Recent advances in economic analysis have helped to clarify why corruption
is so detrimental to economic development and to the efficient functioning of
mature economies. More significantly, this research has produced some
general guidelines for how to combat corruption. Writing in the November
2003 issue of the Economic Journal, Dr Toke Aidt of the University of
Cambridge emphasises the importance of getting incentive structures right
and avoiding inefficient policy measures.
Corruption – understood as an act in which the power of public office is used
for personal gain in a manner that contravenes the rules – is a persistent
feature of societies around the world and throughout history. The sale of
parliamentary seats in ‘rotten boroughs’ in England before the Reform Act of
1832 is just one historical example. Contemporary examples also abound –
and not just in developing countries like Nigeria, India and the Philippines and
transition economies like Russia.
While sociologists and anthropologists often focus on culture as a key
determinant of corruption, economists emphasis incentives and view
corruption as the outcome of a rational calculation. Corruption, then, arises if
a combination of circumstances is present:
· First, the relevant public official (a bureaucrat, politician or judge) must
possess the authority to design regulations or to administer them in a
discretionary manner.
· Second, the discretionary power must allow extraction of ‘rents’ or
creations of rents that can be extracted.
· Third, the incentive system embodied in political, administrative and
legal procedures and institutions must be such that officials are left with
an incentive to exploit their discretionary power to extract or create
rents.
Thus, incentives are crucial both for understanding why corruption arises in
the first place and for what can be done to reduce it. Proper incentives can be
created by effective monitoring, by rewarding public officials with salaries
above market alternatives and by penalising corruption when it is discovered.
Importantly, however, all these measures are costly to introduce: there is no
free lunch. As a consequence, it can be optimal to allow corruption up to a
point.
This does not, however, imply that corruption levels as observed in, for
example, Russia or India are anywhere near to being optimal: there is no
presumption that incentive structures have been adjusted appropriately. In an
environment with ill-designed incentives, corruption carries large social costs.
This is because corruption and inefficient policy measures are two sides of the
same coin.
Take the example of industrial licenses, a policy measure used in many
countries to regulate entry into certain economic activities. To allow public
officials to collect bribes, license holders must earn a ‘super-normal’ profit.
Such scarcity rents, in turn, require that the number of licenses issued is
inefficiently low.
In short, corruption feeds on super-normal profits that are created by the
introduction of inefficient policy measures. It is the latter – the inefficient policy
– that is the real cost of corruption and which is so detrimental to economic
development.
This line of reasoning also demonstrates why the proposition that corruption
can enhance efficiency by ‘greasing the wheels’ and allowing firms to
circumvent cumbersome rules and regulations is misguided if not outright
wrong. It simply overlooks the reason why these cumbersome rules exist in
the first place.
Once it takes root, corruption can be very persistent. This is because
incentives to accept bribes are very different in societies with high and low
levels of corruption. One reason is that reporting of corruption is less likely to
happen in an environment in which almost all individuals take bribes and so, it
pays for each individual to accept bribes because the risk is smaller.
This makes it extremely difficult to combat corruption in societies with high
levels of corruption, and sustained, large-scale reforms of the incentive
structures are the only way to move a society away from a high corruption
‘equilibrium’ to one with low corruption. The example of the Hong Kong police
force, however, demonstrates that it can be done.
ENDS
Notes for Editors: ‘Economic Analysis of Corruption: A Survey’ by Toke Aidt
is published in the November 2003 issue of the Economic Journal.
Dr Aidt is in the Faculty of Economics and Politics and Jesus College,
University of Cambridge.
For Further Information: contact Toke Aidt on 01223-335231 or 01223-
766471 (email:
tsa23@econ.cam.ac.uk); or RES Media Consultant Romesh Vaitilingam on
0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).