Public Se c t o r - World Bank Group

The World Bank Ma y
1998
PREMnotes
Public Sector

Corruption and development

Corruption’s costs It is sometimes argued that bribery can Growing recognition
have positive effects under certain circum- and discussion of
The growing body of theoretical and stances by giving firms and individuals a corruption have
empirical research on the economic means of avoiding burdensome regula- made it possible to
impact of corruption suggests that: tions and ineffective legal systems. But in address its costs
• Bribery is widespread, but there are sig- corrupt societies many politicians and and causes
bureaucrats exercise enormous discretion
nificant variations across and within to help fuel the growth of excessive and dis-
regions. For example, survey responses cretionary regulations on entrepeneurs.
suggest that Botswana and Chile have
less bribery than many fully industrial- Empirical evidence refutes the “grease”
ized countries. and “speed money” arguments. Responses
• Bribery raises transactions costs and from more than 3,000 firms in 58 coun-
uncertainty in an economy. tries surveyed in the World Economic
• Bribery leads to inefficient economic Forum’s Global Competitiveness Survey
outcomes. It impedes long-term for- for 1997 indicate that enterprises report-
eign and domestic investment, misallo- ing a greater incidence of bribery also
cates talent to rent-seeking activities, tend—even after taking firm and country
and distorts sectoral priorities and characteristics into account—to spend a
technology choices (by, for example, greater share of management time with
creating incentives to contract for large bureaucrats and public officials negotiat-
defense projects rather than rural ing licenses, permits, signatures, and taxes
health clinics specializing in preventive (figure 1).
care). It pushes firms underground,
undercuts the state’s ability to raise rev- Bribes are equally pernicious when they
enues, and leads to ever-higher tax override regulations needed by society, such
rates being levied on fewer and fewer as building codes, environmental controls,
taxpayers. This, in turn, reduces the prudential banking regulations, and restric-
state’s ability to provide essential public tions on logging in tropical rain forests. The
goods, including the rule of law. A obscure insider lending practices and
vicious circle of increasing corruption improper financial schemes resulting from
and underground economic activity poorly supervised financial schemes have
can result. contributed to macroeconomic crises in
• Bribery is regressive, falling heavily on Albania, Bulgaria, and several Asian coun-
trade and service activities undertaken tries. Finally, bribers can also purchase
by small enterprises. monopoly rights to markets—as, for exam-
• Corruption undermines the state’s ple, in the energy sectors in some transition
legitimacy. economies, where unprecedented amounts

from the development economics vice presidency and poverty reduction and economic management network

The cost of capital of grease payments buttress gigantic monop- often restricted. Laws in government are
for firms tends to be olistic structures. poorly developed, if they exist at all, and
higher where bribery the legal institutions charged with enforc-
is prevalent—and Corruption’s causes ing them are ill prepared for this complex
corruption imposes job. The watchdog institutions that pro-
a significant tax on Corruption is widespread in developing vide information on which detection and
foreign direct and transition economies, not because enforcement is based—such as investiga-
investment in all their people are different from people tors, accountants, and the press—are also
regions elsewhere but because conditions are ripe weak. Yet strong investigative powers are
for it. First, the motivation to earn income crucial. Because the two parties to a bribe
is extremely strong, exacerbated by poverty often both benefit, bribery can be
and by low and declining civil service extremely difficult to detect. Even if detec-
salaries and the absence of risk-spreading tion is possible, punishments are apt to be
mechanisms (including insurance and a mild when corruption is systemic—it is
well-developed labor market). hard to punish one person severely when
so many others (often including the
Second, opportunities to engage in cor- “enforcers”) are likely to be equally guilty.
ruption are numerous. Monopoly rents And the threat of losing one’s job is a lim-
can be very large in highly regulated ited deterrent when official pay is low.
economies—and in transition economies,
where property is essentially up for grabs. Finally, certain country-specific factors,
The discretion of many public officials is such as population size and natural
broad in developing and transition resource wealth, also appear to be posi-
economies, and this systemic weakness is tively linked with the prevalence of bribery.
exacerbated by poorly defined, ever-
changing, and poorly disseminated rules Creating political will
and regulations.
Understanding what makes powerful
Third, accountability is typically weak. politicians do what they do, and which
Political competition and civil liberties are interests they represent, is of paramount
importance in addressing corruption.
Finding pockets of political support is cru-
cial; even in countries where corruption is
endemic, there are likely to be some
reform-minded decisionmakers whose
constituencies will support reform to fur-
ther the country’s broader interests. And
windows of opportunity may open up
when there is a change in regime or in
individual leadership, or when there is a
crisis. When such special opportunities
are absent, though, the necessary political
will may still be generated—albeit more
slowly—by efforts to enhance public
awareness and mobilize civil society to sup-
port anticorruption efforts.

