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.

140 thoughts on “Corruption and development: Not what you think?

  1. Brilliant, could not agree more. Much much Mo attention needs to be paid to refining how we quantify the negative, and other, impacts of corruption on economic and human development of corruption, never mind assigning causal relationships and costs. Crony capitalism to this day gives us a live demonstration of how corruption and issues of governance are complex. About time poor countries and development practitioners are liberated – by evidence, from this misplaced burden of developed countries’ psychological anxieties.

  2. What about in a country like Nigeria, where I did my research this summer on the effect of the fuel subsidy reduction on the welfare of the poor? Out of 150+ responses across 3 cities in the southwest, only one or two respondents mentioned property rights. More (10-20) mentioned the effect of Boko Haram on the availability of certain commodities (tomatoes, for example, which come from the North), but the overwhelming majority (and it’s easy to see why, with Nigeria) mentioned corruption as the most major impediment to the improvement of their daily lives. Granted, my methods were not those of a political scientist, but are these people just wrong? Or is the issue the way that multinational companies and governments work out their deals, keeping the money sequestered from flows that could encourage real, equitable development — does this factor into your definition of ‘corruption’?

  3. @Justin: Interesting point. It might be so overwhelming and out-of-control a problem in some countries to be top of the list. Nigeria could be that case. Other cases could be incredibly large-scale theft by the ruling cabal. But in all these cases I would ask whether corruption is the symptom of the deeper problems of governance, and whether attacking corruption directly and specifically is more important than the deeper problems. If those deeper problems are deep and difficult enough to affect, then maybe, but you’d have to believe that corruption can improve on the margin in spite of that,

  4. There may be another way in which every-day corruption is not always necessarily bad for economic development. Excuse my pre-101 level economics in the following (which may therefore be total nonsense). If we can assume that the likelihood of being charged a bribe for some low level service or to avoid some minor fine is the same for everyone (probably at least roughly true of urban residents) then in developing countries where the major of the population is poor, every-day corruption would work like a regressive tax, shifting money to better-educated elites in government. These elites will then accrue enough capital to start businesses that might not otherwise be started, especially if the bribe payers lack the education and business skills necessary. (These businesses can be important just in laundering the money so the corrupt officials cannot be accused of having unexplained income.) Certainly around where I work I see a lot of businesses run by local officials. Moreover as corrupt officials accumulation of capital increases, just as with the robber barons of yesteryear, they may support better property rights in future to as to hold on to their wealth more securely.

    Of course this is an optimistic view, and one which ignores the critical question of justice. Also it probably does not apply to grand corruption. At the end of the day, I remain appalled by much of the corruption I encounter here, but like you am sceptical that it is critical to economic development, at least in its early stages, just look at Italy and China. Also some of the more notable successes in squashing corruption in developing countries appear to rely on a strong leader, which just end up storing up bigger problems in the long haul, e.g. Museveni’s early reputation for zero tolerance now long since evaporated. You are therefore probably right in calling for a focus on underlying political causes and not just symptoms.

  5. I think you are too quick to say that it fails the A test. For example, you didn’t mention Olken and Pande’s review, which claims that most papers find a negative correlation between corruption and growth. In any case, focusing on small-scale bribes that may grease the wheels ignores the worst types of corruption. Going by Transparency International’s surveys of business people, the most severe cases of corruption occur in oil, gas, mining, utilities and public construction contracts. This corruption isn’t like the bribes individuals and small firms pay because the government doesn’t have the capacity to tax, it’s huge sums of money going to the top, likely helping leaders overstay their welcome. And more rents at the top means larger incentives to grab power, so there is an interaction with civil conflict.

    All this is speculative of course, but since the effect of really big corruption is under researched it seems too soon to dismiss it.

  6. I wonder about two things:

    1) A precise definition of corruption. This includes the distinction between small-scale corruption and large-scale corruption. The latter being things like, as Mounir notes, as industrial policy choices made to benefit a select few. Also there is the issue of varieties of small-scale corruption. Some of it can certainly be thought of as “user fees” which may even lead to more efficient allocation of services (at least from a growth perspective). But there is also small-scale corruption that specifically limits the options of significant groups of people.
    2) What about the effect of corruption on expectations? While large direct effects on growth may be hard to discern, do the existing studies take into account future actions foregone by those discouraged by corruption from making investments in human or physical capital?

