Costs of corruption – Investor column

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Instinctively, the answer is: yes. The evidence, however, is less clear.

Certainly, corrupt countries tend to be poorer than less corrupt ones. But this could be because in poor countries there are fewer ways to earn a living honestly, which is pushing people towards crime and corruption: similarly, the economic downturn in the West in recent years. has led to an increase in fraud.

But does corruption hamper economic performance? There is evidence that this is the case, depressing investment: having to pay bribes reduces returns on capital and therefore the incentive to invest. And if money is siphoned off abroad into tax havens or offshore accounts, corruption reduces aggregate demand. It also skews the allocation of resources if government contracts are awarded to the biggest bribe rather than the company best able to do the job. And corruption can also increase political instability and therefore discourage investment – although this is not guaranteed, as people’s response to injustice is often to resign itself to it rather than rebel.

All of this, however, is only part of the story. Sometimes corruption can increase economic growth, as the payment of bribes can grease the wheels of commerce by helping to overcome planning restrictions or other red tape. And economists have found that the impact of corruption varies from country to country. It has a debilitating effect in some countries in sub-Saharan Africa, but on the other hand, countries like Malaysia, Indonesia and Thailand have grown rapidly for decades with rampant corruption. One of the reasons for the difference is stability: paying regular bribes in return for predictable favors is little different from paying taxes. It’s if you don’t know who to pay or what you’re getting in return when corruption weakens economies.

Individual corruption, however widespread, may not be the important thing. Something else matters more, as argued by Daron Acemoglu and James Robinson in Why nations fail. This something is institutional quality. Some nations are handicapped by what they call extractive institutions, through which ruling elites appropriate wealth while denying others economic opportunities.

Institutions, however, can change. The late Mancur Olson showed how vested interests put pressure on governments to protect themselves from the forces of competition. As Northwestern University’s Joel Mokyr wrote: “Lobbyists will try to manipulate the political system to suppress successful innovation.” Countries, he points out, have historically only been economically dynamic for fairly short periods of time because these anti-growth forces eventually win. For example, companies are pushing for (and getting) restrictive intellectual property laws, lax competition policy, or implicit subsidies for banks. Not to mention the nimbyism or manipulation of the tax system in their favor: while businesses and workers will pay more taxes in the coming years, a property value tax is no longer on the agenda.

Of course, it is the individual acts of corruption that attract attention and outrage. For economists, however, what matters most are systemic actions – how laws and institutions can be used by the elite to protect themselves from the forces of competition and creative destruction that are driving the engines. economic progress. Corruption is unacceptable, but economies are often weakened by things that we consider acceptable.

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