Corruption and Corruption and Development:Development:

A Review of IssuesA Review of Issues

Pranab BardhanPranab Bardhan

Vincent LallyVincent Lally

Corruption is an ancient problemCorruption is an ancient problem Kautiliya in Kautiliya in ArthasastraArthasastra

44thth Century B.C. Century B.C.

Why is corruption perceptibly so Why is corruption perceptibly so different in different societies?different in different societies? What policy changes could be made?What policy changes could be made?

Corruption- the use of public office Corruption- the use of public office for private gains, where an official for private gains, where an official (the agent) entrusted with carrying (the agent) entrusted with carrying out a task by the public (the out a task by the public (the principal) engages in some sort of principal) engages in some sort of malfeasance for private enrichment malfeasance for private enrichment which is difficult to monitor for the which is difficult to monitor for the principal.principal.

Illegal transactions aren’t always Illegal transactions aren’t always corrupt transactions. corrupt transactions.

Distinction between immoral Distinction between immoral transactions and corrupt transactions.transactions and corrupt transactions.

Distinction between political and Distinction between political and economic corruption.economic corruption.

Effects on EfficiencyEffects on Efficiency

Corruption may actually improve Corruption may actually improve efficiency and help growth in some efficiency and help growth in some developing countries.developing countries.

If Govt. has implemented incorrect If Govt. has implemented incorrect policies, corruption may be better for policies, corruption may be better for welfare.welfare. Black marketeering, smuggling, etc.Black marketeering, smuggling, etc.

Efficiency cont.Efficiency cont.

Corruption as “speed money”Corruption as “speed money” Reduces delay in moving files in Reduces delay in moving files in

administrative officesadministrative offices Francis T. Lui- bribing strategies will form a Francis T. Lui- bribing strategies will form a

Nash equilibrium that will minimize waiting Nash equilibrium that will minimize waiting costs, thereby reducing inefficiency in public costs, thereby reducing inefficiency in public administration.administration.

InefficiencyInefficiency

Arguments in favor of efficiency Arguments in favor of efficiency effects of corruption are fraught with effects of corruption are fraught with general problems. general problems.

Distortions are not exogenous to the Distortions are not exogenous to the system and are instead often part of system and are instead often part of the built-in corrupt practices of a the built-in corrupt practices of a patron-client political system.patron-client political system.

Officials may slow down rather than Officials may slow down rather than speed up when bribed.speed up when bribed.

Corruption leads to inefficiency more Corruption leads to inefficiency more often than it leads to efficiency. often than it leads to efficiency.

Boycko, Shleifer, and Vishny(’95) Boycko, Shleifer, and Vishny(’95) acknowledge that corruption acknowledge that corruption contracts are not enforceable in contracts are not enforceable in courts and there is many a slip courts and there is many a slip between the bribing transaction and between the bribing transaction and the actual delivery of the good or the the actual delivery of the good or the service involved. service involved.

In general, centralized corruption has less In general, centralized corruption has less adverse consequences for efficiency than adverse consequences for efficiency than decentralized bribe-taking.decentralized bribe-taking.

A weak central government with its A weak central government with its inability to stop the setting up of inability to stop the setting up of independent corruption rackets makes independent corruption rackets makes the problem of inefficiency particularly the problem of inefficiency particularly acute.acute.

Efforts to avoid detection and Efforts to avoid detection and punishment cause corruption to be punishment cause corruption to be more distortionary than taxation. more distortionary than taxation.

Secret payments tend to be spent Secret payments tend to be spent abroad rather than inside the abroad rather than inside the country. country.

Autocratic rulers are usually more Autocratic rulers are usually more corrupt than democratic ones corrupt than democratic ones because autocratic rulers do not because autocratic rulers do not need to worry about running for re-need to worry about running for re-election.election.