  7. So the economic literature (see the Bardhan articles, or that by Svensson maybe) says that, in theory, centralized corruption should be more efficient than decentralized corruption. i.e. one thief (the President) rather than many. The reason is twofold. First, the single leader has incentives not to overtax people, so that he can keep them viable for taxing them in future. Decentralized corruption, on the other hand, creates a common pool resource problem. The second reason centralized corruption can be better is that it should be easier for a single ruler to commit to deliver certain actions in return for the bribe, compared to a decentralized actor. that is, he can grease the wheels more easily. People have used this to explain why corruption under some (like Suharto in Indonesia) is consistent with growth. I’m not sure it translates to the Mobutus of the world, but I don’t think the problem in places like the Congo stop at mere corruption. That degree of kleptocracy has deeper and more important roots.

  8. My personal fave on this is Kahn & Jomo (Eds) Rents, Rent-seeking and Economic Development Cambridge University Press…definitely worth taking a look. (PS I don’t think you mentioned the possibility that corruption provides an imperfect and non-ideal substitute for property rights…think Indonesia during the New Order period of massively pro-poor growth, or China recently, though becoming less necessary over time).

  9. I’d like to add “inconsistent definitions of corruption” to the list of reasons why corruption may not be seen to correlate with lack of economic growth. “Corruption” just means different things in different contexts. In antebellum Syria, where corruption meant having to pay small fees regularly to avoid burdensome bureaucracy, corruption may in fact have helped economic prosperity. In Jordan, where corruption means (among other things) entrenched power in the hands of a group of large families, who can monopolize jobs, rewrite the laws to eliminate their economic competitors, and use the police and security services to harass those who compete with or irritate them, corruption seems to be a profoundly demoralizing force that prevents many people from even trying to invest in the country. Why bother to try when it’s all stitched up anway, when being from the wrong family or social group makes bureaucracy impenetrable, and when getting in the way of the fat cats can get your family targeted?

    I have worked in Jordan for years, and it should be obvious this assessment is heavily based on anecdote; on the things I’ve seen happen to friends and sources, and the attitudes I have encountered. But it does lead me to wonder if working with a set of different, carefully parsed definintions of corruption might lead to different results.

  10. Oh, and I should mention that “ending corruption” is pretty much the most consistent and widespread demand of the protesters who have been in the streets here for the past 21 months. (Though even there, different groups seem to have very different ideas about what “ending corruption” would mean.) I think there are even surveys that show corruption as far and away the most pressing economic/political concern for Jordanians, though ATM I am too lazy to find them …

  11. What about colonialism and slave labour ? All efficient in their place. Maybe we ought to rename this medieval, scaremongering word. Call it the “competitive edge” “force multiplier” or the “miracle efficiency generator” ? 1. http://goo.gl/qZup7 2. http://bit.ly/orCEMV

  12. You need to read:
    Andrew Wedeman, “Looters, Rent-‐Scrapers, and Dividend Collectors: The Political Economy of Corruption in Zaire, South Korea, and the Philippines,” Journal of Developing Areas 31 no. 4 (Summer 1997), 457-78.

    There are three types of corruption and they produce different outcomes. I have done business in both China and Nigeria and believe me the “corruption” in these two countries have little in common (as the article discusses). The English language is confusing us by grouping many different actions under one term.

  13. Do absolutely have a look at Mushtaq Khan’s heterodox work on the political ecoomy of corruption, especially if you also read Bardhan’s work. Most of Khan’s published articles can be downloaded from his website for free. And here’s the link to an interesting audio debate between him and Daniel Kaufmann: http://developmentdrums.org/284

  14. Chris, I may have missed a premise to your argument here, but you are focused primarily on economic outcomes. How about social outcomes? My expertise lies in Chinese rights defense, and I can tell you that corruption is not usually good for the rights of the normal person in China. Ex: peasants land is grabbed by local governments for sub-market prices so that the government can turn around and resell to developers for a small fortune. This is done, muc of the time, without consulting peasants as the law requires. Those peasants not only have their legal rights violated, but they also lose out economically. Thoughts?

