Corruption and development: Not what you think?

Should foreign donors care about corruption in developing countries? In my comment on David Cameron’s development vision, I called corruption an Anglo-American fetish. Westerners care about corruption far out of proportion to its impact on poverty alleviation and economic growth.

To be clear, my point wasn’t that corruption is unimportant. But if we’re talking about where the world ought to focus it’s aid energy for the next fifteen years, I simply wouldn’t use corruption in the same sentence (or even paragraph) as civil war or property rights.

Here’s a policy litmus test I use: If you believe issue X ought to be a top priority, you need to believe two things: (A) it matters a lot for development, and (B) you can do something about it.

When it comes to corruption, I don’t know a whole lot about B. But a lot of economic research has gone into A, and corruption does not jump out as very important.

We intuitively think of corruption as sand in the wheels of prosperity. This is surely true. Corruption reduces the incentive for a small entrepreneur or a big firm to invest. This robs us of the industry I said was so important, and with it jobs and growth. In many ways, corruption is like a tax on business, one that seldom finds its way into providing public goods.

The reasons that corruption should hurt growth are so persuasive that economists have been pretty surprised not to find much evidence. One team reviewed 41 different cross-country studies of corruption and development. Two-thirds of the studies don’t even find a negative correlation. Cross-country studies have mostly bad data and empirics, so we should not rest here. But Jacob Svensson has a nice overview of the broader evidence and draws the same conclusion: there’s not much to show that corruption reduces growth on net.

Why might this be so?

One reason: 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.

In theory, this improves overall efficiency. If bribes subsidize large chunks of the government, then corruption reduces the need to collect taxes and allocate government spending efficiently–difficult and expensive tasks in poor countries. The “tax” that corruption imposes could be more efficient than the seemingly clean alternative. (To see more on this, besides the Svensson article, Pranab Bardhan has a nice review here and especially here.)

Most of the economists I’ve read conclude that the gains from corruption are probably outweighed by the losses. But, looking at the numbers, it seems the losses don’t outweigh them by much (assuming either matter much at all).

A second reason corruption might not cause underdevelopment is that it’s a symptom of a deeper problem and not a cause of poverty itself. The lack of any real constraints on so many developing country Presidents could be responsible both for corruption plus all the other nasty things that impede growth. Attacking the corruption doesn’t change the fundamental problem. In fact, I think fighting corruption has become a distraction from the real issues.

So why do people like the British PM care so much about corruption? One reason, I think, is is the theoretical case is so compelling. A second is the cultural fetish I mentioned–the same thing that upsets us when we go to a country where people jump the queue or don’t yield to pedestrians.

I’m willing to bet three-quarters of my readers felt a flash of outrage and a churn in their stomach when I suggested that corruption could be efficient. Did you? I understand the rage, but I’m not sure it makes for sound policy.

It’s because of this fetish that I think Cameron’s inside voice sagely says the following: “If even a little bit of British aid money is stolen, the British public will yank it all away.” That’s the real reason corruption’s is in his top few priorities.

Let’s get back to my hasty policy formula, where policies need to (A) matter and (B) be fixable. On part A, we might conclude corruption matters for growth only because the uptight American and British publics will drop support for things that do help development because some dictator’s son drives a Ferrari in Cannes. Not the best case I’ve heard for a policy priority, but one I’d follow were I in Cameron’s shoes.

What about part B of the formula? Are we any good at stopping corruption? Svensson and Bardhan see some hope, but not many good answers. In this article, Rohini Pande’s more hopeful, especially if we design policy armed with economic theiry and experiment. Fortunately the UK government is moving in that direction.

We will need to be realistic about the pace of change, though. I worry most that the US or UK or UN will set unattainable goals, fail to meet them, and then punish themselves and (more importantly) the aid recipients.

To see why, you must read one of my favorite articles of recent years, by Lant Pritchett, Michael Woolcock and Matt Andrews has my favorite. It’s more impenetrable than most of their writing (sorry, guys), but worth the slog.

They run the following thought experiment: What if we tried to measure the quality of governance (including corruption) over time and space, and figure out the 20 fastest improvements countries have made in recorded history? Then, using this best-case-scenario, we ask how long it will take today’s poorest and weakest states just to get to the median level of governance–not to the level of a Canada or Sweden, but to the (decidedly less ambitious) level of a Tanzania or Guatemala. The answer, depending on the country, is 15 to 35 years. And that’s if they experience a miracle of change.

The goal the US and UK commonly set for the Afghanistans and Liberias of the world, of course, is about three to five years. Just witness the public and political angst every time the NY Times uncovers corruption in its Afghan regime. Be prepared for more.

If this saddens you, just remember the first half of my post: it probably doesn’t matter much, and outsiders should probably be putting their attention elsewhere. So your despair is part of the solution.

Canny readers will note, though, that the things I said do matter for development–checks on power, and industrialization–possibly only pass one half of my policy test: part A (importance) but perhaps not B (our ability to do anything about it). I half expected to see more criticism from this direction.

I’ve written a little before about our excess of pessimism on industrial development, and will try to write more in future. Before that I hope to tackle the institutions argument, where I am cautiously optimistic, but only after half accepting the anarchist view on development. That, however, will be a post for a future day.