Does corruption hinder development?
Sam Choon Yin (09/2004)
Prior to the Asian crisis,
corruption and a lack of an effective legal framework did not seem to have halted inflows of foreign direct investments (FDIs)
to the affected countries. This also appears to be the case, as at today, in China.
Andrew MacIntyre offers an explanation. Based
on his study on Indonesia, he argued that strong expected rates of return on investment had minimised cost associated with
corruption. This may seem puzzling since FDIs are often injected for long-term purpose because of the heavy initial capital
outlays. Why would the firms be willing to invest in Indonesia despite her seemingly corrupt environment? Wouldn’t that
hinders the growth potential of their investment plans in the medium to long term?
this puzzle, MacIntyre provided two explanations. First, Indonesia’s former President Suharto was able to make sure
that the cost of corruption on investors did not get too substantial and drive investments away. He had the ability to ‘monitor
the behaviour of his core preferences, thereby minimising agency loss’ (MacIntyre, 2001, p. 26). Second, the political
leaders provided a credible commitment about the future political environment to the investment community. The key being the
decision to open-up the country’s capital account, and allow full convertibility of rupiah in 1970. This essentially
allowed the investors to (1) take their money out of the country if things went wrong, and (2) help discipline the government
to act properly. As MacIntyre explained, ‘By allowing capital to move freely, the government was in effect, enabling
investors to punish it if the business environment deteriorated. Unlike other aspects of its policy behaviour, this commitment
to guarantee an acceptable business environment had strong credibility’ (ibid, p. 39).
With the benefit of hindsight, a corrupt political
regime like the one in Indonesia could not last forever. The Asian crisis revealed flaws in the Indonesian system with the
majority subsequently demanding political changes. Poor governance might not be a matter of concern to the majority when the
country grew and jobs were plentiful. But it would be difficult to tolerate poor governance any further when crisis hit and
people’s lifestyle and economic well being were affected.
Corruption has been ‘credited’ for
promoting entrepreneurship. The reason being that excessive regulations tend to hinder entrepreneurs from emerging and expanding.
Corruption offers a solution. By bribing the public officers, one could avoid going through the official procedures and excessive
paper work. It is generally true that excessive regulations breed uncertainty. It would be more costly, time consuming and
troublesome in this case to get things done in the official way. Mohammad Yunus, founder of the Grameen Bank and the concept
on microcredit, understood this (see Yunus, 1999 and http://www.grameen.com). He believes that government and foreign aids are generally not helpful in eliminating poverty because they tend to get
‘swollen up’ by public officers along the way. Instead, he believes in providing credit to the poor directly for
everyone is a potential entrepreneur, but a lack of capital has prevented the person from taking off.
It has been argued that with corruption,
resources could be diverted to relatively more productive sectors. Wong (1997) for example noted that corruption had improved
the overall allocation of resources in China. Resources were directed from the low yield state sector to high yielding non-state
sector leading to faster economic growth and improved general well being of the Chinese. In this respect, corruption may be
deemed desirable as it lowers the transaction cost and frees up resources.
In an interesting study, Pranad Bardhan argues
that corruption could improve efficiency and fosters economic development. Citing the Coasean bargaining process, Bardhan
‘Even without pre-existing distortions, one may look
upon corruption as part of a Coasean bargaining process in which the bureaucrat and the private agent may negotiate their
way to an efficient outcome. If in a bribery game there is competitive bidding by private firms for a government procurement
contract, and the corrupt official awards the contract to the highest bidder in bribes, then allocation efficiency is maintained,
as only the lowest-cost firm can afford the largest bribe’ (Bardhan, 1997, p. 1322).
also claims that corruption could enhance administrative efficiency in the public sector for it reduces ‘delays in moving
files in administrative officers and in getting ahead in slow-moving queues for public services’ (Bardhan, 1997, p.
cases highlight the fact that quality of governance matters. The issues emerged essentially because public officers have the
opportunity and incentive to receive bribes and extort payments from others. What the country needs is a political system
that allows for reforms, which should be administered in a systematic and democratic manner. A good political leader must
exist to remove those who are corrupted regardless of their political status and influential power. To do this, the legal
framework must provide him/her with the necessary power. More importantly perhaps is for him/her to have the support from
the society to carry out the tasks. Absence from any of these supports will adversely affect the probability of success in
raising the standards of public governance.
