Corruption and Development: A Review of Issues

1. Corruption and Development:A Review of Issues Pranab Bardhan Vincent Lally

2. Corruption is an ancient problem • Kautiliya in Arthasastra • 4th Century B.C. • Why is corruption perceptibly so different in different societies? • What policy changes could be made?

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

4. Illegal transactions aren’t always corrupt transactions. • Distinction between immoral transactions and corrupt transactions. • Distinction between political and economic corruption.

5. Effects on Efficiency • Corruption may actually improve efficiency and help growth in some developing countries. • If Govt. has implemented incorrect policies, corruption may be better for welfare. • Black marketeering, smuggling, etc.

6. Efficiency cont. • Corruption as “speed money” • Reduces delay in moving files in administrative offices • Francis T. Lui- bribing strategies will form a Nash equilibrium that will minimize waiting costs, thereby reducing inefficiency in public administration.

7. Inefficiency • Arguments in favor of efficiency effects of corruption are fraught with general problems. • Distortions are not exogenous to the system and are instead often part of the built-in corrupt practices of a patron-client political system.

8. Officials may slow down rather than speed up when bribed. • Corruption leads to inefficiency more often than it leads to efficiency.

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

10. In general, centralized corruption has less adverse consequences for efficiency than decentralized bribe-taking. • A weak central government with its inability to stop the setting up of independent corruption rackets makes the problem of inefficiency particularly acute.

11. Efforts to avoid detection and punishment cause corruption to be more distortionary than taxation. • Secret payments tend to be spent abroad rather than inside the country.

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

13. The Growth Process • Corruption has its adverse effects not just on static efficiency but also on investment and growth • Having to pay a bribe for a license reduces incentive to invest • Smaller return on investment • Entry barriers may discourage the flow of new ideas and innovations.

14. In general, when there is slow growth the returns to entrepreneurship fall relative to those to rent-seeking, and the ensuing increase in the pace of rent-seeking activities further slows down growth. • Decreases innovation even further. • Have been cases where corruption in dispensing licenses or loans has led to the emergence of an entrepreneurial class. • New opportunity to make money

15. Circumstantial evidence suggests that corruption has generally declined with economic growth in most rich countries over the last 100 years. • As the economy expands and becomes more complex, public officials see more opportunities for making money from their decisions.

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

17. Why is the incidence of corruption so palpably different in different countries? • Why is corruption so persistent in some countries and not others?

18. Regulations • Liberal economists believe states with more regulations regarding permits leads to more corruption. • Post-communist China and Russia acted the opposite. • Social norms are different in different countries. • Corrupt activities in one place may be viewed as acceptable in another

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

20. If an economy starts with a high average level of corruption it will move toward the high-corruption stable equilibrium C • If avg. corruption is low, move toward equilibrium A • B, although an equilibrium is not obtainable because one would want to move either way and be better off.

21. Olivier Cadot (’87) models corruption as a gamble and finds that a higher time discount rate, a lower degree of risk-aversion, and a lower wage rate will induce one to be more corrupt, under certain conditions. • Expected punishment for corruption declines as more officials become corrupt. • More likelihood you are discovered by a corrupt official

22. Impact of the ‘Middle Man’ • Raaj Sah (’88) indicates that it is possible that there may be a discrepancy between beliefs about corruption and how often it actually occurs. • Oldenburg (’87)- looks at land consolidation program in Northern India. • Unhappy people sometimes assume corruption is occurring

23. Middlemen have incentive to spread information that corruption is prevalent and bribing must be done to obtain results. • Prisoner’s Dilemma • Move towards equilibrium where everyone is corrupt.

24. Never-ending Problem • Tirole (’96) finds that younger generations may inherit reputation of elders and may have no incentive then to be honest themselves. • A one-period reduction in corruption may not have any lasting impact • Very difficult to return to level of low corruption

25. Policy Issues • Regulations breed corruption, so if we eliminate regulations, things will be better • Things don’t get better. Just move from public monopoly to private monopoly. • No improvement in efficiency

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

27. Policy Recommendations • Eliminate Monopoly power • Competition, over time, tends to drive the prices to obtain a license down to its correct economic cost, and therefore drives the level of bribes to zero. • Democratize • Having more than one official working on each case makes it necessary to bribe every person involved with decision.

28. “Spring Cleaning”- must be credible and sustained to be effective • Could lead to more corruption if not seen as serious by society • Publicize honest transactions • Attempt to minimize/eliminate role of middlemen on increasing corruption

29. Incentive Payments for Civil Servants • One of the most effective ways to fight corruption has been to implement an incentive pay structure for public officials. • Reduces incentive to be corrupt. Bonuses lead to more income with honesty.

30. Critiques • Paper is analytical and speculative. No empirical data • Bardhan acknowledges that good empirical data on corruption is difficult to collect and often nonexistent • Corruption is not publicized

31. Critiques cont. • Assumptions are made that may not necessarily be plausible • Bardhan assumes in many cases that the client knows whether or not the agent is corrupt. This is not always the case. • There are cases that refute Bardhan’s argument. • Post-communist Russia and China had more corruption with less regulation.

32. Bardhan acknowledges the problem of corruption, but never offers any one particular solution to reduce the amount of corruption. • No models or equations are shown to support the claims by Bardhan. He only uses models created by other authors on the subject.