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Strong government: a corruption antidote

No one is likely to claim intellectual authorship for the idea now, but until a few decades ago serious academics argued that corruption was actually good for economic growth. At the time, the prevalent perception was that bribes helped business people cut through red tape, greasing the wheels of otherwise lethargic bureaucracies and offering public servants an incentive to work.

This outdated notion was recalled by Paolo Mauro, an Oxford- and Harvard-trained economist with the International Monetary Fund spoke on the issue of corruption at a luncheon held by the IDB’s Forum of the Americas program in September.

Since then the world has taken a much less sanguine view of this phenomenon. In recent years, corruption has ranked high on the list of public concerns in Latin America and the Caribbean, along with crime and unemployment. Private rating agencies and groups such as Transparency International regularly poll members of their networks in many countries to find out where corruption is rife and where it is marginal.

Mauro, who has been delving into the subject for a number of years, said that a review of recent empirical studies suggests that corruption can seriously hamper economic performance by discouraging investment, limiting growth and distorting public sector spending. Similarly, a country that succeeds in reducing corruption and polishing its image could reap substantial rewards. According to the IMF official, a nation that moves up a notch on a corruption index where 0 is virulently venal and 10 is absolutely angelic could see its gdp growth rate increase by 0.25 percent. This may seem a small gain in a single year, but over the course of many years it can represent an enormous achievement.

A great deal of public corruption results from the economic power of politicians and bureaucrats. Trade restrictions, government subsidies, price controls, multiple exchange rate schemes and legal monopolies have long been suspected of breeding bribery, embezzlement and favoritism.

During the past decade many countries resorted to liberalization, deregulation and privatization policies to improve their economic performance, expecting as an additional benefit to limit the opportunities for rent-seeking. Nevertheless, not all countries have rushed to embrace such policies, nor has the public’s concern over the problem subsided. Latin America is widely considered to have a somewhat higher level of corruption than the world average. Mauro, however, cautions that corruption indices have limitations due to the subjective nature of much of their data. For instance, they do not distinguish between high-level corruption (say, a defense minister demanding kickbacks for purchasing jet fighters) and low-level corruption (a policeman who takes a bribe for pardoning a traffic violation). Nor do they differentiate between well-organized corruption (where crooked officials deliver on their promises) and chaotic corruption (where a bribe does not guarantee a favor will be granted).

Nevertheless, Mauro has found that corruption is most prevalent in countries cursed with political instability, red tape and weak legislative and judicial systems. Empirical evidence suggests that countries with democratic government, freedom of press and good-quality and well-financed education systems tend to have lower levels of corruption.

His policy conclusions: if you really want to get rid of corruption, you can’t take gradual steps. One of the keys is to ensure fiscal transparency by avoiding off-budget transfers and opaque budget-allocation mechanisms.


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