Econ171 Economic Development

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Econ171 Economic Development

• Corruption and Economic Development

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Corruption

• Power corrupts, and absolute power corrupt
  absolutely.
• Lord Acton
• In third world countries, the corrupt get power
  and the absolutely corrupt get absolute power.
• Atanu Dey ?
• See that bridge?

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Definition

• Most commonly refers to the misuse of public
  power for private gain. Incentives for corruption
  arise whenever a public official has
  discretionary power to allocate government
  services, on which it typically has a monopoly,
  to the private sector.
• Klitgaard summarizes the basic ingredients of
  corruption as being equal to monopoly power plus
  discretion minus accountability.
• Corruption and Economic Development, Nicholas
  A. Lash, Loyola University Chicago
• http//bit.ly/epm6C

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Government and Corruption

• Rent Seeking
• Monopoly control of the economy
• 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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Public Corruption

• Public corruption can be traced to government
  intervention in the economy, policies aimed at
  liberalization, stabilization, deregulation, and
  privatization can sharply reduce the
  opportunities for rent-seeking behavior and
  corruption. Where government regulations are
  pervasive, however, and government officials have
  discretion in applying them, individuals are
  often willing to offer bribes to officials to
  circumvent the rules. -- Paolo Mauro

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Causes of Corruption

• Engineered Shortages
• Socialism
• Trade Restrictions
• Subsidies
• Price Controls
• Multiple Exchange Rates and Forex allocation
  schemes
• Low wages in the civil service
• Natural resource endowment
• Ethnolinguistic fractionalism and nepotism

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Consequences of Corruption

• Lowers investment and retards economic growth
• Rent seeking misallocates talent
• Reduces the effectiveness of aid flows
• Loss of tax revenues, leading to adverse
  budgetary consequences
• Lower quality infrastructure and public services
• Distorts the composition of government
  expenditure
• Kakistocracy!!

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Transparency International

• www.transparency.org
• 2008 Corruption Perception Index for 180
  countries
• Top ranks Denmark, New Zealand, Sweden,
  Singapore, Finland, Switzerland
• Bottom ranks Somalia, Burma, Iraq, Haiti,
  Afghanistan
• China 72, India 85, Pakistan 134, Bangladesh 147
• Burkina Faso 80 ?

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Some References

• Why Worry About Corruption by Paolo Mauro. IMF.
• http//bit.ly/pCJIV
• Corruption as an impediment to economic growth.
  
• Greg Mankiw http//bit.ly/GXzvI
• The Persistence of Corruption and Slow Economic
  Growth by Paulo Mauro. IMF Working Paper
• Read the last section, pages 21-22.
• http//bit.ly/44fhNb
• Corruption and Economic Growth
• Nicholas Lash. May 2003
• http//bit.ly/epm6C