Mysteries of Corruption

the source: “Eight Questions About Corruption” by Jakob Svensson, in Journal of Economic Perspectives, Summer 2005.

Corruption is the new bête noire of the globalized world, yet there’s a surprising degree of uncertainty among specialists about its costs and cures.

There’s even some doubt that corruption causes great harm to national economies, reports Jakob Svensson, an economist at the World Bank and Stockholm University. Scholars have yet to turn up much systematic evidence of the harm, and some, notably Harvard University’s Samuel Huntington, argue that bribery and other shady practices have a bright side, helping firms operate efficiently in countries hampered by heavy-handed bureaucracies. “China has been able to grow fast while being ranked among the most corrupt countries,” Svensson notes.

Bribery, embezzlement, and other forms of corruption cost the world $1 trillion a year, by one estimate. (If ill-gotten gains are put back in circulation rather than stashed overseas, corruption’s economic damage may be blunted.) Grotesque examples of corruption are legion. In Angola, where most people live on less than $1 a day, nearly $1 billion in oil revenues vanished from state coffers in 2001—three times the amount of all the humanitarian aid the country received from abroad. Corruption also distorts economic incentives. Studies show, for example, that in sub-Saharan Africa peasant farmers avoid rapacious officials “by taking refuge in subsistence pro­duction,” thus sacrificing productivity and living standards. Some firms inevitably specialize in gaining competitive advantage through political connections—a further drag on economic efficiency.

Research generally confirms the commonsense proposition that corruption is greatest in countries with low levels of income and education. But there’s still great variation. Argentina, Russia, and Venezuela all rank relatively high in income, education, and corruption. Svensson adds that researchers have not produced much systematic evi­dence for the notion that history, culture, and religion are very influential—that former French colonies in the developing world, for example, have more regulation and therefore more corruption.

What can be done? “Most anticorruption programs rely on legal and financial institutions—judiciary, police, and financial auditors—to enforce and strengthen accountability in the public sector,” notes Svensson. But in many poor countries, those very enforcement institutions “are weak and often corrupt themselves.” Pouring more money into them doesn’t seem to help. Another favorite prescription of aid donors and international organizations is to pay higher wages to civil servants. But that works only if enforcement institutions are strong.

Svensson’s own research suggests that the most corrupt countries are those that also most restrict economic activity and the news media. Selective deregulation of the economy, depriving bureaucrats and politicians of the leverage to extract payoffs, is one promising avenue of reform. Grass-roots monitoring is another. Between 1991 and 1995, local officials and politicians in Uganda siphoned off all but 13 percent of the grant money primary schools were supposed to receive from the central govern­ment. When Uganda’s government began publicizing the monthly transfer payments to the schools in newspapers, parents and school staff were able to act. In 2001, the schools got 80 percent of the money earmarked for them.