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Corruption has been a part of human societies since the oldest of times. Corruption, fraud, embezzlement, theft, bribes, and kickbacks are all forms in which people try to increase their income at the cost of others. Beginning in the latter half of the 1990s, an increased recognition of these costs led to many international and nongovernmental organizations demanding that political and business leaders demonstrate high standards of honesty, ethics, and social responsibility. This in turn led to a concerted fight against corruption, money laundering, and black markets around the world as well as to the recognition of the importance of governance.
What is Corruption?
Although disagreements abound, corruption is most frequently defined as the misuse of public power for personal gains. Corruption, unlike fraud and embezzlement, refers to decisions that politicians and public bureaucrats (public officials for ease of exposition) make based on authority delegated to them by the populace. When these decisions are motivated by personal gains rather than by the public’s interest, other than politicians favoring segments of the population they represent, this is considered corruption. One of the difficulties of identifying corruption is that these self-serving decisions can often be disguised as good public policy.
Corruption exists in two broad forms—although there are many variations within these two categories and often the two will be intertwined with each other. Administrative, or petty, corruption refers to acts of bribery, kickbacks, or grease money, in which public officials extract a payment for implementing an existing decision. In its purest form this type of corruption is an attempt to redistribute rents or profits associated with a decision. When officials accept a bribe for favoring a particular contractor for a public construction project, they are asking the contractor to share profits associated with the contract with them. The main consequence of such an act of corruption is the redistribution of income that in turn will have some influence on resource allocation.
Political, or grand, corruption or “state capture” occurs when political leaders either allocate national budgets or introduce legislation to facilitate projects from which either they themselves or their close associates will benefit. In almost all cases of political corruption the public would not have made the same decision as the political elite if it were in a position to make that decision. The corrupt elite’s profits come either in the form of bribes or from direct stakes in the projects that benefit from the decisions. Examples of corrupt politicians accepting bribes exist in almost every country—industrialized or developing. Also, examples of dictators who have managed to enrich themselves while impoverishing their countries abound: Haiti under François Duvalier (1907–1971), Philippines under Ferdinand Edralin Marcos (1917–1989), Zaire under Mobutu Sese Seko (1930–1997), Nigeria under Kwame Nkrumah (1909–1972), and Uganda under Idi Amin (c. 1925–2003) are just some of the examples. Political corruption leads to the misallocation of a country’s economic resources while redistributing income within that country. Corruption is difficult to measure, but it exists in all countries. In countries where corruption is not endemic, corrupt acts are carried out under secrecy. In countries where corruption is widespread, corrupt incomes take so many forms that measurement becomes meaningless. The most consistent attempt to measure corruption has been carried out by Transparency International (TI), a Berlinbased nongovernmental organization (NGO). Every year TI surveys business people and experts, and based on their perceptions it provides a rating between 10 (no corruption) and 1 (most corrupt). Of the 158 countries ranked in 2005, Iceland, Finland, and New Zealand were the least corrupt and Turkmenistan, Bangladesh, and Chad were the most corrupt.
Why Does Corruption Grow, Persist, or Decline?
To understand why corruption exists, it helps to examine why there is less corruption in some—usually industrialized—countries. One can start by recognizing that authority over public-sector budgets and regulatory frameworks comes with the potential for huge personal benefits. Assuming that only a small percentage of a population is pathologically honest, most public officials will be tempted to take advantage of their authority. Their gains, however, come at someone else’s cost. Therefore, those who may lose from corruption want to control and check the powers of public officials. These checks come in the form of well-developed legal, political, and social institutions within the society. As such, the existence or absence of corruption depends on the balance between the powers of public officials against the strengths of institutions and control mechanisms that empower the public.
All countries have laws against corruption. Selection and retention of public officials, at least in democratic societies, will depend on the public officials demonstrating honest behavior. Democratic institutions that allow a fair and wide participation of the public in the selection of public officials create a barrier against the spread of corruption. Offending officials will be identified and punished by the judicial system or at least not reappointed to their positions. A free press accompanied by an independent and honest judiciary forms another barrier that prevents corruption. Institutions and a variety of organizations that represent specific interest groups in a given society will exert influence on public officials if corruption is likely to harm that society. In so far as politicians derive their authority and appointment from their constituencies, these institutions form another line of defense against corruption. Once in power, however, public officials will have means to render these control mechanisms less effective. A dictator usually succeeds in rendering them completely ineffective; hence, dictatorial regimes are often more corrupt than democratic ones. Democratic leaders are restricted by the strengths of the institutions in a society that constrains behavior of public officials.
