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Corruption and Policy Reform

Paper Prepared for the Copenhagen Consensus Project

November 17, 2016

Susan Rose-Ackerman1 and Rory Truex2
Contact information:

Susan Rose-Ackerman

Yale Law School

PO Box 208215

New Haven CT 06520-8215

Susan rose-ackerman@yale.edu

Policies designed to improve the quality of life for the poor and to spur economic growth often fail. A program that succeeds in one country or even in one village may not work in another. Promising experiments may not be capable of replication and may be impossible to scale up to cover an entire country. Reformers are told: “One size does not fit all.” Yet, problems of poor health, low educational attainment, degraded natural environments, and violence and crime are widespread. Why shouldn’t similar policies work in various settings? We argue that, over and above substantive differences, a key reason for cross-country differences in policy efficacy is the quality of government and the ubiquity of corruption and related forms of self-dealing by politicians, civil servants, and the private individuals and business interests with whom they interact. A policy that works quite well in one country may fail or be coopted in another with lower quality governance.
Understanding the incentives for corruption and self-dealing is a precondition for making progress on the other challenges facing the world. A beautifully designed policy that seems to have high net benefits may fail in the face of weak institutions.3 One response is to urge a crackdown by law enforcement authorities, but that strategy will seldom be sufficient. Those seeking to further economic development need to understand the institutional origins of corruption and take them in to account in designing polices. Certain policies may simply be infeasible because they are riddled with incentives for illicit self-dealing. Others may need to be combined with programs explicitly designed to reduce the incentives for corruption built into existing institutions.
To set the stage for our analysis, part I summarizes the macro-data on the overall costs of corruption and then review research that illustrated the specific mechanisms by which corruption lowers human welfare. Next, section II explains how corrupt incentives arise in a variety of contexts. We outline the basic “corruption calculus” that underlies corrupt behavior. Understanding why people and businesses pay and accept bribes and engage in other forms of malfeasance is a necessary first step towards limiting the damage that corruption causes.
We then discuss six linked types of reforms that each can be part of an overall strategy. Section III discusses solutions that involve external monitoring and enforcement combined with the punishment of wrongdoers. Recognizing the limited impact of such strategies, Section IV concentrates on bottom-up reforms under which the victims of corruption help to limit its incidence. Section V discusses internal controls ranging from reforms in the civil service system to the redesign of programs and service delivery to limit the opportunities for illicit gains. Section VI moves to the top of the government hierarchy to discuss the control of high-level corruption that distorts infrastructure projects, defense spending, privatization of public assets, and concession contracts. Section VII locates situations where the private market can substitute for the state to limit corrupt incentives. Even when such opportunities exist, however, the process of shifting assets or services from public to private ownership can itself be corrupted. Sometimes a fall in public corruption simply means a rise is private corruption. Finally, Section VIII discusses a set of new initiatives at the international level. We conclude with some reflections on the state of the art of quantitative research on corruption and its reform.
I. The Severity of the Problem
Corruption is generally defined as the abuse of public power for private gain. This is an umbrella definition, covering behavior as varied as a head of state embezzling public funds or a police officer extorting bribes in the street. Most cross-country data do not distinguish between varieties of corruption, limiting the relevance of these measures as guides to policy. Nevertheless, research suggests that the many types of corruption are highly correlated so that countries can be characterized as more or less corrupt (Treisman, 2007). In proposing reforms, however, it is important to distinguish between grand and petty corruption, as well as between bureaucratic and political corruption, and to consider reforms that account for the special characteristics of particular sectors.
Citizens perceive that corruption, however defined, is on the rise. According to data from Transparency International’s 2010 Global Corruption Barometer (GCB), 56% of citizens worldwide believe corruption has increased in the past three years (Transparency International, 2010). Surprisingly, this figure is highest in the EU, where over 73% of respondents perceive that their country has experienced an increase. Such overall attitudes suggest that corruption ought to be an ongoing object of study, but they are of little help in assessing the specific impact of different types of corruption on political, economic, and social life.