The Growth ProcessThe Growth Process

Corruption has its adverse effects not Corruption has its adverse effects not just on static efficiency but also on just on static efficiency but also on investment and growthinvestment and growth Having to pay a bribe for a license Having to pay a bribe for a license

reduces incentive to investreduces incentive to invest Smaller return on investmentSmaller return on investment

Entry barriers may discourage the Entry barriers may discourage the flow of new ideas and innovations.flow of new ideas and innovations.

In general, when there is slow growth the returns In general, when there is slow growth the returns to entrepreneurship fall relative to those to rent-to entrepreneurship fall relative to those to rent-seeking, and the ensuing increase in the pace of seeking, and the ensuing increase in the pace of rent-seeking activities further slows down growth.rent-seeking activities further slows down growth. Decreases innovation even further.Decreases innovation even further.

Have been cases where corruption in dispensing Have been cases where corruption in dispensing licenses or loans has led to the emergence of an licenses or loans has led to the emergence of an entrepreneurial class.entrepreneurial class. New opportunity to make moneyNew opportunity to make money

Circumstantial evidence suggests Circumstantial evidence suggests that corruption has generally that corruption has generally declined with economic growth in declined with economic growth in most rich countries over the last 100 most rich countries over the last 100 years.years.

As the economy expands and As the economy expands and becomes more complex, public becomes more complex, public officials see more opportunities for officials see more opportunities for making money from their decisions.making money from their decisions.

Democracy on CorruptionDemocracy on Corruption

Democratic institutions build Democratic institutions build mechanisms of accountability and mechanisms of accountability and transparency which make it difficult transparency which make it difficult for the networks of corruption to be for the networks of corruption to be sustained for long.sustained for long. Need to worry about re-election.Need to worry about re-election. Many people working on same issues.Many people working on same issues.

Why is the incidence of corruption so Why is the incidence of corruption so palpably different in different palpably different in different countries?countries?

Why is corruption so persistent in Why is corruption so persistent in some countries and not others?some countries and not others?

RegulationsRegulations

Liberal economists believe states with Liberal economists believe states with more regulations regarding permits leads more regulations regarding permits leads to more corruption.to more corruption. Post-communist China and Russia acted the Post-communist China and Russia acted the

opposite.opposite.

Social norms are different in different Social norms are different in different countries.countries. Corrupt activities in one place may be viewed Corrupt activities in one place may be viewed

as acceptable in anotheras acceptable in another

Expected gain from corruption depends on the number of other people who are corrupt

If an economy starts with a high If an economy starts with a high average level of corruption it will average level of corruption it will move toward the high-corruption move toward the high-corruption stable equilibrium Cstable equilibrium C

If avg. corruption is low, move If avg. corruption is low, move toward equilibrium Atoward equilibrium A

B, although an equilibrium is not B, although an equilibrium is not obtainable because one would want obtainable because one would want to move either way and be better off.to move either way and be better off.

Olivier Cadot (’87) models corruption as a Olivier Cadot (’87) models corruption as a gamble and finds that a higher time gamble and finds that a higher time discount rate, a lower degree of risk-discount rate, a lower degree of risk-aversion, and a lower wage rate will aversion, and a lower wage rate will induce one to be more corrupt, under induce one to be more corrupt, under certain conditions.certain conditions.

Expected punishment for corruption Expected punishment for corruption declines as more officials become corrupt.declines as more officials become corrupt. More likelihood you are discovered by a corrupt More likelihood you are discovered by a corrupt

officialofficial

Impact of the ‘Middle Man’Impact of the ‘Middle Man’

Raaj Sah (’88) indicates that it is Raaj Sah (’88) indicates that it is possible that there may be a discrepancy possible that there may be a discrepancy between beliefs about corruption and between beliefs about corruption and how often it actually occurs.how often it actually occurs.

Oldenburg (’87)- looks at land Oldenburg (’87)- looks at land consolidation program in Northern India.consolidation program in Northern India. Unhappy people sometimes assume Unhappy people sometimes assume

corruption is occurringcorruption is occurring

Middlemen have incentive to spread Middlemen have incentive to spread information that corruption is information that corruption is prevalent and bribing must be done prevalent and bribing must be done to obtain results.to obtain results.

