Corruption and development. Does the “rule of law” factor weigh more than we think?

At a glance, the research on the causes of underdevelopment is built on a universally accepted list of factors, e.g., lack or poor social and economic infrastructure, low educational levels, ineffective regulation, poor geography. Corruption is generally in that list, but how much does a corruptible environment has contributed to the (under)development of communities and countries? Under the perspective of the private investment, some people argue that corruption is a boat to navigate the intricate areas of inefficient regulation. Samuel Huntington (2000) understands corruption as a necessary stage in the modernization process – mainly due to the proliferation of laws. Nathaniel Leff mentions that corruption is, in fact, “an extralegal institution used by individuals or groups to gain influence over the actions of the bureaucracy”. He argued that, in the context of those underdeveloped countries, corruption was essential in influencing policy choices to promote growth. Robert Klitgaard points out a plausible summary for those who claim that a hint of corruption might help. He says that the benefits come “from specific corrupt acts, not from systematic corruption pervading many or most decisions”. He assumes that “if the prevailing system is bad, then corruption may be good”.

On the other hand, other authors argue that, though corruption may be beneficial in isolated instances, its cumulative effect in the end is detrimental to development. As stated by Kempe Ronald Hope (2002), corruption diverts public resources from their public purposes and distorts the composition of government expenditure. Paulo Mauro (1998) carried out cross-country comparisons a concluded that corruption has large, adverse effects on private investment and economic growth. “Regression analysis shows that a country that improves its standing on the corruption index from, say, 6 to 8 (0 being the most corrupt, 10 the least) will experience a 4 percentage point increase in its investment rate and a 0.5 percentage point increase in its annual per capita GDP growth rate.”

The World Competiveness Report 2008-2009 (2008) presents an estimation of the relationship between a series of indicators to GDP per capita. These are the figures in the area of Rule of law:

Relationship of indicators to GDP per capita (log) while controlling for endowments (The World Bank, World Development Indicators 2008)

According to this report, corruption was the most frequently mentioned factor that hampers doing business:

The Connecticut Center for Economic Analysis (2004) conducted another quantitative assessment worth citing based on US data:

Note. Again and again, these type of explanatory quantitative evaluations must be taken carefully since, as we all know, growth and development is an outcome of multivariable interactions. When we try to understand the influence that A has on B, we seek for comparisons between two or more communities’ As and Bs. However, we see that in community 1 A is influenced by C and thus we need to freeze the latter’s effect. At the end of the day, these studies are an impressionist portrait of what is happening at our street. They are our reference, and that is their value.

Personally, I think that corruption helps to reduce market barriers but in this process, new obstacles are created. Successful investors in corrupted environments are those who are capable to integrate corruption into their business planning, which demands not only sufficiency in managerial, political and financial resources, but a strong argument to overcome the psychological factor that represents investing in such an uncertain environment. Now, in the macroeconomic perspective, here are some graphs on corruption that help inferring a general picture of the relationship between corruption and development:

 

Favoritism in decisions of government officials

When deciding upon policies and contracts, government officials in your country (1 = usually favor well-connected firms and individuals, 7 = are neutral)

See more at:

A. J Heidenheimer et al, Political Corruption: A Handbook (New Brunswick, NJ: Transaction Books,

1989), pp. 8–11.

Elia Armstrong, Combating Corruption for Development: The Rule of Law, Transparency and Accountability

J.S.N. Nye, op. cit., and Susan Rose-Ackerman, Corruption and Government: Causes, Consequences,

and Reform (Cambridge, UK: Cambridge University Press, 1999), among others.

Nathaniel Leff, “Economic Development Through Bureaucratic Corruption”, in Heidenheimer, op. cit.

Samuel P. Huntington, “Modernization and Corruption” in Heidenheimer, op. cit.

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s