Fridays Academy: Corruption, Growth and Poverty

(From Raj Nallari and Indira Iyer's lecture notes)

The literature on corruption is large and growing. In this and upcoming Fridays Academy comments we will attempt to capture the essence of the arguments and provide some empirical evidence on the impact of corruption on growth and poverty reduction. Corruption, which includes bribery, rent-seeking, extortion, embezzlement, is perceived as a major problem facing many countries.  Corruption has therefore been variously defined to mean ‘the misuse of public office for private gain.’   This does not mean that there is no corruption in the private sector because this is quite common in (private) financial firms.  But, corruption is more severe in the public sector than in the private sector.  One of the first known articles on corruption and its punishment is in Kautilya’s Arthasastra (dating back to 14 BC).  Corruption is found to be closely inter-related with a country’s social norms, formal and informal rules and culture as well as legal environment in a country.  No matter what, corruption connotes illegal or improper (moral) behavior and is treated as a ‘socially and culturally deviant behavior.’  From political science point of view, high level of corruption coincides with political instability and tends to reduce citizen’s trust and faith in institutions.

Measurement of Corruption

Corruption is measured by perceptions index and is subject to victimization bias.  That is only aggrieved parties who suffered in such ‘illicit’ transactions speak out while the vast majority who benefited from giving and receiving bribes may not speak out or provide information.  Like black economy and capital flight, only indirect measures can be used. Firms may be paying bribes to officials to avoid legal problems or paying taxes or to hide their non-compliance with regulations.  Obviously, such transactions are not reported or recorded.  Also, different branches of government (Parliament, Executive, Judiciary, day to day administration) may have different degrees of corruption. The corruption perception index (CPI) of the Transparency International, the ‘control of corruption’ indicators of Kaufmann et al of the World Bank Institute,  the Business Environment and Enterprise Performance Survey (BEEPS, a World Bank survey of 26 countries on the extent of bribe payments in 1999), and the Bureaucratic Efficiency index are some of the attempts at measuring corruption.