Prisoner’s DilemmaPrisoner’s Dilemma Move towards equilibrium where Move towards equilibrium where

everyone is corrupt.everyone is corrupt.

Never-ending ProblemNever-ending Problem

Tirole (’96) finds that younger Tirole (’96) finds that younger generations may inherit reputation of generations may inherit reputation of elders and may have no incentive elders and may have no incentive then to be honest themselves.then to be honest themselves.

A one-period reduction in corruption A one-period reduction in corruption may not have any lasting impactmay not have any lasting impact

Very difficult to return to level of low Very difficult to return to level of low corruptioncorruption

Policy IssuesPolicy Issues

Regulations breed corruption, so if Regulations breed corruption, so if we eliminate regulations, things will we eliminate regulations, things will be betterbe better Things don’t get better. Just move from Things don’t get better. Just move from

public monopoly to private monopoly.public monopoly to private monopoly. No improvement in efficiencyNo improvement in efficiency

Beneficial RegulationBeneficial Regulation

There are regulations which serve There are regulations which serve some other valued social objectives, some other valued social objectives, and there may be a tradeoff between and there may be a tradeoff between these objectives and that of reducing these objectives and that of reducing corruption through deregulation. corruption through deregulation. Government rationing food so poor has Government rationing food so poor has

access.access.

Policy RecommendationsPolicy Recommendations

Eliminate Monopoly powerEliminate Monopoly power Competition, over time, tends to drive the Competition, over time, tends to drive the

prices to obtain a license down to its prices to obtain a license down to its correct economic cost, and therefore correct economic cost, and therefore drives the level of bribes to zero.drives the level of bribes to zero.

DemocratizeDemocratize Having more than one official working on Having more than one official working on

each case makes it necessary to bribe each case makes it necessary to bribe every person involved with decision.every person involved with decision.

““Spring Cleaning”- must be credible Spring Cleaning”- must be credible and sustained to be effectiveand sustained to be effective Could lead to more corruption if not Could lead to more corruption if not

seen as serious by societyseen as serious by society Publicize honest transactionsPublicize honest transactions

Attempt to minimize/eliminate role of Attempt to minimize/eliminate role of middlemen on increasing corruptionmiddlemen on increasing corruption

Incentive Payments for Civil Incentive Payments for Civil ServantsServants

One of the most effective ways to One of the most effective ways to fight corruption has been to fight corruption has been to implement an incentive pay structure implement an incentive pay structure for public officials.for public officials. Reduces incentive to be corrupt. Reduces incentive to be corrupt.

Bonuses lead to more income with Bonuses lead to more income with honesty.honesty.

CritiquesCritiques

Paper is analytical and speculative. Paper is analytical and speculative. No empirical dataNo empirical data Bardhan acknowledges that good Bardhan acknowledges that good

empirical data on corruption is difficult empirical data on corruption is difficult to collect and often nonexistentto collect and often nonexistent

Corruption is not publicizedCorruption is not publicized

Critiques cont.Critiques cont.

Assumptions are made that may not Assumptions are made that may not necessarily be plausiblenecessarily be plausible Bardhan assumes in many cases that the Bardhan assumes in many cases that the

client knows whether or not the agent is client knows whether or not the agent is corrupt. This is not always the case.corrupt. This is not always the case.

There are cases that refute Bardhan’s There are cases that refute Bardhan’s argument.argument. Post-communist Russia and China had Post-communist Russia and China had

more corruption with less regulation.more corruption with less regulation.

Bardhan acknowledges the problem Bardhan acknowledges the problem of corruption, but never offers any of corruption, but never offers any one particular solution to reduce the one particular solution to reduce the amount of corruption. amount of corruption.

No models or equations are shown to No models or equations are shown to support the claims by Bardhan. He support the claims by Bardhan. He only uses models created by other only uses models created by other authors on the subject.authors on the subject.