Tuesday, May 09, 2006

Corruption - a Devil's Advocate view

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 Harvard University.

4 Gary S. Becker, “A Theory of Competition among Pressure Groups for Political Influence,” Quarterly Journal of Economics, vol. 98(3) (1983): 317-400.

5 See my old article here.

6 See my old article here.


  1. An Angel's advocate:
    1. The argument that corruption can serve to grease the wheel is a 'second best' solution that aims to solve the problem by not focusing on the roots of the problem itself. Instead of having to buy grease to grease the wheel, why not replace the old wheel with one that is "frictionless" (The first best solution). This way we will not have to spend time, money and effort to "grease" the wheel. Moreover, this argument is proposing a view that corruption can be used to alleviate some of the negative effects that corruption caused in the first place. Why not eliminate corruption all together and hence the wheel will be in no need of greasing.
    2. In regards to the second argument, this might be true. However, it could be true that the "extra tax" imposed might chase away both efficient and non-efficient firms and hence there will be no economy. How do you know only less efficient firms are chased away? Also, corruption creates further corruption and as corruption increases, so does the extra tax. In the long run, the tax will be so large that efficient firms will also be chased away.
    3. Assuming this arguments to be true, that corruption will eventually be eliminated through market mechanisms, corruption is still unjustified. A person who catches the flu might heal even if he doesn't rest and take care of himself. This is no justification for doing nothing. Not only might the flu take much longer to heal, but the flu might take its toll in different ways such as the person being less productive in the meantime. A similar picture emerges in the case of a country with a corruption epidemic.

  2. A nice explanation on the corruption. You have a talent to be a devil advocate :D (j/k)

    I have quite the same opinion :

    1. Corruption is externalities.

    If the initial level of economy is not efficient, than the corruption could be greasing or harmful. While, if the initial level of economy is already efficient, then the corruption surely harmful.

    2. Corruption can deter competition.(especially in case of bribing in license)

    Conditional on the level of bribe, the one who has lots of fund has higher probability to pay. It means that only firms with large capital have probability to stay in the market. While the small and medium firms will tend to decrease in numbers because of the inability to pay the license bribe. The entrant will decrease due to the high entry cost (high sunk cost). These three effect, will increase the monopoly power of the big firms.

    What do you think?


  3. interesting that none brought the moral side of the argument, or at least how the disregard for law and order can affect/discredit the economy itself (i'm not being a moralist, i just think that the impact is very real, not to mention that it directly affect uneven distribution of wealth, as is the case here and India, and in the end creates other problems in even larger magnitude)

    Most of these arguments only apply to simple bribe in procedural/administrative stuff and not in the larger sense, i guess.
    might have more later. interesting anyway.

  4. a.p., I’m a little bit surprised you didn’t mention the paper by Bertrand et al, the paper from an experimental study in India on the practice of bribes and corruption in obtaining driver's license. It's a very nice attempt to answer your point number 1 “does corruption grease the wheel” (YES, for individuals), to test whether the bureaucracy actually creates red tape to extract rents (YES), and whether in the end they fulfill social needs (i.e. producing safe drivers - NO). In other words, while in that particular case bribes did help get things moving, in the end they also created other problems (unsafe drivers) for the society, a possibility pointed out by Trainspotter.

    I guess jr nails it when he/she argues that all these are second-best solutions (at best!), so the way to think about it maybe is that a.p. was making an implicit assumption that we are only operating within the constraint of the second-best world.

  5. Thanks for the comments, guys. Looks like the devil doesn not have too many followers here :-)

    Ujang -- about the paper, remember that this is the devil's thought. But you and j.r. are correct about the second-best assumption. In fact, in policy context, more often we're in the second, thirt or fourt-best situation. And as T.D. mentioned, sometimes the second-best is Pareto oprimum. moving from that point is inefficient, unless we compensate something with other thing.

    To j.r.: "help, I'm burnt in hell..!" :-) Replies to the related numbers:
    1. good point. but the bottom line: corruption itself may not be the root of problems. it is a symptom of another disease -- inefficiency.
    2. again, good point. but just in terms of logical structure, you can't counter an "in this case" type of argument with another "in this case" one.
    3. the moral of the story is: sure, punishment and enforcement matters. but so do (dis)incentives and competition. that's the message from the dev.. i mean, economists.

  6. To Treespotter:appo-polly-logies for mistyping your name. I think I confused you with the other u.k. sensation ;-)