Corruption has been around for a very long time and will be around in the future unless governments can figure out effective ways to combat it. This is not going to be easy. Although the study of the causes and consequences of corruption has a long history in economics, going back 30 years to seminal contributions on what economists call rent seeking, related empirical work on quantifying the extent of corruption and putting a dollar sign on its economic effects has been limited. This is hardly surprising since most corruption is clandestine. Also, determining just how efficient government institutions are is not what would be called an exact science. As a consequence, corruption is notoriously hard to measure and empirical economic research on the question is fairly meager. This paper focuses exclusively on corrupt public practices--illegal activities that reduce the economic efficiency of governments. It does not address private corruption, such as that practiced on individuals and private enterprises by organized crime.
Wide publicity surrounding the statements at the multinational financial institutions' 1996 Annual Meetings by the Managing Director of the International Monetary Fund that governments must demonstrate their intolerance for corruption in all its forms and by the President of the World Bank that the "cancer of corruption" must be dealt with have stimulated renewed interest in the topic. Researchers have begun to look at so-called corruption indices, which are produced by private rating agencies and are typically based on replies by consultants living in the countries to standardized questionnaires. Obviously the replies are subjective, but the correlation between indices produced by different rating agencies is very high, suggesting that most observers agree more or less on ranking countries according to how corrupt they seem to be. The high prices paid to the rating agencies by their customers (usually multinational companies and international banks) constitute indirect evidence that the information is useful and can have tangible economic effects. On the other hand, the judgment of the consultants who produce these indices may be skewed by the economic performance of the countries they monitor. Substandard economic performance by itself does not argue to pervasive corruption, nor is economic success an infallible sign of innocence of corruption. It is therefore important in analyzing the relationship between perceived corruption and economic variables to be cautious about interpreting correlations as cause-effect relationships. An additional drawback of these indices is their failure to distinguish among various types of corruption: high-level versus low-level corruption or well-organized versus poorly organized corruption. Despite these limitations, the indices provide a wealth of useful information.
This paper has two goals. First, it lists a number of possible causes and consequences of corruption, derived from a review of recent empirical studies that use cross-country regressions to determine the strength of the links between corruption and its causes and consequences. (A regression is a statistical technique for estimating the equation that best fits sets of observations. In this case, regressions point to the most probable causes and the most probable consequences of corruption.) Although data limitations subject empirical work to many uncertainties, these studies provide tentative evidence that corruption may seriously inhibit economic performance. Second, the paper presents recent evidence on the extent to which corruption affects investment and economic growth and on how it influences governments in choosing what to spend their money on. It finds that corruption discourages investment, limits economic growth, and alters the composition of government spending, often to the detriment of future economic growth
Corruption has been around for a very long time and will be around in the future unless governments can figure out effective ways to combat it. This is not going to be easy. Although the study of the causes and consequences of corruption has a long history in economics, going back 30 years to seminal contributions on what economists call rent seeking, related empirical work on quantifying the extent of corruption and putting a dollar sign on its economic effects has been limited. This is hardly surprising since most corruption is clandestine. Also, determining just how efficient government institutions are is not what would be called an exact science. As a consequence, corruption is notoriously hard to measure and empirical economic research on the question is fairly meager. This paper focuses exclusively on corrupt public practices--illegal activities that reduce the economic efficiency of governments. It does not address private corruption, such as that practiced on individuals and private enterprises by organized crime.
Wide publicity surrounding the statements at the multinational financial institutions' 1996 Annual Meetings by the Managing Director of the International Monetary Fund that governments must demonstrate their intolerance for corruption in all its forms and by the President of the World Bank that the "cancer of corruption" must be dealt with have stimulated renewed interest in the topic. Researchers have begun to look at so-called corruption indices, which are produced by private rating agencies and are typically based on replies by consultants living in the countries to standardized questionnaires. Obviously the replies are subjective, but the correlation between indices produced by different rating agencies is very high, suggesting that most observers agree more or less on ranking countries according to how corrupt they seem to be. The high prices paid to the rating agencies by their customers (usually multinational companies and international banks) constitute indirect evidence that the information is useful and can have tangible economic effects. On the other hand, the judgment of the consultants who produce these indices may be skewed by the economic performance of the countries they monitor. Substandard economic performance by itself does not argue to pervasive corruption, nor is economic success an infallible sign of innocence of corruption. It is therefore important in analyzing the relationship between perceived corruption and economic variables to be cautious about interpreting correlations as cause-effect relationships. An additional drawback of these indices is their failure to distinguish among various types of corruption: high-level versus low-level corruption or well-organized versus poorly organized corruption. Despite these limitations, the indices provide a wealth of useful information.
This paper has two goals. First, it lists a number of possible causes and consequences of corruption, derived from a review of recent empirical studies that use cross-country regressions to determine the strength of the links between corruption and its causes and consequences. (A regression is a statistical technique for estimating the equation that best fits sets of observations. In this case, regressions point to the most probable causes and the most probable consequences of corruption.) Although data limitations subject empirical work to many uncertainties, these studies provide tentative evidence that corruption may seriously inhibit economic performance. Second, the paper presents recent evidence on the extent to which corruption affects investment and economic growth and on how it influences governments in choosing what to spend their money on. It finds that corruption discourages investment, limits economic growth, and alters the composition of government spending, often to the detriment of future economic growth
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