Unfortunately, there has been little systematic data collection on sector-specific corruption, but a cross-national survey conducted by Transparency International permits a preliminary assessment. The 2007 version of the GCB polled over 63,000 people in 60 countries on their corruption perceptions and experiences. The survey asked respondents whether they had contact with a government institution, and if so, whether they were asked for a bribe. Experiences were collected for eleven different government sectors: health, education, judicial, police, registry and permit services, tax collection, water, electricity, gas, and telephone.4
Despite its limitations,5 the GCB provides a window into the way corruption varies across sectors in different countries. For each country and sector, we can measure bribery rates by dividing the number of respondents asked for bribes by the total number of respondents who had contact with the institution. These rates are a loose proxy for the incidence of corruption. Table 1 presents bribery-rates by sector for the 53 countries in the GCB where complete data are available. The table is sorted by GDP per capita, with the poorest countries at the bottom. Each column is shaded by quartile to depict how countries rank relative to others in the survey. White corresponds to the top-quartile, countries with the lowest bribery rates and the least corruption. Dark grey corresponds to the bottom-quartile, and the light and medium shades of gray correspond to the second and third quartile countries, respectively.
As expected, corruption is more endemic to some sectors than others (Hunt 2006). On average, 18% of respondents faced corruption when interacting with the police, while only 2% experienced corruption in dealing with water providers. The chart also illustrates a strong relationship between income and corruption, although countries differ in the sectors most prone to corruption. The groupings, although crude, give a sense of where countries overachieve and underachieve. For example, the Greek police seem to be performing reasonably well, with only 2.1% of police interactions resulting in a bribe request. This relative success is in sharp contrast to rampant corruption in Greek hospitals, where almost 22% of users reported some form of bribery. In health-related corruption, Greece ranks third to worst, just above Ukraine and Cameroon. Based on the GCB data, Turkey seems to have the opposite problem. Turkish doctors and hospitals are relatively clean, only 3.8% of interactions involved bribery. In the police sector, Turkey fares much worse than Greece, with a bribery rate of around 16%.
Collectively, these different forms of corruption can have crippling effects on development and human welfare. Figure 2 illustrates the simple relationship between the UN’s Human Development Index and perceived levels of corruption in 2010, as measured by Transparency International’s Corruption Perceptions Index. This correlation is one of the most robust relationships to have emerged out of corruption research.6 Countries with higher levels of corruption have lower levels of human development. Highly corrupt countries tend to under-invest in human capital by spending less on education, over-investing in public infrastructure relative to private investment, and degrading environmental quality (Mauro, 1998; Tanzi and Davoodi, 2001; Esty and Porter, 2002). However, some countries have managed to have high levels of human development despite high levels of corruption, showing that the relationship is far from deterministic.
In general, richer countries and those with high growth rates have less reported corruption and better functioning governments (Kaufmann, 2003). Estimates of the precise magnitudes of these effects vary. Dreher and Herzfeld (2005) find that an increase of corruption by one index point dampens GDP growth by 13 basis points (i.e., .13 percentage points) and lowers per capita GDP by around $425. Gyimah-Brembong (2002) estimates the effect to be between 75 and 90 basis points or just under one percentage point.7 Aidt (2011) constructs a broader index of sustainable development and shows that corruption, however it is measured, has a detrimental effect. Corruption in Aidt’s formulation might spur investment and growth in the short run, but this could have negative effects in the long run if the projects chosen do little to enhance long-term growth and poverty reduction.
Furthermore, the data in figure 3 show that, within countries, low-income respondents tend to experience higher bribery rates than higher income individuals. This is true across every government sector except the judiciary.
Much of this work does not deal with the simultaneous equation nature of the relationship. It leaves unclear whether low levels of income and growth are a consequence or a cause of corruption.8 Most likely, the causal arrow runs both ways, creating vicious or virtuous spirals (Treisman, 2007; Lambsdorff, 2006). Thus, we must examine more focused research that concentrates on isolating the mechanisms through which corruption reduces growth and human welfare. These links are summarized in Figure 4, although more complex interactions are also possible.

