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When is corruption good?

James Surowiecki looks to Iraq and asks whether corruption can at times be beneficial?

Corruption may be ethically unsavory, but, according to some economists, it may also be economically beneficial. In a country where elaborate bureaucracies make it hard to start companies, import or export goods, or simply get a passport, bribes can cut through red tape, serving as what’s called “speed money.” Bribes can also motivate bureaucrats who would otherwise shirk their duties; in the Russia of Peter the Great, for instance, most officials received small salaries and made up the difference with bribes. And corruption isn’t necessarily an obstacle to economic growth. In the postwar years, countries like South Korea and Indonesia were bastions of cronyism and graft but saw their economies boom; today, China and India are two of the world’s fastest-growing economies, and both receive poor grades from Transparency International.

Because, don’t bribes serve a purpose?

There are conditions under which bribes seem to work well. When power is in the hands of an authoritarian government that keeps bureaucrats under firm control, the state is able to act like a smart monopolist: its employees charge prices that are high but not too high, and are able to deliver what they promise. So bribe-takers collect what amounts to an unofficial tax and bribers get what they pay for...

Though in the end, cooler heads prevail:

Even if corruption can be a useful means of bypassing inefficiencies in the short term, in the long term it tends to create inefficiencies of its own. Bribing, it turns out, doesn’t always speed things up: in a vast study of twenty-four hundred companies in fifty-eight countries, Daniel Kaufmann, of the World Bank, and Shang-Jin Wei, of the I.M.F., found that the more a company had to bribe, the more time it spent tied up in negotiations with bureaucrats. Graft also encourages government officials to keep complicated procedures in place, since that insures that the bribes keep coming. So corruption isn’t just a product of bad institutions and policies; it also helps cause them… Fighting corruption, then, is not only an ethical issue but an economic one.

The bold is mine. Via Mark Thoma. Also see this new reading list we put together on new ways to measure the cost of corruption or previous corruption posts.

Comments

Submitted by Pablo on
Christopher: Thanks for the pointer to Posner's comments. Here are: Becker's comments: http://www.becker-posner-blog.com/archives/2005/08/comment_on_corr.html Posner's reponse to comments: http://www.becker-posner-blog.com/archives/2005/09/corruption--pos.html and Becker's response to comments: http://www.becker-posner-blog.com/archives/2005/09/response_on_cor.html

A long way to get to the fact that corruption is an economic issue. The significance of the circular relationship between institutions and corruption, as well as its economic nature, is that the private sector must lead efforts to limit the spread of corruption - it should not be a prerogative of governments and NGOs. In regards to Iraq, in our survey of the Iraqi business community [across the country], 38% of respondents indicate that corruption adds as much as 40% to the costs of doing business. You can read more here. Speaking of incentives... [Added by PSDBlog: http://www.cipe.org/blog/?p=155]

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