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Saturday, 23 May 2009

The Fallacy of Beneficial Corruption

A new paper challenges the idea that corruption greases the wheels of development. Presenting both the theoretical and empirical case, it concludes that corruption has a negative impact on sustainable development. Previous studies have found a mixed picture in relation to GDP (a narrower measure than considered in the new paper). Although it does not deal with important issues of measuring corruption or the importance of distinguishing between different forms, it's nevertheless use in terms of raising questions on the robustness of existing measures : 
Does corruption, then, sand or grease the wheels? While corruption in a very narrow sense can be seen as a lubricator that may speed things up and help entrepreneurs getting on with wealth creation in specific instances, in a broader sense, corruption must be considered as an obstacle to development. This is so for a number of related reasons. One is the fallacy of efficient corruption: the cumbersome procedures that corruption is supposed to help overcome may be created and maintained precisely because of their corruption potential and substantial real resources may be devoted to contesting the associated rents. This leads to pure waste and to misallocation of resources. There is also a fallacy of composition lurking: undisputed, but isolated, instances of efficiency-enhancing corruption at the micro-economic level cannot be taken as evidence that corruption can be efficiency-enhancing at the macroeconomic level.

Both the micro and macro evidence evaluated here support this view. Quantitative evidence from field studies and surveys points to substantial costs of corruption. At the macro level, although the search for a negative effect of corruption on the average growth rate of GDP per capita has failed to produce convincing and robust evidence, this does not imply that corruption is irrelevant (or even beneficial) at the macro-economic level. At least in societies with otherwise good governance and strong political institutions, corruption reduces growth at the margin. More importantly, even if the average effect of corruption on GDP growth is close to zero, the new evidence presented above suggests that corruption is a significant hindrance for sustainable development. Arguably, I have only scratched the surface. Much more work is needed to establish how robust and causal the correlation between corruption and the growth rate of genuine wealth per capita is and to construct better measures of genuine wealth. Nevertheless, as Dasgupta (2009) rightly points out, we should be shifting our attention away from growth in GDP per capita to growth in genuine wealth and start asking questions about what role economic, political and legal institutions play in promoting accumulation of genuine wealth and sustainable development.



  2. Interesting. Reminds me of a discussion we had on this issue some time ago...


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