First, corruption negatively affects the business and investment climate. Corrupt countries tend to suffer from more bureaucratic red tape, which may be intentionally created by rent-seeking bureaucrats. According to Wei (2000), an increase in the corruption level from relatively clean Singapore to relatively corrupt Mexico is the equivalent of an increase in the tax rate of over 20 percentage points. Lambsdorff (2003a, 2003b) finds that an improvement moving Colombia’s level of integrity to that of the United Kingdom would increase net yearly capital inflows by 3 percent of GDP. According to World Bank research in Bangladesh, China, India, and Pakistan, firm export levels and foreign investment were higher where hassles and delays were low. To help one understand the magnitude of the effects, the authors report, “if Calcutta could attain Shanghai’s level of investment climate, the share of firms …exporting would nearly double from the current 24% to 47%, comparable to the coastal Chinese cities. Similarly, the share of foreign-invested firms would increase by more than half, from the current 2.5% of firms, to 3.9%” (Dollar, Hallward-Driemeier & Mengistae, 2006).

There is evidence that corruption distorts firms’ production decisions. Thus, Sequeira & Djankov (2010) study bribe payments for cargo passing through customs in ports in Maputo, Mozambique and Durban, South Africa for a random sample of 1,300 shipments ultimately headed for South Africa. On average, bribes represent 14 percent of the shipping costs for a standard container passing through the port of Maputo and 4 percent of shipping costs for a standard container passing through Durban. They show that some shippers bear higher transport costs in order to ship through the low bribery jurisdiction and that South African firms are more likely to use domestic suppliers when bribery raises the costs of imports. Corruption in customs creates important distortions in the real economy.
A second mechanism through which corruption dampens development is by inflating the budgetary costs of public goods and services because these costs incorporate kickbacks. Corrupt demands from officials are analogous to a tax on businesses and households, but the consequences are much more pernicious. Bribes are paid to obtain and retain business. Unless the procurement process is very competitive, this means that individual projects and procurement contracts are excessively expensive and unproductive.9 Cole & Anh (2011) document the magnitude of these costs in an Asian country by examining the account books of two firms. One firm sold industrial parts, and reported kickback demands from both private and public buyers, although the level and incidence of kickbacks were higher for government and military sales than for other buyers. They show a statistically significant positive relationship between the profit margin and the size of the payoff that is almost dollar for dollar. The second firm sold imported pharmaceuticals to public and private hospitals and faced widespread kickback demands from both types. In the former most of the gains flowed to the managers, and in the latter, the hospitals benefitted. Overall payoffs roughly double the prices of the drugs. If this study can be generalized to other countries and firms, it suggests that the impact of corruption on development is not limited to payoffs to public officials but extends to private to private dealings as well. It also suggests that if the distortionary effect of kickbacks is not equal across sectors, then that difference will distort the government’s programmatic choices. If corrupt officials set priorities, they will set priorities to maximize their payoffs. If honest officials set priorities, they will use the distorted information on costs that results from the distribution of corrupt kickbacks.
Third, if tax collectors accept payoffs, the impact on the government budget is direct. One researcher reports that at least half of tax collections are lost to corruption in some countries (Fjeldstad, 2005). In Bolivia one study estimated that 42% of the VAT was lost in 2001; reforms reduced the loss to 29% in 2004 (Zuleta, Leyton and Ivanovic, 2006). In 2004 Russia reported losing $4.5 billion in duties on goods imported from Europe. Bangladesh in 2000 lost duties equal to 5% of GDP, and that figure omits the discouragement of potential investors caused by the corrupt regime (OECD 2003, 9). Corrupt countries may also be reluctant to balance their budgets during times of financial crises because this would reduce the level of rents available. Using a data set for 28 OECD countries spanning the period 1978-2007, Peren et al. (2011) find that corruption significantly reduces the probability of successful budget consolidation.
In circumstances of low government legitimacy, citizens try to avoid paying taxes, and firms go underground to hide from the burden of bureaucracy. Cole and Anh (2011: 419-424) show how this can be done through the examination of the official and the internal books of an Asian construction firm. In this firm accounting manipulation to lower taxes mostly involved reporting excess costs for materials and machinery, not labor. High levels of perceived corruption are associated with high levels of tax evasion (Uslaner, 2007). Similarly, Torgler’s (2003) study of attitudes toward tax evasion in Central and Eastern Europe shows that when individuals perceived that corruption was high, they were less likely to say that people have an obligation to pay taxes. Thus, one indirect impact of corruption is to persuade people that it is acceptable not to pay taxes because government has been captured by corrupt officials, violating norms of fairness. As a consequence, corrupt governments tend to be smaller than more honest governments, everything else equal (Friedman, Johnson, Kaufmann, and Zoido-Lobaton, 2000; Johnson, Kaufmann, McMillan, and Woodruff, 2000).
Fourth, corruption negatively affects service delivery and human capital because goods and services leak out of the system before reaching their final recipients. In Uganda, estimates from the 1990s suggested that 40% to 94% of drugs simply disappeared (McPake et al. 1999, 855-856). Brazilian federal police authorities estimated that embezzlement in the pharmaceutical sector totaled $637 million (Colitt, 2004). In an Indonesian program designed to provide food aid to the poor, at least 18 percent of the rice was lost; in one third of the villages 43 percent disappeared (Olken, 2006). Ferraz, Finan, and Moreira (2010) show that students in Brazilian municipalities where corruption was detected in education have test scores that are 0.35 standard deviations lower than those without corruption, as well as higher dropout and failure rates. Teachers in corrupt municipalities are less likely to have a computer or science lab and less likely to have received formal training, presumably because resources have leaked out of the system.

