Is Corruption an Obstacle to Development?

CPI2016_Map_web
Corruption Perceptions Index 2016

Corruption can be defined as abuse of administrative authority or entrusted power to achieve personal benefits. Often, regulations and administration should be circumvented by corruption. Corruption is a topic in every country, even in the most developed ones. (Transparency International 2016, 1) The abuse of administrative power is often barely noticeable for outsiders. (Bardhan 1997, 1320f) Because of the omnipresence of corruption, it is important to have a look at the effects. Especially in developing countries, corruption is a serious problem (Transparency International 2017, 1). Therefore, the posed question is, if corruption is an obstacle to development. The first thought of many people will be: of course. Corruption is associated with negative views in many countries. For other cultures corruption is part of the daily routines. Both, negative and positive effects of the circumvention of regulations are conceivable and opinions differ on the question which effect is really relevant. One group understands corruption as “greasing the wheel” as it makes decisions possible or faster. The opposite side interprets corruption as “sanding the wheel” because of the counter productive effects on development. (Aidt 2009, 1)
Frequently, regulations in developing countries work inefficiently and therefore corruption may theoretically improve efficiency as it enables trade (Leff 1964, 8f). Evidence for such positive effects of corruption in developing countries was found by Egger and Winner (2005) in form of advancing effects of corruption on foreign direct investments in states with restrictive policy. Yet, trying to solve the problems rather than circumvent them might increase efficiency more. When there is a limited amount of licenses provided in a country, corruption might lead to efficiency, if only efficient individuals are able to pay the bribes. This could be the case because they have higher win-cost-ratios than less efficient individuals. (Aidt 2009, 4f) Nevertheless, it would be the second-best solution as a removal of the regulation would increase efficiency even more due to more competition and the missing rent-seeking problem.
Often, regulatory problems are accepted or promoted by decision makers because they take the resulting personal benefits into account. Corruption seems to be the reason for and not solution of inefficiency. (Rose-Ackerman 1999, 14ff) But there are other positive effects of corruption considered in the theory. Efficiency should be increased by “speed-money” as it leads to faster working bureaucracy. Thereby, waiting costs are decreased and if the benefit exceeds the costs of corruption this might lead to increasing welfare. (Bardhan 1997, 1322f) Although there are arguments for increasing efficiency in an economic sense, it might incentivize the decision makers to slow down the administration even more to increase their personal profits which is clearly not efficient.
To understand why corruption exists in general the institutional circumstances have to be considered. In developing countries, regulations are often characterized by long proceedings to get permissions for starting a business which costs a lot of money and time. (Djankov et al. 2002, 4,ff) This is obviously a motivation to engage in shady business or at least to try to accelerate the permission process by corruption. It is imaginable that individuals might profit of engaging in corruption or circumventing the regulations. Djankov also detected a strong correlation between the obstacles of becoming a legal firm and the amount of bribery. But what is beneficial for individuals might not be necessarily beneficial for the whole economy as corruption is supposed to come always with social costs (Bertrand et al. 2006, 1642ff). Clear evidence for injurious effects of corruption on development was found by Reinikka and Svensson who did research about the education system in Uganda in the 1990s where almost one fifth of all public expenditures were spent on education. Primary schools in Uganda got fixed payment per child from public funds. They found out that on average only thirteen percent of the actual aids reached the schools. In fact, many schools received nothing. The results show that schools in poor communities received less than the ones in better situated regions. The discrimination of the poorest should be a clear obstacle to development. Furthermore, the local decision makers used this opportunity to benefit from abusing their distributing authority. A part of the missing money is supposed to be unjustifiably retained by corrupt politicians and distributors. (Reinikka and Svensson 2004, 8) Decreasing the aids and thereby lower resources for education should also lower the possibilities of progress. This seems to be no moral problem for the abusing parties as there is a lot of evidence of similar behavior in other developing countries. One may argue that poverty forced those people to abuse their positions. On the other hand, it could be assumed that people in such positions are relatively well situated in their countries. It could also be asked if they simply do not care about or ignore the long-term effects of their actions for their countries and children or if they are not able to anticipate the effects. The latter should be not the case as it is quite intuitive to understand the effects from deteriorating the pupils education which will be for certain the effect of lowering the financial scope of schools.
So it can be concluded that there might be theoretical benefits from corruption but often times the corruption is not only the solution but also the reason why such regulatory problems exist. The empirical evidence show the regulatory and administrative problems which are the reasons why many people engage in corruption. But it also shows the discrimination of the poorest and the social costs. Therefore, corruption can be considered as an actual obstacle to development.

References

Aidt, T. (2009): “Corruption, Institutions and Economic Development”, Oxford Review of Economic Policy, Vol. 25 (2), Summer 2009, 271-291.
Bardhan, P. (1997): “Corruption and Development: A Review of Issues”, Journal of Economic Literature, Vol. XXXV, September 1997, 1320-1346.
Djankov, S., La Porta, R., Lopez-De-Silanes, F. and Shleifer, A., (2002): “The regulation of entry.”, The Quarterly Journal of Economics, Vol. 117(1), 1-37.
Egger, P., Winner, H. (2005): “Evidence on corruption as an incentive for foreign direct investment.”, European Journal of Political Economy, Vol. 21, 932-52.
Leff, N. (1964), “Economic development through bureaucratic corruption”, American Behavioral Scientist, Vol. 8 (3), 8-14.
Reinikka, R. and Svensson, J. (2004): “Local capture: evidence from a central government transfer program in Uganda.”, Quarterly Journal of Economics, Vol. 119(2), 679-706.
Rose-Ackerman, S. (1999): “Corruption and Government, Causes, Consequences and Reform”, Cambridge, U.K.: Cambridge University Press.
Shleifer, A., Vishny, R. (1993): “Corruption” Quarterly Journal of Economics, Vol. 108, No. 3, August 1993, 599–617.
Transparency International (2017): “CORRUPTION PERCEPTIONS INDEX 2016”, https:// http://www.transparency.org/news/feature/corruption_perceptions_index_2016, access: 3.7.2017.
Transparency International (2016): “What is Corruption?”, https://www.transparency.org/what-is-corruption#define, access: 3.7.2017.

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