Constructive pressure and assistance
from abroad is certainly not decisive, but
it can help. International organizations
and donors can help to focus attention on
corruption and support reformists in gov-
ernment and civil society. Furthermore, in
an increasingly integrated global econ-

omy countries competing for foreign a list of possible anticorruption measures International
investment are discovering that foreign (figure 2). To be credible, they felt, such organizations and
investors value stability, predictability, and watchdog bodies needed to be created in a donors can help to
honesty in government. Evidence is emerg- political environment characterized by focus attention on
ing that corruption imposes a significant honest leadership, insulation of civil ser- corruption and
“tax” on foreign direct investment in all vants from political interference, and support reformers
regions of the world, including East Asia. revamped incentives that discouraged cor- in government and
ruption. Otherwise, such bodies could eas- civil society
Tackling corruption ily be rendered useless or, worse, misused
for political gain. The respondents empha-
Is fighting corruption worth the bother? sized the importance of economic liberal-
Skeptics point out the dearth of successes ization and budgetary, tax, and regulatory
in anticorruption drives and the fact that it reforms, soundly rejecting the notion that
took England more than a century to bring such reforms fuel corruption.
corruption under control. But Hong Kong
(China) and Singapore, for example, have In fact, survey respondents thought their
shifted reasonably quickly from being very countries should have made more progress
corrupt to being relatively clean. Botswana in implementing broad reforms and indi-
has been a model of propriety for decades. cated that corruption and vested financial
Chile has performed well for many years, interests were key reasons for their slow
and Poland and Uganda have recently progress. While emphasizing first and fore-
made progress in controlling corruption. most the domestic causes of corruption,
many respondents also indicated that
What are the most common features of bribery by foreign firms played a significant
these successes? Anticorruption watchdog role. They thought that OECD members
bodies, such as the Independent Com- should enforce antibribery legislation
mission Against Corruption in Hong Kong abroad and that international institutions
(China) and smaller corruption-fighting should make curbing corruption a priority
institutions in Botswana, Chile, Malaysia, when providing assistance to their countries.
and Singapore, are often credited with
much of the progress. In contrast, the In sum, addressing corruption effec-
broader economic and institutional tively requires an emphasis on preven-
reforms that have taken place simultane- tion—that is, reforms of economic
ously have not received sufficient credit. policies, institutions, and incentives—if
The government that came to power in enforcement measures taken by the police,
Uganda in 1986 implemented a strategy ethics offices, or government watchdogs
encompassing economic reforms and are to bear fruit.
deregulation, civil service reform, a
strengthened auditor general’s office, the
appointment of a reputable inspector gen-
eral empowered to investigate and prose-
cute corruption, and a public information
campaign against corruption. In Botswana
sound economic and public sector man-
agement policies led to honest governance
early on; the country’s success in fighting
corruption has not been principally
derived from the more recent advent of its
anticorruption department.

In a recent survey public officials and
members of civil society in developing
economies rated the effectiveness of anti-
corruption watchdog bodies the lowest on

The entrenched The following are only some of the needs to reflect the particular lessons the
nature of systemic major economic policy changes that will country has learned about dealing with
corruption requires unambiguously reduce opportunities for perverse political influences, and how spe-
boldness in corruption: lowering tariffs and other bar- cific innovations in procurement and bid-
implementation— riers to international trade; unifying ding methods can reduce corruption.
incrementalism is market-determined exchange rates and
unlikely to work interest rates; eliminating enterprise subsi- Finally, practitioners need to search for
dies; minimizing regulations, licensing the information gathering and dissemina-
requirements, and other barriers to entry tion methods that can have the quickest
for new firms and investors; demonopoliz- and most direct impacts. The Bangalore
ing and privatizing government assets; and (India) NGO scorecard method, whereby
transparently enforcing prudential bank- users rated local service-providing agen-
ing regulations and auditing and account- cies, has already resulted in firings of offi-
ing standards. The reform of government cials, improved service delivery, and a
institutions may include civil service decreased incidence of bribery. Gathering
reform; improved budgeting, financial data and publicizing the vastly different
management, and tax administration; and costs of publicly provided school lunches in
strengthened legal and judicial systems. various localities have brought about gov-
Such reforms should involve changing ernment reforms. The existence of a free
government structures and procedures, press is of paramount importance. To safe-
placing greater emphasis on competition guard citizens’ freedoms of expression and
and incentives within the public sector, information, libel laws protecting politi-
and strengthening internal and external cians and public officials must not be overly
checks and balances. As a complement to restrictive. Indeed, however difficult and
these broader reforms, the transparent imperfect gathering data and disseminat-
implementation of enforcement mea- ing information about corruption are, the
sures, such as prosecuting some prominent importance of these activities cannot be
corrupt figures, can also have an impact. overstated. Secretiveness has helped elites
and politicians keep corrupt practices
Emphasis should be placed on selecting under wraps in many countries. Careful
measures that are in line with a country’s analysis, presentation, and dissemination
implementation capabilities during an of data can be very effective in raising gen-
anticorruption campaign. The entrenched eral awareness, creating momentum for
nature of systemic corruption requires reforms, and furthering our limited under-
boldness in implementation—incremen- standing of what does and does not work in
talism is unlikely to work. Genuine reform- efforts to control corruption.
ers will want to move quickly beyond the
general first principles contained in a This note is adapted from an article in the
country assessment to demand practical, March 1998 Finance and Development writ -
country-specific advice. For instance, tech- ten by Cheryl W. Gray (Interim Director, Public
nocratic lessons are beginning to emerge Sector, PREM Network) and Daniel Kaufman
as to how different privatization method- (Lead Economist, Development Research Group,
ologies may contain greater or lesser Development Economics). For further reading on
opportunities for corruption, how the corruption-related topics, visit the Knowledge
strengthening of banking regulations Management System website (http://kms).

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