in the public sector are actually quite similar to those faced by private corporations. The agency problem for one is applicable
in the public sector even though it is often discussed in the context of corporate governance in the private sector. In the
public sector, the citizens represent the principals while the elected political leaders represent the agents (as opposed
to the shareholders being the principals and company directors as agents in private corporations). It is the latter’s
duty to maximise the interest of the principals (maximising the welfare of the society). In reality however, it is difficult
to ascertain what constitutes as the society’s interest because the society comprises many individuals who have interests
that could be conflicting with one another. In a democratic society, the political leaders are given the power and responsibility
to represent the society. Their decisions therefore are representative of the society. The problem arises when the agents
do not act to maximise the principals’ interest. Rather, they may use whatever means they can to cheat the principals
and expropriate public funds.
or public officers do have contractual agreements with the principals to see that the former carries out their duties ethically
and with the interest of the society in mind. But the contracts are often incomplete. For instance, it is technically not
feasible for the principals to monitor the actions of the agents at all times. Curbing corruption in this context is almost
similar to efforts aimed toward solving the principal-agent problem in the private sector.
we want to argue in this essay is that corruption mitigates social and economic development. That is, corruption brings forth
more harm than benefit to the society (so my answer to the question posed in the title of this essay is ‘yes’).
International institutions like the World Bank and International Monetary Funds seem to support this claim in view of their
continuous efforts to combat corruption. Corruption is essentially viewed as a form of theft of state assets where public
officers misuse their power to expropriate public funds and disrespect state law and control. Corruption has resulted in more
serious income inequality and poverty problems. The benefits from corruption are generally accrued to influential politicians,
law enforcement officers and well off private individuals at the expense of the masses.
have showed that in recent years the society has become more disapproved of corruption. For instance, former politicians like
Abdurrahman Wahid and Suharto in Indonesia and Joseph Estrade in the Philippines were removed from their post because of corruption
allegations. Thailand’s Thaksin Shinawatra was indicated by the National Counter-Corruption Commission but was eventually
acquitted in a controversial decision by the Constitutional Court. In 2002, the reputation of Korea’s Present Kim Dae-Jung
was tarnished when his two sons were convicted of corruption charges.
we offer three reasons why it is useful to curb corruption.
in the aftermath of the Asian economic crisis, good governance has been considered as an important criterion for investors
to decide where to invest. Financial institutions and other borrowers also look at the country's level of corruption to assess
the risk of lending to the country. The country’s economic capability and
reputation is judged very much by the county’s level of corruption. As such, international ranking on corruption provided
by the Transparency International (TI) and the Political and Economic Risk Consultancy Limited (PERC) have been
extensively used by the academics, investors and governments around the world. Table 1 provides the recent ranking on corruption
tabulated by the TI.
could intensify activities in the underground sector. Public officers for example may deliberately assist businesses or individuals
to smuggle goods and human beings into the country. The politicians did this in exchange for votes during election and to
earn commissions to supplement their income. As Phongpaichit, Piriyarangsan and Teerat (1998) has illuminated, it is common in
Thailand for influential politicians and low ranking police law enforcement officers to be involved in illegal activities
like gambling and prostitution.
The illegal income must be laundered somewhere.
In a recent study, Schneider (2002) estimated that at least 50% of the funds flowed to the Al Qaeda group was obtained from
illegal and underground activities. It is imperative therefore to curb corruption and subsequently the growth of the underground
economy so as to minimize flows of funds to the terrorist groups and lessen future attacks. Indeed, corruption has been accused
of hampering efforts put in to fight against terrorism. Corrupt law enforcement officers for instance could have allowed weapons
and terrorists to enter checkpoints. In Russia, it was believed that soldiers were bribed to supply arms and weapons to Chechnya
fighters. Also, it was pointed out that two of the attackers in the recent hijacking incident at Beslan School (on 3 September
2004) were allowed to go free from police custody in Chechnya (prior to the incident) after offering bribes to the police.
Third, corrupt public officers may deliberately
cause delays in transactions to extort payments. Corrupt public officers may attempt to entice company agents to work with
them. The latter may choose to go ahead with the plan, first, to seek additional income and second, to ‘enhance’
the performance of the company and consequently reward themselves through stock options plan and other performance based remuneration
schemes. Without reasonable standards of corporate governance, company agents may be tempted to act improperly. Thus, the
problems on corruption could be derived from the demand side (extortions by public officers) as much as the supply side (company
agents paying bribes to public officers to get things done). Together, they could impose very high external cost on the society
(because of their powerful status in the society) if proper checks to contain the problem are lacking.