Public Expenditure Tracking Surveys (PETS), a monitoring tool developed by the World Bank, reveal similar estimates of the loss of funds and goods. The first PETS was conducted in Uganda and found that only 13% of an annual capitation grant actually reached the intended beneficiary schools (Reinikka & Svennson 2004). Such leakage undermines the efforts of both governments and donors. In turn, poor service delivery reduces the accumulation of human and physical capital with obvious negative effects on growth. This effect may be particularly acute for the poor because, as we showed above, they tend to report paying bribes more frequently. In a corrupt system the allocation of services will have little to do with need or qualifications, but rather reflects willingness to pay (Bertrand, Djankov, Hanna & Mullainathan 2007).

Fifth, corruption likely has negative effects on “softer outcomes”, such as popular satisfaction with government and democratic legitimacy. Corruption can undermine government competence (Piga 2011). In a country with high levels of corruption, competence may not be a worthwhile attribute of public officials. Much higher benefits can be obtained through networking activities that give one access to the dominant, corrupt crony and patronage-dominated environment. The resulting, pervasive technical incompetence makes the corrupt system run much more smoothly because of the absence of accurate and precise monitoring and the ease of capture. This interaction, in turn, undermines public trust in government.
Low levels of trust may ultimately contribute to political instability and internal turmoil. Interviews in a range of countries have found widespread popular disapproval of entrenched corruption (Anderson, Kaufmann, and Recanatini, 2003; Pasuk and Sungsidh 1994). In a study of four Latin American countries, Seligson (2002) finds that citizens who had personally experienced a corrupt act reported lower levels of interpersonal trust and belief in the political system. In Nicaragua, respondents were asked if the payment of bribes “facilitates getting things done in the bureaucracy.” Interestingly, those who agreed that corruption gets things done were less likely to believe in the legitimacy of the political system.10 The corruption-legitimacy finding has been replicated across a number of other countries and contexts (Anderson & Tverdova 2003; Chang & Chu 2006).
In short, corruption is a lynchpin problem that both curbs growth and investment and exacerbates other problems associated with weak states and poverty. Efforts to improve educational outcomes will be frustrated by absentee teachers, missing school supplies, and inadequate buildings. Efforts to improve infrastructure will be burdened with nepotism and inflated costs. Efforts to mitigate disease will be thwarted if medical supplies are stolen and sold in the black market.
With this summary as background, section II outlines the fundamental conditions under which corruption can flourish. That analysis provides a framework on which to build our discussion of efforts, both successful and unsuccessful, to reduce corruption.

