Third and last part of Raj Nallari's note on corruption.
Persistence of Corruption. Is corruption the norm in certain countries or is it an ‘abberation’ or deviation from the norm? The very definition of corruption as a misuse of public duties for private gain implies a deviation. It also raise the questions of ethics (morality), cultural values, and social behavior. Norms are persistent social traditions or behavior. Corruption persists because of imperfect information or underlying beliefs or the ease of collusion at all levels or is it because corruption is self replicating? Does the introduction of a few corrupt individuals into an other wise honest society lead to spreading of bad influence and pervasive corruption over time? Mishra 2003 suggests that self-replicating behaviour may be the problem as youth look at corrupt but successful people and want to follow in their footsteps.
Economists view this as a multiple equilibria problem – different societies at similar level of economic and political development (per capita incomes, political structures, judicial efficiency) may exhibit varying degrees of corruption, tax evasion and other non-compliant behavior. This multiplicity of equilibria may arise due to complementarities, but the key question is why do societies get trapped in such bad equilibrium? The answers are complex. If people in a country expect more people to be corruption then the expected cost of being corruption and caught would be less, which then leads to more people becoming corrupt. While incentives and rewards can get one out of a bad equilibrium and move from high to low corruption, these do not solve other problems, such as agency costs and costly information gathering, which also lead to multiple equilibria.
We may have high-corruption equilibria with fever firms choosing to pollute or if the inspector spending more time and effort to be informed about ‘when and how firms pollute or not pollute.’ On the other hand, we may have a low-corruption equilibrium where the inspector is uninformed about firms (and wants to be uninformed) and a greater proportion of firms take a chance and pollute.
Evolutionary social dynamics can also explain multiplicity of equilibria. One chooses to be corrupt because everyone else is corrupt in the country and this is accepted social norm. How does individual (say an honest leader) bring about new social norm of low-corruption?
Recantini et al (2005) find that both corruption and the design of the organization can be influenced by the individuals at the very top of the agency. This is suggested by the finding that the procedure for appointing the head of the agency is one of the major determinants of corruption, as well as of the design of its internal organization. Agencies whose head is popularly elected are systematically more corrupt and adopt worse internal organizations. Independent agencies whose head is appointed by a political body tended to adopt better organizational design. Finally, the data show that corruption is also influenced by demand-side factors, and not just by its internal organization. Agencies that provide services to firms (rather than households) are more prone to corruption; and corruption is more likely if the service provided by the agency has no easily available substitute in the market place or elsewhere.
Impact of corruption on economic performance. Widespread bribery is found in many countries with significant variation across and within countries. Bribery raises transactions costs and uncertainty in an economy, leads to inefficient economic outcomes, impedes long-term foreign and domestic investment, misallocates talent to rent-seeking activities, distorts sectoral priorities say from agriculture and rural development towards ‘roads to nowhere’ and large defense projects, pushes firms underground, lowers revenue collection, acts as a regressive tax against the smaller firms, and is the root cause of several other ills, all compounding to economy in a vicious spiral downward.
The World Economic Forum’s Global Competitiveness Survey for 1997 indicates that enterprises reporting a greater incidence of bribery also tend to spend a greater share of management time with bureaucrats and public officials negotiating licenses, permits, signatures, and taxes
In a seminal paper, Mauro (1995) showed the negative impact of corruption on investment and thereby on growth. In a recent IMF book titled Governance, Corruption, and Economic Performance, edited by George T. Abed and Sanjeev Gupta, 2002, cross-country details a high-corruption countries having lower tax revenues, lower per capita income and higher incidence of poverty, and worse social indicators. Of course, the causation is an issue in all such countries. Are poorer countries with weak implementation capacity in all facets of economic management likely to have higher levels of corruption or do corrupt countries likely to have lower per capita income and higher incidence of poverty. Is corruption more in stagnating countries or are countries stagnating due to high levels of corruption.
How to reduce corruption? The above discussion depicts the complexity of dealing with ‘corrupt’ behavior. While higher wages to government employees, with incentives and penalties can reduce the bribery, other studies indicate the need to implement major policy changes that will ‘boldly’ move to reduce opportunities for corruption. These include need to enhance transparency in public transactions, accountability of public officials, which calls for media and civil society playing a ‘watch dog’ role. Other common prescriptions for lowering corruption include, lowering tariffs and other barriers to international trade; unifying market-determined exchange rates and interest rates; eliminating enterprise subsidies; minimizing regulations, licensing requirements, and other barriers to entry for new firms; price liberalization and privatizing government assets; and transparently enforcing prudential banking regulations and auditing and accounting standards. The reform of government institutions may include civil service reform; improved budgeting, financial management, and tax administration; and strengthened legal and judicial systems. Such reforms should involve changing government structures and procedures, placing greater emphasis on competition and incentives within the public sector, and strengthening internal and external checks and balances. As a complement to these broader reforms, the transparent implementation of enforcement measures, such as prosecuting some prominent corrupt figures, can also have an impact.
Other studies point to the role of role of timely audits and monitoring. For example, a randomized field experiment examined several approaches to reducing corruption in over 600 village road projects in Indonesia by having engineers independently estimate the prices and quantities of all inputs used in each road, and then comparing these estimates to villages’ official expenditure reports. Announcing the certainty of a government audit (top-down monitoring) reduced theft by 8% of expenditures, and increasing grass-roots participation in the monitoring process reduced theft of villagers’ wages (but that this was almost entirely offset by corresponding increases in theft of materials, which are public goods).
The score-card method advanced by The Bangalore (India) NGO, whereby users rated local service-providing agencies, has already resulted in firings of officials, improved service delivery, and a decreased incidence of bribery. This approach has been found to be effective in a number of other states and cities in India, and in several developing countries. Free press at least in some case disseminated information about corruption and triggered some changes.
Future research. Much needs to be done in the area of micro-motives of corruption and the politics of it from the point of view of new institutional economics, the behavior economics, and empirical evidence from randomized experiments at the grass-roots level. One realizes that despite all the checks and balances, tightening of penalties and enforcement of civil service rules, and other major reforms, both the private sector representatives (givers) and the public employees (receivers) are jointly and separately finding ingenuous and unique ways of colluding sometimes but invariably ‘capturing the state’ and avoiding getting caught. What is the role of power, wealth and inequality in income and asset distribution in explaining corruption?
Corruption is a growing area of research but high corruption is only one indicator of misgovernance. So study of corruption may have to be done jointly with other governance issues such as rule of law, crime and violence, voice and accountability, transparency, etc. It is often said that ‘the fish rots at the head first’ implying that if ethical standards are reinstated at the highest level of the country or organization, corruption could be reduced. What is the role of ethical leadership in turning around countries with pervasive corruption?
One research area is to gain a better understanding of why the internal design of the organization varies so much across agencies. Why do some agencies adopt more open and transparent procedures, or rely on external auditors, while others do not? This would throw light on internal organizational structures and corruption and help in policy recommendations.
With rapid technological changes, the changing role of media in society and use of internet for information dissemination, greater transparency is being achieved. But the rich and powerful are the very owners of ‘media’ and even if the ‘captured media’ exposed the corrupt practices through greater transparency, in a world of pervasive corruption and likely corruption of ‘media’ how can one ensure truthful reporting and transparency?
How much do we know about corruption in private sector and motives driving this behavior?
Download the whole note on the economics and politics of corruption.
