Economics and its love-hate relationship with corruption | The Daily Star
12:00 AM, March 06, 2020 / LAST MODIFIED: 02:29 AM, March 06, 2020

Economics and its love-hate relationship with corruption

Abhijit Banerjee, who was awarded the Nobel Prize in Economics in 2019, made his mark with some early work on corruption in government. However, Banerjee is not just an armchair wrestler. During the 30 years of his professional life, Banerjee, often in collaboration with his wife and fellow Nobel Laureate Esther Duflo, has conducted scientific experiments to capture the impact of corruption and identify the best intervention methods. However, as with many economic theories, the results from research are not always clean and dry.

If one were to ask you, "What is the most common problem in every modern society?", your answer is likely to be income inequality or the lack of universal healthcare. However, a recent survey revealed that one problem that has become a plague across the league of nations today is corruption. There is almost a consensus that corruption is endemic and spreading. "It exists in all countries, both developed and developing, in the public and private sectors, as well as in non-profit and charitable organisations," according to U Myint, a research scholar.

From a historical perspective, corruption has been a problem in every society and economists have grappled with it for ages. In his seminal treatise on economic system and market forces—"An Inquiry into the Nature and Causes of the Wealth of Nations"—Adam Smith considered corruption as an abuse of power and detrimental to society. Some of the modern world's topmost economists including the earliest recipients of the Nobel Prize in Economics—Gunnar Myrdal, Gary Becker, and George Stigler—have made their mark with scientific papers on the impact of corruption.

Unfortunately, economists have not been very forthcoming when asked to offer solutions for the problem of corruption. This attitude reminds me of Mark Twain who is often reputed to have said, "Everyone talks about the weather, but nobody does anything about it." Whatever the provenance of this interesting phrase, it has recently been adapted to engender another very apt and more modern adage: "Everyone talks about corruption, but nobody does anything about it".

Economist and Nobel Prize winner Gunnar Myrdal was puzzled by this lack of interest. In 1968, Myrdal pointed out that many rulers in developing countries "came to power on the promise that rampant bribery and nepotism would be eradicated". Myrdal concluded that academics were silent about corruption because they were embarrassed to probe corruption in developing countries, many of which had just emerged from hundreds of years of colonial rule. Things have changed since then. A report in the Guardian newspaper of UK pointed out that research on corruption, both in developing and developed countries, is mainstream now, and economists are probing into where and among whom corruption is prevalent, how it works, who profits and who loses from it.

In one of his earliest papers in a prestigious scientific journal, Banerjee tries to explain why government bureaucracies are associated with red-tape, corruption, and lack of incentives. In the paper "A Theory of Misgovernance" published in the Quarterly Journal of Economics, he uses a simple model to consider the possible benefits of red-tape and corrupt bureaucrats who might be using "grease money" to foster better allocation of scarce resources. In other words, corruption performs the role of a lubricant to turn the wheels of economic growth. Unfortunately, Banerjee did not test his theory or predictions with real data.

However, once Banerjee and other economists refined the tools of randomised control trials (RCT), they used them to test the efficacy of various anti-corruption options. In a paper entitled, "Improving Police Performance in Rajasthan, India: Experimental Evidence on Incentives, Managerial Autonomy and Training", he and his fellow researchers tested five interventions recommended by police reform panels: limitations of arbitrary transfers, rotation of duty assignments and days off, increased community involvement, on-duty training, and visits by field officers posing as citizens attempting to register cases. Only two of these, training and decoy visits, had robust impacts. A lesson from these experiments and other research is that government agencies could try small policy changes rather than go for major or radical institutional reform.

Samuel Fleischacker of the University of Illinois at Chicago raises another possibility which may offer some clue as to why economists have a hard time capturing corruption in a mathematical model and they lack any clear policy measures to clean up corruption. He offers a sampling of cases that point to a wide range of corruption we witness.

i) A low-paid constable offers a deal to a smuggler at the border post: the police will ignore its activities in return for a cut of his profits.

ii) A government minister appoints someone to a job in return for a contribution to his election campaign.

iii) A prime minister offers a judgeship to a legislator in return for the latter's support on a key vote in the parliament.

iv) A political party with a majority in the parliament passes electoral laws to enhance its chances of winning future elections.

v) A garments company makes a generous contribution to the electoral campaign of key legislators, in order to get laws crafted in its favour.

vi) A "mega project" incurs cost overruns but is not penalised because the contractors exercise their political influence at the highest levels of power.

vii) Parliament members who relied heavily on rich donors to win their electoral campaigns vote for large tax breaks for the rich, even though they do not believe those tax breaks to be in the best interest of their constituencies as a whole.

Ironically, economists have also argued that corruption has a beneficial effect since it allows the entrepreneurs to get around red-tape and this increases investment. Banerjee and Duflo feel that the culture of corruption in poor countries is at least partly a result of underdeveloped institutions, including lack of democracy.

Economists attribute some of the problems they encounter in investigating the connection between corruption and GDP growth to the difficulty inherent in measuring corruption. As an example, both the businessman who offers a bribe to seek a contract and the official who takes money will try to hide or under-report the amount and nature of corruption.

In the end, one has to point out that corruption is not just an economic issue but also political and social. Regardless of the difficulties in measuring corruption, a multitude of studies reveal that corruption in the public sector erodes tax compliance and leads to higher tax evasion. Moreover, corrupt public officials abuse their public power to extort bribes from the private agents. In these instances, "the private agents are bound to face uncertainty with respect to their disposable incomes. Most importantly, it is demonstrated that the increase in corruption via higher uncertainty exerts adverse effects on capital accumulation, thus leading to lower growth rates."


Dr Abdullah Shibli is an economist and works in information technology. He is Senior Research Fellow, International Sustainable Development Institute (ISDI), a think-tank in Boston, USA.

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