Corruption is commonly defined as the abuse of public office for private gain. It involves bribe taking and deviation from public duties by officials in various governmental spheres such as the grant of licenses and permits, implementation of public programs, and enforcement of government policies. This view of corruption is meant to be a working definition only and it does not capture the contextspecific andmultidimensional nature of corrupt acts.
The difficulties in arriving at a commonly accepted definition are many. Corruption has moral, legal, and sociological dimensions. It need not be confined to the public sector. Corruption need not involve bribes or monetary payments. Moreover, in certain societies the culture of gifts, networking, and reciprocal favors is quite common, and these acts are socially acceptable.
Corruption, inone form or other, ispresent inmost countries in varying degrees. Many poor and developing economies, however, are perceived to be highly corrupt, and the recent attention in academic as well as policy circles tends to focus on the type of corruption prevalent in these countries. Many development economists view corruption as amajor problem.
Corruption is a fairly new field of inquiry in economics, although the earlier literature on rentseeking activities is related and has influenced research in corruption. The phenomenon of corruption, however, is certainly very old. There are several accounts of governmental corruption in England, Italy, and China in the 18th and 19th centuries. References to bribery and the punishments for bribery can be found in many ancient sources, such as Babylon’s Code of Hammurabi (22nd century B.C.), Egypt’s Edict of Harmhab (14th century B.C.), and Kautilya’s Arthasastra (14th century B.C.).
Types of Corruption
Many scholars make a distinction between two types of corruption: grand corruption and petty corruption (e.g., Rose-Ackerman 1999).The latter category refers to bureaucratic corruption in which officials take bribes to grant favors in violation of their formal duties. Grand corruption refers to corruption by politicians and highlevel decision-makers who accept payments from clients to influence policies or laws. This can be viewed as a form of state capture.
It is also useful to make a distinction between collusive and extortive corruption. Suppose an official is in charge of screening projects by granting approval only to socially desirable projects.Collusion occurs when the owner of an unqualified project manages to get approval by bribing the official. Extortion occurs when the official demands a bribe to approve qualified projects. The granting of permits and licenses by bureaucrats with near monopoly power resembles this type of corruption. Corruption can also take the form of embezzlement and appropriation of public funds. This is the more dominant formof corruption inmany public education, health, and antipoverty programs.
Irrespective of their legal status, corrupt acts are always held in secrecy, and it is difficult to unearth systematic information on corruption. To a large degree research on corruption has suffered on this account. Early discussions of corruption tended to rely on journalistic accounts in newspapers and reports, on anecdotal evidence, or in a fewcases,on prosecutorial evidence.Recently, there have been several attempts to construct more systematic measures of corruption.
Many authors have used perception measures of corruption.Thesemeasures are based on perceptions by various types of respondents such as local and multinational businessmen, country experts, and citizens. Two common measures are the corruption perception index (CPI) of Transparency International and the corruption control index (CCI) of the World Bank Institute. Transparency International has been publishing these indexes on an annual basis, and they now cover more than one hundred countries (Transparency International 2006). The CCI is more recent and it is available for selected years (Kaufmann et al. 2004). These indexes are based on many different polls conducted by several independent organizations. These polls use different methods and different sets of questionnaires about the business environment and corruption.
More recently, there have been attempts to use experience-basedmeasures of corruption.TheWorld Bank conducted a Business Environment and Enterprise Performance Survey (BEEPS) in 1999, in which selected firms in 26 East European and central Asian countries were asked various questions about the extent of bribe payments and the reasons for making such payments. In general, these surveys take care toelicitbribe-relatedinformationfromthefirms. Firms are seldom asked about their own payments; rather they are encouraged to talk about the average payment made by a similar firm in the industry.
Similar surveys have been conducted in some other countries to elicit information about corruption-related experiences ofthegeneralpublic.Despite their imprecise nature, these surveys convey useful information about corruption in different branches (police, judiciary, public services) of the government. There have been recent attempts to collect such information through field experiments.
In addition to the perception-based and experience-based measures, economists have also looked at several indirect measures. For example, by tracking government expenditure from its origin to the destination, one can get an estimate of the extent of leakage of public funds. This leakage may be viewed as a measure of corruption.
Recent research into the causes of corruption focuses on the role of factors such as an oversized public sector, poor quality of regulatory institutions, the lack of democratic governance, low wages of public officials, and lack of economic competition. Researchers have used country-level perception measures to explore these causal links. Although there is disagreement about the nature and strength of these links, one can identify certain common features of the countries perceived to be highly corrupt.
In general, low levels of development (measured in terms of per capita income) and lowhuman capital (measured in terms of years of schooling) are associatedwith high levels of perceived corruption. These two can be viewed as structural features, which could change only in the long run. But there are several other features that reflect the policy choices made by these countries.
For example, most of these countries also have a highly regulated business environment with a plethora of rules and bureaucratic procedures. A study by Djankov et al. (2002) shows that in a cross section of countries the minimum official time required for a business startup varies from 2 business days in Canada and Australia to a high of 152 days in Madagascar. The association between the number of days required to start a legal business and the extent of perceivedcorruptionispositive androbust.Thepresence of the rules allows bureaucrats to exercise monopoly power and extract bribes from private business.
