Corruption: Causes and Consequences

Corruption: Causes and Consequences
Corruption—the use of public power for private gain—is a universal phenomenon, but its scale varies radically between countries. Why are some societies corrupt while others are not? What are the economic consequences of corruption?

Forms and Types of Corruption

Corruption takes different forms:

• Bribery: payment for a service that an official should provide for free, or for the violation of rules by an official.
• Extortion: an official creates artificial obstacles and demands payment for their removal.
• Embezzlement: misappropriation of public funds.
• Nepotism and cronyism: appointing relatives and friends to positions.
• Conflict of interest: making decisions that personally benefit the official.
• State capture: systematic distortion of laws and regulations in the interests of narrow groups.

“Grand” vs. “petty” corruption.
Petty corruption—bribes at the grassroots level.
Grand corruption—corruption at the highest levels, distorting policy.

Economic Analysis of Corruption

Economists analyze corruption as a rational choice:

• Becker’s Model. The official compares the benefit from a bribe with the risk of punishment. Corruption is profitable if:
  Bribe > Probability of punishment × Severity of punishment.

  • Consequences:
    • Higher salaries reduce the attractiveness of bribes
    • Strengthening oversight and punishments restrains corruption
    • The greater the discretion of the official, the more opportunities for corruption

• Multiple equilibria. Corruption tends to be self-sustaining:

  • If everyone takes bribes, not taking them is stupid and dangerous
  • If no one takes bribes, taking them is risky
  • “Good” and “bad” equilibria are possible

Causes of Corruption

Why is corruption higher in some countries than in others?

• Institutional factors:

  • Weak rule of law, ineffective courts
  • Excessive regulation, creating opportunities for rent-seeking
  • Low transparency of government decisions
  • Weak oversight and accountability

• Economic factors:

  • Poverty—low salaries for officials
  • Inequality—the rich can “buy” power
  • Natural resources—rents create opportunities for corruption

• Political factors:

  • Authoritarianism—lack of political competition and oversight
  • Weak civil society and media
  • Political instability—short planning horizon

• Cultural factors:

  • Norms tolerant of corruption
  • Importance of personal ties vs. impersonal rules
  • Trust in institutions

Economic Consequences of Corruption

How does corruption affect the economy?

• Allocative distortions. Resources are directed not where they are most effective, but where there are opportunities for corruption. Investments go into projects with larger bribes, not with greater returns.
• Reduction in investment. Corruption is a tax on investment, and an unpredictable one. Uncertainty holds back investment more than even high but predictable taxes.
• Rising costs. Bribes increase the cost of doing business. Infrastructure projects in corrupt countries are significantly more expensive.
• Undermining competition. Those who are most connected, not most efficient, win. This suppresses innovation and productivity growth.
• Deterioration of public services. Corruption decreases the quality of public services—education, healthcare, infrastructure.
• Inequality. The poor suffer more from corruption—they cannot pay bribes and depend on public services.
• Empirics. Research shows a negative relationship between corruption and growth, investment, human development.

"Grease the Wheels"?

There is an argument that corruption can be beneficial:

• Argument: under conditions of excessive regulation and inefficient bureaucracy, bribes “grease the wheels,” speeding up processes.

Counterarguments:

• Corruption creates incentives to complicate regulations
• Bribes don’t speed up but slow down processes (extortion)
• Empirically: corruption is associated with worse, not better, outcomes even under poor regulation

Combating Corruption

How to reduce corruption?

• Simplifying regulation. Fewer rules—fewer opportunities for corruption. Deregulation is a powerful anti-corruption tool.
• Transparency. Publication of budgets, contracts, declarations. E-procurement reduces corruption.
• Independent anti-corruption bodies. Effective if protected from political pressure (Hong Kong, Singapore).
• Freedom of the press. The media is a watchdog, exposing corruption.
• Competition. Political competition creates incentives to expose opponents’ corruption.
• International pressure. Anti-corruption conventions, FATF, conditions of international organizations.
• Changing norms. In the long run, it is necessary to change the culture, but this is the most difficult.

Successful cases of fighting corruption (Singapore, Hong Kong, Estonia) show that it is possible, but requires political will, time, and a comprehensive approach.