II. The Corruption Calculus
Corruption is a crime of opportunity. It occurs at the intersection between the public and private sectors (or even entirely within a sector) wherever the opportunity for illicit private economic gain exists. Identifying an act as “corrupt” implies a background standard of acceptable behavior. Thus, its prevalence depends upon the way the law and the society define the proper scope for public and private action.
II.A. Kleptocracy, Cronyism, and Corruption
In a state controlled by an autocrat who does not recognize any distinction between public and private funds, bribery, fraud, and other forms of under-the-table payoffs may be uncommon. The state is simply organized as a personal, kleptocratic fiefdom. It is “corrupt” in the sense that the ruler has no concern for the general welfare. The population is impoverished, and the economy is monopolized by “public” firms controlled by the ruler. Such states, of course, face serious problems of governance, because the rulers of such states do not recognize the distinction between public and private power.11 It is a sign of progress when those with political power recognize that it is illegitimate for them to use their political power to accumulate wealth.
Closely related to such kleptocratic regimes are ones where the state largely serves the interests of a narrow group of business people and politicians, sometimes with criminal elements mixed in. Even if the group with influence changes when the government changes, most of the citizens are left out. In Michael Johnston’s (2005) taxonomy the contrast is between “power chasing wealth” and “wealth chasing power.” For example, Russia may be moving from a case where private wealth controlled public power to one where political power dominates private wealth.
In some states where the link between the political and the economic elite is strong, favored firms may not have secure property rights in the legal sense, but they obtain beneficial treatment because of their insider status (Hellman, Jones, and Kaufmann 2003). Political connections can operate much like outright payoffs to distort investment priorities. In a study of 20,202 publicly traded firms in 467 countries, Faccio (2006) finds that having politicians as board members or substantial shareholders brings a 2.29 percent increase in share value. Political connections may promote short-run economic growth although it is likely to be unbalanced and inequitable and to limit long-term growth prospects (Rock and Bonnett 2004; Aidt 2011). A study of bank loans in Pakistan by Khwaja and Mian (2005) found that firms with a politician on their boards borrow 45 more than other firms but have a 50 percent higher default rates on these loans. Because only government-owned banks provide special treatment, the excess defaults are a cost to taxpayers. They estimate the deadweight loss at between 0.15 percent and 0.30 percent of GDP. In addition, many of these bad loans presumably financed projects that did not make economic sense ex ante. If so, then Pakistan loses an additional 1.6 percent of GDP per year due to preferential lending.
In such polities the main risk to the economic elite is a change in political leadership. For example, in a study of Indonesia under President Suharto, Fisman (2001) used an index of the political connectedness of firms listed on the Jakarta Stock Exchange, dubbed the Suharto Dependency Index. He demonstrates that rumors about Suharto’s health problems between 1995 and 1997 had a more negative impact on the share prices of firms with high levels of this index and that the differential impact was greater the worse the rumors.12
Sustained corruption can itself undermine political legitimacy, shortening the time horizon of both rulers and investors, and prompting regime change (Rose-Ackerman 1999: 32). However, the more democratic regimes that emerged in several of the countries studied by Rock and Bonnett (2004: 1101) have had to confront corrupt networks that now work to undermine growth.13 If top political figures themselves exploit their position for private gain, the effectiveness of government programs and the impact of foreign aid and lending suffer. This inequality of influence can extend beyond special treatment by the executive and the legislature to include the courts as well.
In this essay we leave to one side such political systems where either regime change or a drastic change of heart at the top is a precondition for reform. We focus, instead, on the structural conditions that create corrupt incentives in states that are nominally organized to benefit their citizens, whether or not they have strong democratic institutions. Thus, we concentrate on situations where private gains are available to officials and to private actors, if they take advantage of the opportunities created by public programs. We recognize that similar conditions may exist entirely within the private sector (Argandona, 2010), especially in large firms, but our focus here is on public sector corruption and its connection with private wealth and public power.
II.B. High and Low-Level Corruption
