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Corruption and Growth
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From the course by Universiteit Leiden
Political Economy of Institutions and Development
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From the lesson
Governance
Governance. Argues that good governance provides a transparent and stable environment for risk assessment and decision-making and contributes to welfare and growth. The question is how to get it.
Meet the Instructors
Richard Thomas GriffithsProf. dr.
Faculty of Humanities
Hi there.
In the previous video, we saw how the World Bank looked and indicators for
the rule of law and how the rest of us looked at it.
And how the rule of law could be expected to influence economic growth,
but we also saw that the statistical verification was weak.
Well, in this video, we're going to do the same for the control of corruption.
Let me start then with a story as it was told to me by way of illustration
of the mentality behind corruption.
I was in the northwest corner of China, Xinjiang.
The same area that's been in the news,
because of the senseless acts of random violence.
I was teaching there, but I didn't often have the chance or
opportunity for private conversations.
But one afternoon, the director of one of the institutes took me for
a drive to the Heavenly Lake, a local beauty spot.
We had a very pleasant and wide ranging discussion.
We touched on the question of corruption.
Imagine you are a business man coming to see me, he said and
I am a senior official in the ministry.
This is what I say to you, I am a senior official.
I have much power, but I am a government employee and I'm not paid much money.
You have lots of money, but you have no power.
Without my approval, you're going to get nowhere.
But with my signature on this paper, you have a chance to make even more money.
Lots more money, because my action has allowed you to do so.
But why should all that money go to you?
Should I not be allowed to share even a little of it?
In fact, he added, I wouldn't even have to say that.
You and I would both know the game we're playing.
Well, corruption is difficult to measure.
Because it involves the taking of bribed and favors and
it's almost always conducted in secrecy.
And often, it's highly illegal and it's highly sensitive.
Note for example,
the indicators call the control of corruption not simply corruption.
This name somehow implies that states are at least trying to control it.
Now, the usual approach to measuring corruption is through business opinion
surveys since it involves those paying or receiving bribes.
But here, there even more problems in usual computability.
After all, how much is the business willing to admit to?
The World Bank use these sources to compile its own indicator and
the way would which we become familiar, and
the last two videos we've given you an alternative indicator.
But this time,
there is no reason to believe that the results will be any different.
There is one indicator, a very authoritative one that the bank itself
uses and that's the indicator prepared by Transparency International.
It's Corruption Perception Index.
Now, Transparency International was founded in Germany as an independent
organization dedicated to the elimination of corruption and
it started publishing its own index in 1995.
One criticism levied at both indices is that they focus on business corruption.
Usually, the payment of bribes for contracts or
small regular extortions to smooth everyday business.
But they both ignore the equally damaging phenomenon of political corruption.
This can range from jobs for party members to secret funding of candidates
in return for support for favorable pieces of legislation or fat, juicy contracts.
The second criticism is that it focuses attention on the bribe takers
not the bribe givers.
It's usually the businesses in these squeaky clean Western countries at
the better end of the rankings than are the ones paying bribes.
And of course, it's in the banks of those Western countries where the illicit gains
are deposited.
In a small effort to expose this side of corruption,
Transparency International is also constructed a Bribe Payers Index and we've
included this together with the corruption results in a separate visualization.
You can look at after this video.
A final criticism is that we're dealing with a very Western definition of
corruption and condemning practices that may not
be considered abnormal elsewhere in the world.
A prince in his own country uses his position to smooth your way through
difficulties that you may encounter trying to secure a lucrative contract.
Does he not deserve a small fee for his services?
So, how does corruption actually influence growth?
Well, the obvious answer in a narrow sense is that increases the cost of doing
business.
It reduces profits.
And therefore, reduces the incentive to invest.
It acts as a form of tax.
Now if that was all that was involved,
businesses could simply include it in their calculations.
Far more corrosive is a form of corruption where the incident is unpredictable
in the import of essential machineries or competition for contracts, or
the prolongation of a particular license.
In this form, corruption access a major infringement of property rights.
Another factor is that when considerable sums are creamed off from government
contract, it actually reduces the provision of public goods.
You get fewer roads.
You get un-modernized facilities for your tax money or for your foreign aid and
this too inhibits its growth.
The final root is a feedback loop into trust.
Persistent exposure to the routine of corruption is extremely damaging
to the reputation of institutions and
it must have an effect of undermining levels of generalized trust in societies.
Among all of the governments indicators, corruption is the only one
that produces significant results at least when related to long run growth.
Its impact is particularly strong in low income countries where unfortunately,
corruption is most endemic.
How can one reduce corruption?
Well, the obvious answer is to eliminate its causes.
But sometimes, those are deeply embedded in the political culture or
political elite culture of a country.
Another answer is to increase the chances of detection and
to enforce stricter penalties.
But this merely transfers the problem to another dimension of good governance,
efficient institutional controls and open and transparent government.
The final suggestion then is to increase public sector pay, but
this is exactly what poorer countries cannot afford to do.
Before we leave this whole problem, let me make one final personal observation.
In 19th century Europe, corruption was also wide spread and
the movement towards reform came first locally
from the improving working classes and the middle class.
It emerged with public parks, with civic libraries, anti-drunkenness campaigns and
an intolerance of local officials and cliques improperly enriching themselves.
As these local movements coalesce national political parties, so
corruption on a national scale was also tackled.
It's easy to explain, but it's difficult to replicate.
So, let's sum up then.
In this lecture, we've seen how the World Bank became convinced of the centrality of
good governance in the question of economic development in poorer countries.
We've seen how the World Bank defined good governance and how it measured it.
When we look at some of the dimensions of good governance and
how they could be expected to impact on economic growth.
We also looked at three dimensions of good governance and
how they could be expected to impact on economic growth.
Next week, we're going to have a look at the whole question of economic development
and development assistance.
For now, we've made a visualization of the world map of corruption and
we invite you to have a look at it.
See you next week.
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