Corruption and Economic Development: A Reference

Yesterday I claimed that
India is the world’s largest kleptocracy
somewhat along
the lines of the claim usually made about India being the
world’s largest democracy (if you use a really flexible
definition of democracy, of course.) One reader, Sudhar, wanted
to know exactly how is it that corruption retards economic
growth. It is a very important question. I could spend a whole
day writing about that but being bone lazy, I am taking the
easy way out of giving you a reference. Why re-invent the wheel,

So the article you may wish to read is
from the Whirled World Bank
by Paulo Mauro:
Corruption: Causes, Consequences, and Agenda for Further Research
To quote just a couple of paragraphs:

From economic theory, one would expect corruption to reduce economic growth by lowering incentives to invest (for both domestic and foreign entrepreneurs). In cases where entrepreneurs are asked for bribes before enterprises can be started, or corrupt officials later request shares in the proceeds of their investments, corruption acts as a tax, though one of a particularly pernicious nature, given the need for secrecy and the uncertainty as to whether bribe takers will live up to their part of the bargain. Corruption could also be expected to reduce growth by lowering the quality of public infrastructure and services, decreasing tax revenue, causing talented people to engage in rent-seeking rather than productive activities, and distorting the composition of government expenditure (discussed below). At the same time, there are some theoretical counterarguments. For example, it has been suggested that government employees who are allowed to exact bribes might work harder and that corruption might help entrepreneurs get around bureaucratic impediments.

One specific channel through which corruption may harm economic performance is by distorting the composition of government expenditure. Corrupt politicians may be expected to spend more public resources on those items on which it is easier to exact large bribes and keep them secret–for example, items produced in markets where the degree of competition is low and items whose value is difficult to monitor. Corrupt politicians might therefore be more inclined to spend on fighter aircraft and large-scale investment projects than on textbooks and teachers’ salaries, even though the latter may promote economic growth to a greater extent than the former.

It is a very accessible article and one does not have to be a
genuine economist to gain considerable insight from it.

6 thoughts on “Corruption and Economic Development: A Reference

  1. krishna Wednesday November 24, 2004 / 8:23 pm

    Going on the line of you argument.

    Nehru is most probably currupt.
    indira,fuled curruption, with her permits,
    inspection, and rules.



  2. uspeed Friday November 26, 2004 / 2:43 am

    my point in pointing out china was that even though they have the death penalty for corruption, their corruption index is a measely 3.4 (as compared to our 2.8).

    the problem is not a lack of punishments on the statute books. For e.g. murder is a crime punishable by death, yet there are many politicians and other powerful people in public life who are accused of murder. If the death penalty can’t deter murder, why will it deter “big corruption” – Like say Enron, or the UTI scandals, or what happened with so many cooperative banks.

    One can’t ignore the systemic/organizational problems inherent in our govt today.


  3. Stan Lam Monday November 29, 2004 / 12:55 am

    uspeed, if I may: imposing the death penalty is not a standalone solution for ridding a society of corruption. It sets a framework within which it is possible to prosecute someone by invoking the most severe penalty possible. Morally, it sets the standard that corruption is an active and insidious societal crime: a clause that should be cemented as a statute. In theory, it >provides


  4. Stan Lam Monday November 29, 2004 / 12:56 am

    You would be absolutely justified in lamenting that such statements don’t go very far today. The underlying problem (in India, and incidentally in China also) becomes one of the judiciary functioning more efficiently, transparently, and in the end, honestly. Both countries are saddled with large-scale corruption in the judicial systems thesmelves! I would venture to add that even a system like what is place in the US is chock-full of problems, although it remains far ahead of countries like India and China. The Chinese judicial system, like much of Chinese administration, is cloistered from public review. The small person gets meted out unusually cruel, military-style punishment from its courts while the large scale crooks who influence infrastructure selection are hand-in-glove with the administration. I don’t have to bother expanding on the fiasco that the Indian juidicial system has degenerated into as I am sure it is intimately familiar to folks on this blog. I will submit, however, that a good indication of the judicial system in any county can be made from the behavior of the police force. A timely incident is the recent arrest and charging of the Hindu seer: the manner in which the police have handled the situation reeks of double-standard and political intrigue; which is indeed a precursor to what lies upstream in the judicial pipeline.

    Stan (to be continued).


  5. Stan Lam Monday November 29, 2004 / 12:58 am

    (End of rant)
    The world over, we would be hard pressed to find an adolescent who aspires to become a Supreme Court justice, or a judge! In India, the problem lies in the funnel that feeds into the judicial system. Indians have figured out a darned good system for corraling the undergraduate engineering talent (IIT), and a highly competitive and largely analytical filter for the upper echelon of management (IIM). The elite administrative filter (IAS) needs some tinkering due to the inequity between subject areas tested for, but is a fundamentally good model that has built a strong reputation of distilling merit from the mass. I feel the Indian judicial selection process should align itself very closely with this existing process: from entry, to rank and remuneration. It already supports entry for police officer administration and broadening it to encompass the judiciary would be a natural extension. I believe the Indian educational system today provides for a bachelors in law. It is worth changing that to a solely post-graduate specialization (as is the case in many western nations) with entry to a law school gated by the same filter.

    I have digressed from the point that a death penalty checks corruption. My points are (a) The death penalty is not a solution as much as a good and timely “Directive Principle” :-), and, (b) The judicial base needs overhaul and a better feeder system can prove a catalyst.




  6. Atanu Dey Monday November 29, 2004 / 8:55 am

    Stan, thanks for the thoughtful comments. Please send me your email address since mails to you are bouncing.


Comments are closed.