Corruption can occur when the state engages in large scale projects that generate massive rents that can be shared between corrupt officials and their private sector counterparts. However, corruption is not just a phenomenon that occurs at the large scale. Although the misallocation of resources may be most dramatic in large projects, day-to-day petty corruption has an immediate impact of people’s lives. The basic causes are similar—a scarce public benefit—or one that can be made scarce by corrupt officials—and monitoring difficulties. The gain to the citizen may be access to a public service or the “benefit” of not having the law enforced against him, whether or not he is a lawbreaker. Examples are numerous, but consider just a few. Suppose there are a limited number of places in subsidized housing so that the households that qualify exceed the available apartments. People may pay to be put at the head of the queue, and officials may manage the queue to maximize bribe revenue. Licenses to operate a motor vehicle are not limited in number but are only available to those who qualify. Officials may refuse to award licenses even to those who qualify unless they are paid, and licenses may also be awarded to the unqualified. Tax collectors may accept a payoff in return for issuing a low tax bill, and inspectors of all kinds can be paid to issue favorable reports. Operators of illegal or unregistered businesses can pay the police to avoid being shut down, and bribes can be levied on ordinary citizens by police to avoid being charged with real or invented offenses (Fried, Lagunes, and Venkataramani, 2009; Peisakhin and Pinto, 2010).
The incidence of both high- and low-level corruption not only depends upon the opportunities available, as determined by the level of rents and the ability to keep payoffs secret. It also depends upon the effectiveness of measures designed to deter malfeasance. If the law enforcement system is itself corrupt or simply incompetent, it will not matter much if people know that corruption occurs. Even if the law enforcement system is honest, it may be understaffed and underfunded. Expected formal punishment is often minimal. However, structural policies can limit corruption even in the face of weak law enforcement, and we outline some of these below. These policies limit the rents in public programs without undermining their basic purposes. They also improve transparency and accountability—both top-down and bottom up—so that corruption is exposed and controlled through techniques other than the criminal law. Of course, the criminal law is a necessary background condition, but it will generally be insufficient unless other institutions support the development of honest and effective government (Rose-Ackerman, 2010).
An implication of the above discussion is that the lower the level of rents created by the public sector, the less the incentive for corrupt payoffs. A highly competitive, open economy where most firms do not earn monopoly rents ought to be less corrupt than a closed, monopolistic one. Indeed, some studies find that trade openness and other measures of competitiveness are associated with less corruption (Ades and Di Tella, 1999, Sandholtz and Koetzle, 2000, Blake and Martin, 2006). However, the direction of causation is unclear. Corrupt officials may create and maintain private monopolies in return for corrupt payoffs. The causes of corruption may be deeper than the organization of the private sector, which may not be exogenous. Lambsdorff (2003a), for example, finds that weak law and order and insecure property rights encourage corruption that, in turn, discourages foreign capital inflows.
If inequality and poverty lower the level of public oversight, both can contribute to high levels of corruption. In democracies, in particular, inequality is linked to corruption, a result consistent with the state capture variant. The negative effect of inequality on growth may be the result of its effect on corruption, taken as a proxy for government weakness (You and Khagram, 2005). Here too, the causal arrow goes both ways. Extreme inequality suggests that a wealthy elite controls the state by paying off officials to provide that elite with benefits.
II.C. Corruption and History
Cross-country differences in perceived corruption levels may have historical and social roots. For example, Acemoglu, Johnson, and. Robinson (2001) use the mortality rates of European settlers as an instrument for the type of colonial regime put in place by the imperial power and find that it does a good job of predicting expropriation risk (and corruption levels) at the end of the twentieth century. La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999) consider legal origin, religion, ethno-linguistic fractionalization, latitude, and per capita income as determinants of a range of features of economic, social, and political life. Corruption and other measures of institutional weakness are worse in countries with higher ethno-linguistic fragmentation, few Protestants, and Socialist or French legal origins. (See also Sandholtz and Koetzle 2000, Treisman 2000.)