  15. Hi Chris,

    Some reactions to your provocative post. It got me all excited at 7 am.

    1. On evidence, two points here: first, you are mainly concerned with the direct effect on economic growth, where this type of literature is fraught with difficulties; second, why is that the only measure of whether corruption matters for development? It doesn’t at all pass a sniff test. If you go to any developing country and ask people why they haven’t grown more, or why government doesn’t do more for people, more often than not, they will say corruption. Shouldn’t that be taken at least a bit seriously? Are most people in the world wrong?

    2. If we think about more practical, measurable ways that corruption affects peoples’ lives, I’d mention the following. Teacher, doctor and nurse absenteeism. Leakage of public pharmaceuticals into the private market. Adulterated pharmaceuticals. Police extortion. Misdirection of public safety nets to the wealthy. And these are primarily the local forms of corruption that directly affect people’s -and often the poor’s – lives. Do these not matter for “development”?

    3. Clearly, the numerous, complex social systems that have characteristics that fall under a broad definition for corruption cannot be simply categorized as ‘good’ or ‘bad’. When popular developed country readers see the word corruption, they mostly think of taking a bribe for a service at the local level, or stealing money at the top level. Conceptual work on corruption actually states that the term covers many more instances, as the above examples indicate. But, because the definition of corruption is very broad, it describes phenomena that could be considered to be ‘good’. Many argue that strong business — government relations fall into this category.

    4. Just how effective the development community is with addressing corruption is a whole other topic for discussion. One main approach taken is transparency, but then we find huge difficulties with information-related interventions (see recent research by Lieberman, Posner and Tsai in Kenya for a deeper analysis of this). Development partners love to focus on PFM reforms, electronic salary payment systems and others, which are often fraught with difficulties (Matt Andrews has researched this); but if we look at the transformation of Latin America over the last 20 years, there have been marked improvements in many systems. None of these interventions is easy, but sometimes they lead to tangible improvements in systems with real benefits for many people. Measuring their success is clearly difficult, given the lack of definitions, their integration into other interventions, the long time lag and zig-zagged roll out, amongst others.

  16. You know if we seriously desire for a population regulated, corruption-free society with decent political atmosphere, has to put genuine commitment in our own mindset, most of the communities (such as Bengali or Tamils) in this sub-continent are engulfed by ‘Culture of Poverty’, irrespective of class or strata, dwells in pavement or apartment. We are not ashamed of the deep-rooted corruption in this society at heart, decaying general quality of life, bad Politico-Governance, poor work place, weak mother language, continuous consumption of common Social Space. We love to become parents only by self-procreation (blindfold support by lame excuses, followed by the very animal instinct) depriving their(the children) fundamental rights of a caring society, fearless & dignified living. Never search for other positive alternative gesture, a passionate way of parenthood, stop giving birth to any child him/herself till the society improves up to the mark, co-parenting children those are born out of extreme poverty, instead. A deliberate hunt to touch the core of the society. Induce reasonableness in our way of life. If a pure freedom is desired from vicious cycle of poverty, rotten capitalism need to involve ourselves in ‘Production of Space'(Henri Lefebvre) movement, clean & quality Politics would certainly come up. SB, Howrah, India. Mob: +91 9051147375.

  17. you are right cause you see it as only economical development generally. for your attention i need to describe such effect of corruption by recent rana plaza tragedy in our country, bangladesh. to establish sweep business garments owner usually involve in various dealing of corruption with govt institution which inspired them to built weak infrastructure. in my recent research project on garment i found most of incident of accident has drawn only for corrupt practices. which never gives us prosperity of business development whether it disrupt our opportunity become strongest exporter. on the other side our own developed national service program where corruption intend to make a generation disappoint of their value. see http://www.ti-bangladesh.org/‎