Is Corruption Bad for Growth?

|Peter Boettke|

It is common-place for folks to claim that the reason why poor countries are poor is because they are plagued with corrpution.  And there should be no doubt that predatory practice by private and public actors is detrimental to growth.  But the evidence is not quite so clear that all acts of corruption should be considered predatory in this sense.

Chris Blattman argues that many development experts overstate the case against corruption.  He argues that: "Most of us fail to imagine that corruption can also grease the wheels of prosperity. Yet in places where bureaucracies and organizations are inefficient (meaning entrepreneurs and big firms struggle to transport or export or comply with regulation), corruption could improve efficiency and growth. Bribes can act like a piece rate or price discrimination, and give faster or better service to the firms with highest opportunity cost of waiting."  This is an important argument to consider.

Back in 2003, Professor Enrico Colombatto made similar argument in a paper "Why Is Corruption Tolerated?" that was published in the Review of Austrian Economics 16 (4), 363-79.  This paper should be read more and incorporated into the contemporary discussions of corruption and development.  

John Wallis's (2006) thorough examination of corrpution in US history is another example of someone who understand the points raised by Blattman about (a) the greasing of the wheels of prosperity, and (b) that corruption is not the cause, but the symptom, and as such is an indication of a deeper instituitonal issue that must be addressed if prosperity is to be achieved and poverty is to be avoided.

 

 

Comments

[Daniel Kuehn]

Isn't this basically the Shleifer-Vishny argument in "Politicians and Firms"?

I think words like "overstate" are important to use in this context. Surely corruption is quite bad in a lot (most??) cases (as you allude to). But these points are important too. Absolutism and science don't mix well.

[Greg Ransom]

"corruption is not the cause, but the symptom"

I have a sense of what this means, but I also am aware of with the way in which an opening for the opportunity to generate corruption drive the creation of institutional structures .

People set up institutions so that money interests or clients have to go through them to get anything done.

We see this all of the time.

[Barkley Rosser]

In terms of growth, the institutional structure matters. A paper in JEBO in 2009 by Blackburn and Fugues-Puccio argued that in cases where the setup is organized and generally known, it does not necessarily damage growth, kind of everybody knows what bribes have to be paid and to whom to get things done. If it is arbitrary and disorganized, then it becomes damaging to growth. China would be an example of the former case.

[Nick Zbinden]

I kind of think that if corruption can be planned it is not so bad (as long at is not to high). If you can count that the things you pay for get acctually done, your are not that bad of.

Sure you basiclly pay double for goverment services, because you have taxes and then you have corruption but at least you get the services (or whatever it is you wanted).

Firms can plan these cost like any other and see if the still have a profitable buissness. It is clear that his hampers growth somewhat but as long as the cost are calculatable you can have confidence in your buissness plan.

I tend to think that acctuall ristriction on markets, tarrifs and so on are much worse then the predicatble corruption. Unpredicted corruption, can potentially a show-stopper, if you do not know if you can get the permit to build or not (because of a honst persion, or to high a price), building something becomes much of a risk.

[Jonathan M.F. Catalán]

I think when economists cite "corruption" as a cause for low growth they have in mind specifically corruption that stems from extractive institutions.

[Jerry O'Driscoll]

The implicit model seems to be of a beleagured businessmen bribing an official in order to be able to supply his customers. But there is also the model of a businessman bribing officials in order to block his competitors.

When I was senior editor of the Heritage Index of Economic Freedom, we thought about the issue quite a bit. I cannot recall an instance of higher corruption being associated with faster economic growth. Overall, corruption is a negative.

I do think that higher corruption measures are associated with other bad economic policies. And vice-versa.

[Ray Burton]

Greg Ransom said,

""corruption is not the cause, but the symptom"

I have a sense of what this means, but I also am aware of with the way in which an opening for the opportunity to generate corruption drive the creation of institutional structures .

People set up institutions so that money interests or clients have to go through them to get anything done.

We see this all of the time."

That maybe true, but surely this only perpetuates the problem? Doesn't the corrupt opening make an unstable foundation making the whole institution unstable?

[Troy Camplin]

I think the real problem with corruption is that it's easily reversible. You might be able to get something done with corrupt officials, but those same officials can change their minds. Rule of man is problematic that way. Further, it seems to me that without corrpution, the system ends up exposing its weaknesses much more readily, fostering change.

[Slugger]

What is corruption? If I am a legislator and a colleague in an adjoining state wants to pass a law to dredge a harbor in his state can I vote for it if:
1. I think it will pencil out in economic growth for my region
2. I know it won't pencil out in dollars but will increase security by providing a better harbor for the navy
3. My brother-in-law will get the contract for the dredging
4. My brother-in-law won't get the contract but it improves the market for the dredging industry as a whole
5. I get a suitcase of money from the dredgers
6. A PAC that supports me gets a suitcase full of money
7. It will temporarily improve the economy in the region and help my re-election
8. The colleague will then vote for a new VA hospital in my district
9. I am sure that you can all come up with more examples
Some of the above items are outside our norms, some are inside, and others are a close call. What is corruption?

[alternative investing]

I think corruption is basically a symptom of a deeper problem of poor governance and the lack of the rule of law.

[sandy ikeda]

Just FYI, I make the bribery-price argument in Chapter 3 of Dynamics of the Mixed Economy, p.81 "Political Entrepreneurship" and footnote 40.

[Bill Drissel]

Even in the US, the gov't approval is corrupt. Gov't bureaus claim approval times that a contractor can plan on.

Then, guess what, there is ALWAYS an exception or two. Now the contractor can go to the end of the line and wait sixty days or pay for "expedited review."

Bill Drissel
Grand Prairie, TX

[Lewis]

I live in Los Angeles, CA and it's pretty much a ditto of what you have in Illinois. We are broke, bnrpaukt, and yet the voters chose Jerry Brown over Meg Whitman and a host of other democrat-socialist pols.Depressing, but not surprising.

[Brad]

Blattman writes that "Most of us fail to imagine that corruption can also grease the wheels of prosperity. Yet in places where bureaucracies and organizations are inefficient (meaning entrepreneurs and big firms struggle to transport or export or comply with regulation), corruption could improve efficiency and growth. Bribes can act like a piece rate or price discrimination, and give faster or better service to the firms with highest opportunity cost of waiting."

The problem with this argument is that it treats the inefficent institutions as exogenous. A rational bureaucrat in a corrput society will create inefficiencies, which he then is paid to overcome.

[Sherry]

"Bribes can act like a piece rate or price discrimination, and give faster or better service to the firms with highest opportunity cost of waiting."

This is an extremely interesting thought. Unfortunately, there are a few anomalies which raise serious doubt about the validity of this proposition. An example that comes to mind immediately is the (relatively) poor economic performance and development of Montenegro, a former Yugoslavian republic with an extremely free market (practically no tax rates and lax regulation).

Its neighbors, such as Croatia and Slovenia, are much more regulated, less free but, at the same time, much more successful. The way that Montenegrin's explain this phenomena is by either (a) blaming their liberal economic policies or (b) corruption. The country is basically governed by the Italian and Russian Mafia. Its dictator, Milo Dukanovic, is literally a gangster.

Additionally, of the three (Montenegro, Croatia and Slovenia), Slovenia does the best and it has the lowest degree of corruption (followed by Croatia and then Montenegro).

I've never been able to understand how corruption is theoretically responsible for the disparity in economic growth and development in this part of the world but, at least empirically, it seems to be a major variable.

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