—and the lowest-cost firm will be able to afford the highest bribe. That is theoretically elegant, but wrong. First, by focusing solely on bribery, this argument fails to take into account that corruption represents a theft of public resources. These bribesend up being diverted from treasury revenues, which impairs macroeconomic stability. And the recipient of the bribe will tend to siphon these funds into overseas accounts, negating any potentially productive use of such funds in the country. Nigeria, for example, has seen billions siphoned out of its budget over the past decades. Second, it is wrong to presume that the highest bidding capability stems from cost-efficiency; instead, it is often associated with substandard quality. Furthermore, the politician rarely subjects the object of an illegal payoff to competitive bidding; rather, he or she will carefully select whom to trust to get bribes discreetly, given the need for secrecy in the corrupt partnership. In Ukraine, a construction firm submitted a bid of US$10 per square meter for tiling a major public building; the official disqualified it immediately, because the contractor had "dared" to submit a bid for less than the "minimum" bidding cost of US$30 per square meter. The winner of the bid was hardly the most cost-effective firm! Viewing bribes as a mechanism for equalizing supply and demand also misses the fact that many public goods ought not to be allocated to the highest bidder. The aim of many social and antipoverty programs is to allocate resources according to the needs of the recipients; this goal is subverted where bribes prevail as an allocating mechanism. Corruption has impaired the provision of social programs to the intended target populations and, more generally, corruption has hurt the poor. Finally, the supply-anddemand view of corruption presumes that the briber gets the good once he has paid for it. This is often not the case, for corrupt transactions cannot be enforced through a court of law.

Bribing and rent-seeking also exact a significant economic cost. Talent is misallocated, as the jobs with the potential to collect lucrative graft attract people who otherwise would accept the more modest financial rewards of truly productive occupations. Poor technological decisions are taken by corrupt bureaucrats, who tend to favor nonstandard, complex, and expensive capital-intensive projects that make it easier to skim significant sums. A large defense or infrastructure contract may thus be favored over the construction of hundreds of primary schools and health clinics. Even more detrimental to development are the many unproductive "white elephant" projects that enrich public officials and suppliers—the recent commission of four incinerators in Lagos, none of which works properly, is one example. Further, enormous time is lost by entrepreneurs and officials engaged in corrupt activities. Queuing, negotiating, ensuring the secrecy of the deals and illicit payments, and guarding against the ever-present risk of nondelivery of the promised signatures and permits are time-intensive activities—as is the frequent need to renegotiate or pay an additional bribe to another bureaucrat. All of these activities come at the expense of productively running firms and governments.

Indeed, evidence from various countries indicates that a positive relationship exists between the extent of bribery and the amount of time that an enterprise's manager spends with public officials. A 1996 enterprise survey showed that within Ukraine firm owners who pay a lot in bribes have to spend almost one-third more time with officials than firm owners who pay less in bribes. Those high-bribing firms also need to spend 75 staff weeks per year of (nonowner) administration time in dealing with officials, as compared with a yearly average of 22 staff weeks for low-bribing firms. Using data compiled by theWorld Economic Forum's Global Competitiveness Report 1996, which surveyed 2,000 enterprises across 49 countries, we have calculated that in settings with higher regulatory and state-bureaucratic interference in business, the incidence of corrupt practices is significantly higher. Further, the higher the degree of regulatory discretion, the higher the incidence of bribery of officials. Surveys in countries of the former Soviet Union show that high regulations and taxes are associated with the need to pay high bribes in order to survive. That situation generates a high cost of doing business. Further, the evidence fromthe 49 countries surveyed by the World Economic Forum reflects that where corruption is more prevalent, the costs of capital and investing for firms tend to be higher. Data and research showing the deleterious effects of corruption on growth have been mounting. A recent empirical study by economist Paolo Mauro found that a corrupt country is likely to achieve aggregate investment levels of almost 5 per cent less than a relatively uncorrupt country and to lose about half a percentage point of gross domesticproduct growth per year. Mauro also found that corruption is likely to distort public expenditures: Corrupt countries appear to spend less on education. The harm to development of underinvesting in education is well known. Yet the effects of illiteracy on corruption are underappreciated and are studied less often.

There is evidence that corruption slows foreign direct investment; a recent study by economist Shang-Jen Wei showed that investing in a relatively corrupt country, as compared with an uncorrupt one, is equivalent to an additional 20 per cent ("private") tax on the investment. The statistical relationship between corruption and lower foreign investment is valid across all regions. Contrary to conventional wisdom, there is no evidence that foreign investors are any less susceptible to corruption in East Asianeconomies than in other countries in the world. This finding also challenges the contention that the East Asian experience shows that corruption does not hurt investment and growth. That argument ignores the reality that corruption is only one of a number of factors explaining growth and development; even the few East Asian countries that are considerably corrupt have developed a credible rule of law, maintained decentmacroeconomic management, limited the pervasiveness of corruption, and prevented corrupt practices from encroaching on their export-oriented policies. Corruption is negatively associated with developmental objectives everywhere.

Opportunistic bureaucrats and politicians who try to maximize their take without regard for the impact of such perdition on the "size of the overall pie" may account for theparticularly adverse impact corruption has in some countries of Africa, South Asia, and the former Soviet Union. Surveying high-level officials from emerging economies offers complementary evidence.

Public sector corruption was rated as the most severe developmental obstacle facing their country, and no significant differences exist across regions. Everywhere, policymaking élites opined that corruption, far from being a lubricant of development, was a most formidable impediment to it. Do Reforms Fuel Corruption? In recent years, academics and commentators in the mass media have argued that in transition economies (particularly in the countries of the former Soviet Union and Eastern Europe) market liberalization and privatization have significantly increased corruption. They maintain that these reforms respond to the vested interests of corrupt élites. Even highly respected academics are ambivalent on this particular issue, advising extreme caution in initiating economic reforms when legal institutions are not yet developed. And in the Winter 1996–97 issue of this magazine, Robert Leiken wrote that "wherecorruption is systemic, market and administrative reforms...may even become counterproductive....Loosening government controls can facilitate illicit...economic activity. Moreover, bureaucrats have been known to compensate for lost revenues by exacting new 'fees' in other areas."

The problem with such perspectives is that what passes for economic reform often is not. Half-baked, poorly designed, inadequately implemented market reforms may indeed boost corruption. Well-designed and properly executed market reforms do not. A public monopoly that, through obscure insider deals, becomes a private monopoly controlled by few shareholders (as happened in prereform Argentina) is certainly not an example of progress in the fight against corruption. Instead, a public monopoly, when demonopolized and followed by privatization through an international, transparent bidding process, will improve matters. Thanks to deregulation and trade liberalization, bureaucrats cannot extract as many bribes as before, and stiff competition will become less a source of corruption. Yet, lowering import tariffs does little to curb corruption if the rules that give customs officials the discretion to decide the amount of import tax on each container are not changed.

Further, analysts who see market reforms as sources of corruption often fail to consider the amount of corruption that would occur in the absence of well-implemented economic reforms. A lack of economic reform can help to perpetuate corruption, since élite interests become more entrenched as their financial might accumulates through monopolistic structures. This "war chest" becomes a major weapon to impede or distort reforms.

Transparency International and domestic institutions that want to take the lead in a cleanup effort. Supporting Transparency International's public education and information role in publicizing individual countries' track records on corruption is also likely to have high payoffs. Finally, international institutions should take steps to encourage participatory approaches in these countries in order to build consensus for anticorruption drives and associated reforms. Civil society is likely to be a major ally in resisting corruption. More and more, it is this ally that seeks concrete support from Western agencies and countries in actively combatting corruption.

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