Thus, institutions that play an important role in controlling corruption include a free press, an independent judiciary, and a free and democratic political system that gives full voice to the populace in the political process. Research clearly establishes that the absence of corruption within countries correlates with the level of development of these institutions. It is noteworthy that ideology does not seem to play a role in the extent of corruption. Daniel Kaufmann divided countries into “leftist” and “non leftist” regimes (1998, p. 140). The correlation between the extent of corruption and the type of regime was zero.
Consequences of Corruption
Corruption—which is an important component of what is now called governance—is extremely inimical to economic growth and development (Jain 2001). It leads to misallocation of resources, distorts labor markets, discourages investments, and alters income distribution. The myth that corruption helps markets by “greasing the wheels of commerce” has been proven false. While it is true that a bribe may speed up one transaction, it creates incentives for more and higher bribes in previously bribefree activities. In a remarkable study of bribery, Robert Wade (1985) shows that once bribes are introduced, bureaucracies redirect their attention from providing services to the public to maximizing bureaucrats’ illicit incomes.
The most damaging consequence of corruption may be in how it inhibits investment in the economy. Research clearly establishes that countries with high corruption have lower levels of investment and economic growth (World Bank 2001). Corruption, which usually exists in an environment of poor overall governance, makes it difficult for entrepreneurs to invest by increasing the cost of starting a business venture. After investments have been made, corruption creates uncertainty for entrepreneurs because the public officials have an option to extract bribes from the venture should it prove profitable. This option increases entrepreneurs’ risks and lowers their returns.
Corruption also distorts the selection of public-sector projects. Small maintenance projects are more effective in terms of their output, but corrupt officials do not like to spend money on smaller projects because they may be carried out by a larger number of contractors, making it more difficult to extract bribes. Thus, corruption biases investment expenditures from high-output to low-output projects. Construction of “roads that go nowhere,” “bridges that no one crosses,” and unused shells of school buildings that abound in the developing world may have been motivated by bribes, not the needs of the society. In addition, if measured by the extent of bribes as a percent of revenue of a firm, corruption affects small firms more than big ones. Because innovative activities in most economies tend to be taken up by small entrepreneurs, corruption stifles an important source of economic growth. Corruption also discriminates against foreign direct investment because dealing with corrupt officials requires familiarity, which is an advantage that domestic firms may possess.
Corruption affects the labor market by distorting returns for various activities. It distorts the allocation of talent between power-seeking activities and other productive activities in an economy. Furthermore, as noted earlier, corruption discourages the allocation of talent to entrepreneurial activities by lowering rewards and increasing risks.
Corruption does not affect all members of a society equally. The poor suffer relatively more from corruption in two ways. First, bribe payments may represent a higher percentage of their income than similar payments by the rich. In this sense, corruption acts as a regressive tax—lowerincome households carry a larger burden than higherincome ones. Second, corruption causes the delivery of public services, for example, health care and education, to deteriorate. Such a deterioration affects the poor more than the rich first, because they may have to pay a bribe to receive the services and second, because they depend more on such services. Corruption may also allow the rich to pay fewer taxes than required by law. This lowers the revenues of the state, further deteriorating the ability of the state to provide services for the poor. Studies confirm that corruption causes income distribution to worsen.
Recognizing that corruption is a serious obstacle to fighting poverty, many international and nongovernmental organizations since the latter half of the 1990s have been leading the fight to reduce corruption around the world. This fight focuses on three areas: civil societies in which the public plays a key role, a top-down commitment from the political leadership to fight corruption, and a proactive private sector that accepts its social responsibility to operate in a corruption-free manner. Countries that belong to the Organization for Economic Cooperation and Development have accepted their responsibility in this fight by passing antibribery laws that prohibit their firms from paying bribes in other countries. These laws, however, are rarely strictly enforced.
It is difficult to assess the impact of global efforts to fight corruption. Stories of success tend to be anecdotal. If the ratings of TI are any indication, it will take several years before this fight has a significant impact on the extent of corruption around the world.
- Jain, Arvind K. 2001. Corruption: A Review. Journal of Economic Surveys 15 (1): 71–121.
- Kaufmann, Daniel. 1998. Research on Corruption: Critical Empirical Issues. In Economics of Corruption. Ed. Arvind K. Jain. Boston: Kluwer Academic.
- Transparency International. 2005. Corruption Perceptions Index 2005. Transparency International. http://www.transparency. org/policy_and_research/surveys_indices/cpi/2005.
- Wade, Robert. 1985. The Market for Public Office: Why the Indian State Is Not Better at Development. World Development 13 (4): 467–497.
- World Bank. 2001. Governance and Corruption. World Bank Group. http://www.worldbank.org/wbi/governance.
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