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Monday, 16 August 2010

The historic origins of corruption

A recent paper investigates the empirical relationship between colonialism, elite formation and corruption. This is part of the broader  literature that has stressed the long term effects of colonialism on institutional quality and economic development :
The link between European settlement and corruption works through the formation of local elites, their power and attitudes. More powerful elites are able to enter in acts of corruption with impunity and the ethnic differences between them and the rest of the population make a concern for the other’s well-being all too unlikely. As we have argued, the power of this European elite and their capacity to impose measures that would favor them at the expense of the native population can be related to their numbers. The relationship is non-linear: a larger number of European settlers can solidify their position of power with respect to the rest of the population, but this is no longer true if Europeans are so numerous that they become the majority of the population. We would therefore expect that corruption first increases and then decreases with the degree of European settlement.

Our results present convincing evidence that the above thesis holds in practice. Controlling for level of development and a set of exogenous determinants of corruption we find that the degree of European settlement is a powerful explanatory factor of corruption and that the relationship is non-linear. The result continues to hold in a large number of robustness tests where we instrument for economic development, consider alternative measures of corruption, and add a large number of additional explanatory factors of corruption found in the literature.
The "corruption" in question is actually perceptional corruption (e.g. as captured by the International Risk Register) rather than "experiential corruption" that includes petty corruption (e.g. as captured by World Business Environmental Survey). When tested by the latter the results appear to fail. That is to say there appears no relationship between experiential corruption and colonial settler influence. The authors defend this result by noting that perceptional corruption better reflects the link to "the elites". That may be so but it is still not fully demonstrated what the pathways are from colonial elites to present day elites, though the results do give us enough motivation for that case study based approach to complement the regressions. 

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