The Iron Lung of Corruption
Corruption, as illustrated by cases like Mobutu Sese Seko in Congo, is most prevalent in developing countries and consistently inhibits economic growth through negative impacts on private investment, resource misallocation, distorted budgets, and reduced efficiency. While some argue that corruption may facilitate certain bureaucratic processes and incentivize superior work in specific contexts, empirical evidence overwhelmingly demonstrates its adverse effects on economic development, urging developing countries to focus on improving their institutions and practices for the well-being of their citizens.
Mobutu Sese Seko, the former strongman of the Congo, once said that “If you want to steal, steal a little in a nice way … But if you steal too much to get rich overnight, you'll be caught." Evidently, he took his own advice seriously. Known as the archetypal African dictator, Sese Seko stole roughly $5 billion in foreign aid from his impoverished country. He did this by engaging in outrageous acts of corruption, such as flying a Concorde jet for personal trips to Paris and once ordering 5,000 sheep to be imported from Venezuela. That latter escapade required 32 round trips from Caracas to the Congo by the government’s DC-8 ship. In 2004, Transparency International put out a list of the most corrupt public officials in modern times, along with estimates of the total value of their scams. Sese Seko’s heists did not even rank first. He was beaten out by Indonesia’s Suharto, who stole an estimated $15-35 billion. In addition, Sese Seko was ranked behind the Philippines’ Ferdinand Marcos, who stole approximately $5-10 billion and whose wife had an infamous collection of 3,000 shoes. But what’s most striking about the list, however, is that it is entirely made up of leaders from underdeveloped countries.
Indeed, corruption is most endemic in developing countries, and in recent decades economists have tried to estimate not just the ‘market value’ of corruption but also the effects that corruption has on a country’s economic growth. What most of the research makes clear is that corruption inhibits economic growth, primarily through its negative impact on private investment, promotion of rent-seeking activities that cause a misallocation of resources and distorted government budgets, and lower overall efficiency. If governments of developing countries wish to ensure a better life for their citizens, many would find it beneficial to focus inwards and improve their own institutions and practices.
Before exploring the evidence of the negative effects of corruption on economic growth, however, it is pertinent to explain some differing views on the issue. That is, why do some economists argue that corruption can, in some instances, help a country’s growth prospects? One common line of argument is that, in countries where the official bureaucratic process and laws are extremely cumbersome for the private sector, corruption can act like ‘speed money’ and be the ‘oil’ for things like mergers and investment decisions to be approved. Without corruption, private investment would be even lower than in its real-world level. A second, though less widely used argument is that corruption acts as an incentive for superior work by public officials. Essentially, corruption can act as a supplement for low public sector wages and can thus produce more efficient work by the bureaucracy. In these two scenarios – overly cumbersome red tape and a low wage public sector – corruption can be pro-growth.
With these qualifications in mind, we can see how much these nuanced understandings of corruption are compatible with the main studies on corruption and growth. In one of the first attempts to quantify the effects of corruption on growth and in a now seminal paper, economist Paolo Mauro found that corruption has a strong and statistically significant negative relationship with economic growth. That is, in his cross-country panel regression with various economic and
political control variables, Mauro found that the larger corruption was in a country, the lower the predicted economic growth would be. In a more recent paper, Ahmad et al. (2012) summarize the literature as having “consistently reported a negative correlation between economic growth and the level of corruption, and evidence on beneficial effects has been scarce at best.” Their paper, however, adds to this literature by testing for non-linearity in the relationship between growth and corruption. That is, previous papers tended to assume a linear relationship, implying that a unit change in corruption always lowers or raises economic growth by the same amount. With their non-linear, quadratic regression specification, they can test whether or not there is indeed a ‘growth maximizing’ level of corruption, i.e., that some corruption may be good. Their results generally indicated statistical significance of their nonlinear model, with the maximizing level of corruption around a score of 8.3/10 on Transparency International’s Corruption Perceptions Index (CPI), along with a strong negative relationship between corruption and growth in their different model specifications.
Although the existence of a non-zero, growth optimal value of corruption may appear to support the case for corruption in certain instances, a closer analysis is needed. In particular, the optimal level found is rather high compared to the global average and is especially above the CPI value for most developing nations. As the authors point out, average countries like Nigeria and Pakistan had CPI values of 3.1 and 4.4 respectively. If they were to improve their corruption levels (that is, raise their CPI score) up to the growth maximizing level, their long run economic growth was predicted to rise by 1.66% and 0.85% respectively. Given that most developing countries are in a similar situation, a prevalence of ‘pro-growth’ corruption is rather unlikely.
As has been made clear, corruption is a major inhibitor of growth for many developing states. Outside of being an affront to the conscience of a democratically minded populace, it is also materially harmful for the least well off among us – the global poor. Given the persistence of the issue in the developing world and the strong potential benefits of its alleviation, governments worldwide need to ensure that the iron lung of corruption is removed for the benefit of present and future generations alike.
Written by Henry Olsen