Government Corruption

Over the last few years, the issue of corruption--the abuse of public office for private gain--has attracted renewed interest, both among academics and policymakers. There are a number of reasons why this topic has come under recent inspection. Corruption scandals have toppled governments in both major industrial countries and developing countries. In the transition countries, the shift from command economies to free market economies has created massive opportunities for the appropriation of rents, excessive profits, and has often been accompanied by a change from a well-organized system of corruption to a more chaotic and deleterious one. With the end of the cold war, donor countries have placed less emphasis on political considerations in allocating foreign aid among developing countries and have paid more attention to cases in which aid funds have been misused and have not reached the poor. And slow economic growth has persisted in many countries with malfunctioning institutions. This renewed interest has led to a new flurry of empirical research on the causes and consequences of corruption.

Economists know quite a bit about the causes and consequences of corruption. An important body of knowledge was acquired through theoretical research done in the 1970s by Jagdish Bhagwati, Anne Krueger, and Susan Rose-Ackerman, among others. A key principle is that corruption can occur where rents exist--typically, as a result of government regulation--and public officials have discretion in allocating them. The classic example of a government restriction resulting in rents and rent-seeking behavior is that of an import quota and the associated licenses that civil servants give to those entrepreneurs willing to pay bribes.

More recently, researchers have begun to test some of these long-established theoretical hypotheses using new cross-country data. Indices produced by private rating agencies grade countries on their levels of corruption, typically using the replies to standardized questionnaires by consultants living in those countries. The replies are subjective, but the correlation between indices produced by different rating agencies is very high, suggesting that most observers more or less agree on how corrupt countries seem to be. The high prices paid to the rating agencies by their customers (usually multinational companies a...

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...e role of other forms of institutional inefficiency.

Corruption is most prevalent where there are other forms of institutional inefficiency, such as political instability, bureaucratic red tape, and weak legislative and judicial systems. This raises the question of whether it can be established that corruption, rather than other factors correlated with it, is the cause of low economic growth. Regression analysis provides some evidence that if one controls for other forms of institutional inefficiency, such as political instability, corruption can still be shown to reduce growth. Nevertheless, it is hard to show conclusively that the cause of the problem is corruption alone, rather than the institutional weaknesses that are closely associated with it. The truth is that probably all of these weaknesses are intrinsically linked, in the sense that they feed upon each other (for example, red tape makes corruption possible, and corrupt bureaucrats may increase the extent of red tape so they can extract additional bribes) and that getting rid of corruption helps a country overcome other institutional weaknesses, just as reducing other institutional weaknesses helps it curb corruption.