Is corruption (always) a problem for the economy? As the role of Devil is to test someone's belief, let me be the Devil's Advocate by raising these points.
1. Corruption as the ‘beneficial grease.’ If the commerce is the wheel for the economy, then corruption, instead of being a hindrance, can be the grease that speeding up the wheel.1 In many developing countries – as well as the developed ones – bureaucratic procedures to obtain business permits usually take quite a long time. That happens because the incentive structure does not provide civil servants do enough motivation to work harder to speed up the process. However, a business player may be able to speed up the process of getting necessary permit by bribing the government official(s). We can argue that this is illegal or morally wrong. But from another perspective, bribery is basically providing an extra incentive for the official(s) to remove the bureaucratic inertia.
Or, consider another case in which a government official illegally sells a product or service in the black market cheaper than the official price. The official takes the money for him/herself, the state loses money but the consumer ends up paying lower price. 2 At the end, it’s just a transfer from the state to the consumer. But the economic wheel moves rather than halts, so there is a net benefit for the economy.
2.Corruption as a ‘screening device.’ Consider corruption (bribery asked by government officials, extra charges to public services in return of special favors, etc.) as ‘additional taxes’ to business sector. Consider there are two types of firm: the high-profitable and low-profitable ones. Who is more willing to pay the ‘tax’? In some cases, we may think of the low-profitable firm is more willing to pay if by paying bribes it can gain access to special treatments. But this is conditionals to the expected profit it may get. In most cases, the low-profitable one, even though it is willing to, would not afford to pay such ‘tax.’
There are cases where the high-profitable firm is the one willing, and can afford, to pay. It is willing to pay if in return it can gain advantages over its competitors. It can afford to pay as long as the cost does is not significant compared to its profit. In this case, corruption acts as the ‘screening device’ that sort out efficient firms to non-efficient ones. Put it in another way, corruption is an ‘invisible foot’ that kicks out non-efficient firms out of the market. 3
3. Competition will naturally drives out corruption. Even if corruption do exists and is harmful, in the long-run the market and political competition will eliminate it. According to Nobel Laureate Gary Becker, market competition among as well as political competition among pressure groups will increase the cost for the rent-seekers. As the result, policy that favors the public interests more is the best strategy to gain support.4 I can give you two real examples. First, the competition among rent-seekers in Thai manufacturing industry after the 1950s has led to a competitive industry structure, since individual patrons or clients could not prevent their competitors from entering the lucrative market.5 Second, following the protests from other debtors who have paid their debts, the Indonesian government decided to cancel the idea to favor debt extensions to big corrupt debtors in 2002.6
I shall stop being the Devil's Advocate now before I become the Devil himself .
1 See the discussion in Shang-Jin Wei, “Corruption in Economic Development: Beneficial Grease, Minor Annoyance, or Major Obstacle?” World Bank Working Paper No. 2048 (1999).
2 Andrei Schelifer and Robert W. Vishny, “Corruption,” The Quarterly Journal of Economics 108(3), pp. 599-617.
3 I borrow this argument from Prof. Ashim Ijaz Khwaja of
4 Gary S. Becker, “A Theory of Competition among Pressure Groups for Political Influence,” Quarterly Journal of Economics, vol. 98(3) (1983): 317-400.
6 See my old article here.