Colonial heritage, legal traditions, religion, and geographical factors seem associated with corruption and other measures of government dysfunction. One can understand why that might be so by studying the different ways that rents are created, maintained and shared under different systems. However, these factors are not policy variables that present day reformers can influence. The key issue is whether these historical regularities directly affect government quality or whether they help determine intermediate institutions and attitudes that present-day policies can affect. In La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1999) the historical variables are not always significant and become entirely insignificant when their studies include income and latitude as explanatory variables. Historical patterns may operate through their impact on underlying institutional structures, not as direct determinants of corruption. If so, that may be good news for reformers who concentrate on the institutional conditions for corruption and its reform. So long as there are alternative routes to institutional reforms that facilitate economic growth and high income, latitude and history need not be destiny (Rodrik, 2006).
II.D. Corruption and Democracy
The impact of democracy on corruption is complex. Democracies generally function with higher levels of transparency and public accountability than non-democracies, and that fact should help control corruption. High levels of economic freedom and lower levels of corruption go together as does an index of democratization (e.g., Sandholtz and Koetzle 2000, Blake and Martin 2006, Kunicová and Rose-Ackerman 2005). Governments with more female participation in politics are less corrupt, and this is consistent with survey evidence suggesting that women are better monitors because, in general, they are more disapproving of corruption than men (Swamy, Knack, Lee, and Azfar 2001). Within the universe of democracies, elements of constitutional structures—such as presidentialism, closed-list proportional representation, and federalism—facilitate corruption (Kunicová and Rose-Ackerman, 2005; Treisman, 2000).14 Presidential systems that use proportional representation (PR) to elect their legislature are more corrupt than other types of democracies. Many parliamentary democracies that elect legislatures by plurality rule have a heritage of British colonial rule, and many PR systems had French or Spanish rulers. Present day levels of freedom also have historical roots. However, if constitutional form, protection of rights, women’s rights, and electoral institutions are important determinants in and of themselves, then countries have policy levers available even if their histories led to institutions that favor corruption.
II.E. Summing Up
To summarize, corruption, like any other crime, occurs when the illicit benefits of malfeasance outweigh the expected costs. However, a distinctive feature of corruption is its two-sided nature. Like any illicit market transaction, both the bribe payer and the recipient must experience net gains relative to the feasible alternatives. The benefits of corruption to officials include the bribe payment itself as well as the social benefits that come with dealing out illicit favors. Corruption may also allow a bureaucrat or politician to expand his political power. On the cost side of the equation, corrupt officials consider the prospect of formal punishment, as well as the internal moral “psychic” costs of engaging in wrongdoing.15 If discovered, corrupt officials may also face social opprobrium and the loss of office. On the other side of the transaction, corrupt partners balance the illicit benefits earned through bribery against expected punishments and psychic costs. If officials extort payoffs by requiring citizens and businesses to pay to get benefits to which they are legally entitled (or to avoid costs), those who pay feel aggrieved, but they are still better off than doing without the benefit (or having a cost imposed on them).
Another distinctive feature of corruption is its tendency to feed on itself (Andvig & Moene, 1990; Cadot, 1987, Goel & Rich, 1989). The more corrupt players there are in the system, the more it pays to be corrupt because the likelihood of both formal and informal punishment is reduced. Bureaucrats who would be honest in Sweden could turn corrupt in Cambodia with no change in their underlying psychology. Conversely, clean governance begets clean governance, as would-be corrupt officials become clean when corrupt networks dry up and self-dealing becomes dangerous and uncouth. The net result of these vicious and virtuous cycles is that countries and sectors can fall into either a high-corruption or a low-corruption equilibrium. And once trapped in a high-corruption equilibrium, a particularly large shock may be needed to shift a country on the path towards good governance. These dynamics are illustrated in Figure 5.
The big question facing reformers is how best to produce that shock. The macro-level factors discussed here— inequality, democratic institutions, religion, market structure— are not typically the subject of policy interventions. Reformers need to focus on shifting individual components of the corruption calculus in the right direction, reducing rents and increasing expected costs. With the right combination of reforms, the corruption calculus can be tipped towards clean governance.
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