A recent document published by the World
Bank has carefully assessed how the private sector could assist in curbing corruption. The document calls for efforts to raise
the standards of corporate governance. There should also be a conscious effort to introduce ethics compliance program. The
program should consist of three important components; (1) a clear statement of values strongly supported by top management,
(2) training and dissemination grounded in the experience of company staff and (3) effective information and support systems
(Arvis and Berenbeim, 2003, p. xx). It is generally believed that incentive measures are more cost effective than sanctions-based
public enforcement measures. This is an important point. Organizations (and countries) with limited resources of law enforcement
should focus their attention on improving their internal standards and monitoring mechanisms and getting good people to lead
to organizations (countries), rather than relying more exclusively on sanctions-based measures like the use of threats and
So far, this paper has argued that curbing
corruption is a right step to take to make this world a better place to live in. Corruption mitigates economic development
and degrades the standards of the poor. Many governments and international institutions have spent so much resource and carry
out so many studies to resolve this problem. Were there any significant improvements? Apparently not if one is to agree with
Vinay Bhargava and Emil Bolongaita. The authors have argued in their recent book:
‘….many governments have been prodded if not pressured
to launch or reinvigorate anticorruption policies and programs. In this regard, the number of proposals or ideas on ways and
means to combat corruption has grown… There is hardly any country in which no anticorruption agency exists and few anticorruption
instruments are in place. However, the evidence from manifold sources more than suggests that these institutions and instruments
are not getting the job done for most countries. In fact, either the counter-corruption policies are not working or the anticorruption
institutions themselves are among the most corrupt’ (Bhargava and Bolongaita, 2004, p. 10).
It is not easy to get lower ranking public
enforcement officers to act incorruptly if their superiors are themselves engaged in acts of corruption. Thus, any approach
to eradicate corruption must start from the top, and trickle down to the middle ranking managers and low ranking officials.
Only then would there be some chances of success in curbing corruption.
The political leaders (those in the top and
middle positions) must initiate the changes and be willing to act incorruptly. However, experience has shown that unless some
severe shocks are felt, the powerful can remain powerful for very long. External pressures imposed on the countries may be
accused of meddling with the internal affairs thus rendering them less effective. It is also difficult to educate and reach
out to the masses and those adversely affected by corruption (so that they will become more aware of the problem and vote
out the corrupt incumbents). The powerful incumbents usually have strong control over the mass media thus reducing the amount
of and level of truthfulness in the kind of news conveyed to the public. Moreover, members of the public may not wish to see
changes in the status quo, unless they are personally affected by the shocks (as in the Asian crisis). If the powerful individuals
were not pressured to change (either from the inside or outside), why would they want to turn over a new leaf and act incorruptly?
However, this does not imply that no pressures
should be exerted on corrupt politicians. What I want to point out is that there must be a strong political will among the
political leaders to inculcate a non-corrupt culture in their country. Its probability of success in fighting corruption ought
to be higher than any other measures. The country needs good men to lead, men who are genuinely interested in maximizing the
interest of the society.
Arvis, Jean-Francois and Ronald E. Berenbeim,
2003, Fighting Corruption in East Asia: Solutions from the Private Sector, The World Bank, Washington D.C..
Bardhan, Pranad, 1997, ‘Corruption
and Development: A Review of Issues’, Journal of Economic Literature, Vol. XXXV (September 1997) pp. 1320-1346.
Bhargava, Vinay and Emil Bolongaita, 2004,
Challenging Corruption in Asia: Case Studies and A Framework for Action, The World Bank, Washington D.C..
MacIntyre, Andrew, 2001, Investment, Property
Rights, and Corruption in Indonesia, in Corruption: The Boom and Bust in East Asia, edited by J. Edgardo Campos. (Manila:
Ateneo de Manila University).
Phongpaichit, Pasuk; Sungsidh Piriyarangsan
and Nualnoi Teerat, 1998, Guns, Girls, Gambling, Ganja: Thailand’s Illegal Economy and Public Policy, Silkworm Books,
Wong, Yue Chim Richard, 1997, Reform and
China’s Underground Economy, in The Underground Economy: Global Evidence of its Size and Impact, edited by Lippert,
Owen and Michael Walker (Canada: The Fraser Institute).
Yunus, Mohammad, 1999, Banker to the Poor,
Aurum Press, Great Britain.