A related feature is the absence of economic competition. The regulatory environment tends to discourage entry of new firms and helps tomaintain the profitability of the few existing firms. These existing firms, in turn, transfer part of their profits as bribes to the politicians and bureaucrats.The concentration of economic power and wealth is more pronounced in smaller economies where economic activities rely on abundant natural resources or primary exports. The initially unequal distribution of assets (land, natural resources) leads to concentration of wealth in the hands of a fewwho use the corrupt systemto increase their own wealth at the cost of others.
In many of these countries salaries of public officials are substantially lower than salaries in the private sector. This creates an inducement for the officials to seek illegal bribe income. Since in most cases the punishment for bribery involves loss of job and future income, low salaries also reduce the cost of engaging in corruption.
Other features such as lack of strong democratic traditions and lower level of press freedom are associated with higher levels of corruption. Among the democratic countries the forms of the government and the nature of electoral competition also seem to be associated with different levels of corruption. A presidential form of government is likely to be less corrupt than a prime ministerial form because of greater accountability, but this result crucially depends on the nature of checks and balances in place. Similarly, among electoral rules, a proportional representation systemof voting tends to be associated with higher corruption. In a proportional representation system voters do not directly elect any particular political candidate, reducing the ability for voters to punish corrupt officials.
It is possible that noneconomic variables such as culture, values, religion, and geography also play roles in contributing to the levels of corruption. In a widely cited paper, Triesman (2000) finds support for the view that countries with histories of British rule and Protestant traditions tend to be less corrupt. Though such a result is by no means robust, it is a reminder that cultural determinants of corruption cannot be ignored altogether.
Some scholars argue that corruption can enhance efficiency. In the presence of a rigid bureaucracy and ill-planned regulations, corruption can facilitate speedy implementation of productive investment proposals. According to this view, corruption could grease the wheels of commerce and promote growth. There is very little support for this view in contemporary theoretical or empirical research, however. At best, corruption could result in a partial and temporary efficiency gain. Officials who benefit from such grease money would always have a tendency to increase red tape for their own benefit. Recent research has shown that corruption leads to inefficient allocation of resources with adverse effects on growth, investment, and foreign direct investment.
Mauro (1995) initiated one popular strand of empirical research on corruption by examining the link between corruptionand growthin a cross section of countries. Using the CPI as an explanatory variable, he observed that growth and investment rates are adversely affected by corruption levels. Later studies tend to confirm this broad relationship, though the exact nature depends on several regionspecific variables. One possible exception to this relationship is the experience of many high-growth Asian countries that are perceived to be highly corrupt. Though there is not enough evidence to suggest that corruption has promoted growth in these countries, it suggests that the corruption-growth link is quite complex.
Various studies have claimed that corrupt countries tend to have high inflation rates, greatermilitary expenditures, and less public investment in education and health. The direction of causation is far from established, but the possibility that corruption distorts governmental spending programs cannot be ignored.
Corruption adversely affects inequality and poverty also. Poverty is affected because corruption tends to lower growth, affects the (pro-poor or otherwise) orientation of public spending, and undermines the implementation of many of the antipoverty programs. This issue has generated concerns among national governments, nongovernmental organizations, and international organizations such as the UnitedNations, the World Bank, and the European Union. Empirical research in this area is somewhat limited, however.
At a more micro level, corruption undermines enforcement policies in a variety of fields such as tax collection, environmental regulation, and policing. Hence a higher level of corruption would lead to lower tax revenues, poor environmental standards, and a deteriorating law and order situation.
Views on anticorruption strategies differ considerably, ranging from mild tolerance to advocacy of draconian measures. Even though corruption is perceived to be a problem associated with low levels of development, it is unlikely that corruption will fade out on its own with rising income levels in these countries. First, corruption might constrain the growth process itself. Second, corruption has a tendency to spread and persist across time. Third, apart from generating various economic inefficiencies mentioned earlier, corruption undermines people’s faith in democracy and other human development objectives. Hence curbing corruption is both a goal in itself and an instrument for achieving other goals.
Anticorruption strategies involve design of suitable incentives and organizational structures and, at a more general level, improvements in institutional quality. To a large extent, a person’s decision to be corrupt is based on calculations of associated costs and benefits. Hence many have proposed incentives measures that seek to reward honest behavior and punish the corrupt. This, of course, requires better monitoring and information gathering and a quick and fair judicial process. Such measures have proved to be successful in some of the recent tax enforcement reforms exercises, such as those carried out by the Philippines, Singapore, and Brazil. Studies based on field experiments also support the view that better monitoring is effective.
Additionally, one can reduce the scope of corruption by increasing transparency, reducing discretion, and encouraging competition where appropriate. This involves measures such as simplification of laws and easier access to information by the public. There must also be ways to generate and transmit credible and hard information about governmental decisions where there is potential for corruption. A recent study shows how a newspaper campaign about the amount of funds allocated to schools in certain areas helped stakeholders (parents) to hold the disbursement officials accountable and reduce the leakage of funds. The role of local bodies, activists, and an independent press is quite vital in this respect. Last, bureaucratic and other forms of corruption are unlikely to thrive without corrupt politicians. As pointed out earlier, electoral competition and forms of democratic governance influence the scope and extent of corruption by political representatives. Hence a successful anticorruption strategy may require reforms in the political and electoral process as well. See also aid, international; political economy of trade policy; smuggling