So the economic consequences of corruption depend on which decisions the corrupt act affects, how the bribes are used by the recipients and what would have been done with the money had there been no corruption. I could have also talked about things like the predictability of corruption (e.g., is there a ‘fixed price’ for a certain kind of ‘service’ by the corrupt official?) or the degree of ‘monopoly’ in the bribery market (e.g., how many people do you have to bribe to get a licence?). But the point is that the combined result of all these factors is difficult to predict. This is why we observe such vast differences across countries in terms of the relationship between corruption and economic performance.
If the impact of corruption on economic development is ambiguous, how about the latter’s impact on the former? My answer is that economic development makes it easier to reduce corruption, but that there is no automatic relationship. Quite a lot depends on the conscious efforts made to reduce corruption.
As I discussed earlier, history shows that, at earlier stages of economic development, corruption is difficult to control. The fact that today no country that is very poor is very clean suggests that a country has to rise above absolute poverty before it can significantly reduce venality in the system. When people are poor, it is easy to buy their dignity – starving people find it difficult not to sell their votes for a bag of flour, while under-paid civil servants will often fail to resist the temptation to take a bribe. But it is not just a matter of personal dignity. There are also more structural causes.
Economic activities in developing countries are mostly dispersed across a large number of small units (e.g., small peasant farms, corner shops, hawkers’ stalls and backyard workshops). This provides a fertile ground for petty corruption, which may be too numerous to detect for under-resourced developing country governments. These small economic units also have very poor, if at all, accounts, making them ‘invisible’ for tax purposes. This invisibility combines with the lack of administrative resources within revenue services to produce low tax collection capacity. This inability to collect taxes limits the government budget, which, in turn, encourages corruption in a number of ways.
First of all, low government revenue makes it difficult to pay decent salaries to public officials, which makes them vulnerable to bribery. It is actually quite remarkable how so many developing country government officials live honestly despite being paid a pittance. But, the poorer the salaries are, the higher the chance that officials will succumb to the temptation. Also, a limited government budget leads to a weak (or even absent) welfare state. So the poor have to rely on patronage from politicians who give out loyalty-based welfare benefits in return for votes. In order to do this, the politicians need money, so they take bribes from corporations, national and international, that need their favour. Finally, a limited government budget makes it difficult for the government to spend resources on fighting corruption. In detecting and prosecuting dishonest officials, the government needs to hire (in-house or from outside) expensive accountants and lawyers. Fighting corruption is not cheap.
With better living conditions, people can achieve higher behavioural standards. Economic development also increases the capacity of the government to collect taxes – as economic activities become more ‘visible’ and as government administrative capacity rises. This, in turn, allows it to increase public salaries, expand the welfare state and spend more resources on detecting and punishing malfeasance among officials – all of which help reduce corruption.
Having said all this, it is important to point out that economic development does not automatically create a more honest society. For example, the US was more corrupt in the late 19th century than earlier in that century, as I mentioned earlier.Moreover, some rich countries are far more corrupt than poor ones. To illustrate this point, let’s look at the Corruption Perception Index published in 2005 by Transparency International, the influential anti-corruption watchdog.* According to the index, Japan (per capita income $37, 180 in 2004) was jointly ranked 21st with Chile ($4, 910), a country with barely 13% of its income. Italy ($26, 120) ranked joint 40th with Korea ($13, 980), with half its income level, and Hungary ($8, 270), with one-third its income level. Botswana ($4, 340) and Uruguay ($3, 950), despite having per capita incomes only about 15% that of Italy or 30% that of Korea, ranked well ahead of them, at joint 32nd. These examples suggest that economic development does not automatically reduce corruption. Deliberate actions need to be taken to achieve that goal.[13]
Not only are the Bad Samaritans using corruption as an unwarranted ‘explanation’ for the failures of neo-liberal policies (for they believe that those policies cannot be wrong) but the solution to the corruption problem that they have been promoting has often worsened, rather than alleviated, it.
The Bad Samaritans, basing their argument on neo-liberal economics, say that the best way to tackle corruption is to introduce more market forces into both the private and the public sectors – a solution that neatly dovetails into their market-fundamentalist economic programme. They argue that freeing the market forces in the private sector – that is, deregulation – will not only increase economic efficiency but also reduce corruption by depriving politicians and bureaucrats of the very powers to allocate resources that give them the ability to extract bribes in the first place. In addition, the Bad Samaritans have implemented measures based on the so-called New Public Management (NPM), which tries to increase administrative efficiency and reduce corruption by introducing more market forces into the government itself – more frequent contracting out, a more active use of performance-related pay and short-term contracts and a more active exchange of personnel between the public and private sectors.
Unfortunately, NPM-inspired reforms have often increased, rather than reduced, corruption. Increased contracting out has meant more contracts with the private sector, creating new opportunities for bribes. The increased flow of people between the public and private sectors has had an even more insidious effect. Once lucrative private-sector employment becomes a possibility, public officials may be tempted to befriend future employers by bending, or even breaking, the rules for them. They may do this even without being paid for it right away.With no money changing hands, no law has been broken (and, therefore, no corruption has occurred) and, at most, the official can be accused of bad judgment. But the payoff is in the future. It may not even be made by the same corporations that benefited from the original decision. Having built up his reputation as a ‘pro-business’ person or, even more euphemistically, a ‘reformer’, he can later move to a plum job with a private law firm, a lobbying organization or even an international agency. He may even use his pro-business credentials to set up a private equity fund. The incentive to do favours for the private sector becomes all the greater if the careers of the civil servants are made insecure through short-term contracting in the name of increasing market discipline. If they know that they are not going to stay in the civil service very long, they will have all the more incentive to cultivate their future employment prospects.*
*
The index should be taken with a grain of salt. As the name makes it clear, it is only measuring the ‘perception’ revealed in surveys of technical experts and businessmen, who have their own limited knowledge and biases. The problem with such a subjective measure is well illustrated by the fact that the perceptions of corruption in the Asian countries affected by the 1997 financial crisis suddenly rose significantly after the crisis, despite having almost constantly fallen in the preceding decade (see H-J. Chang [2000], ‘The Hazard of Moral Hazard – Untangling the Asian Crisis’,
*
The marked increase in corruption in post-Thatcher Britain, the pioneer of NPM, is a salutary lesson regarding market-based anti-corruption campaigns. Commenting on the experience, Robert Nield, a retired Cambridge economics professor and a member of the famous 1968 Fulton civil service reform committee, laments that ‘I cannot think of another instance where a modern democracy has systematically undone the system by which incorrupt public services were brought into being’. See Nield (2002),