Corruption is a complex and diverse phenomenon with several causes and effects, since it manifests itself in diverse forms and functions in diverse circumstances. Corruption can range from a single act of making an unlawful payment to an endemic breakdown of a political and economic system. Corruption has been viewed as a political or economic structural problem, as well as a cultural and human moral issue. As a result, definitions of corruption range from broad phrases like “misuse of public power” and “moral degeneration” to rigorous legal definitions like “bribery involving a public worker and a tangible resource transfer”.
Most definitions of corruption, which see it as a unique and distorted state-society connection, highlight the state’s central role. Corruption is commonly defined as the private wealth-seeking behavior of someone who represents the government or a public authority. It also involves the misappropriation of public resources for private gain by public authorities. The World Bank (1997), Transparency International (1998), and others utilize the encyclopedic and working definition of corruption as the abuse of public power for private gain (or profit). Corruption is also described as a transaction between private and public sector actors in which collective products are illegally turned into private goods (Heidenheimer et al., 1989: 6). Rose-Ackerman (1978) emphasizes this concept, stating that corruption exists at the intersection of the public and private sectors.
Background (theoretical and empirical)
Treating corruption as any other crime and applying the conventional economic model of crime proposed originally by Becker (1968) and refined later by various writers such as Polinsky and Shavell is a reasonable starting point for economic study of corruption (1979, 1984). Persons considering corruption use this basic model to compare the monetary equivalent of expected benefits in the form of bribes, favors, or payment in kind with the expected costs in the form of the probability of being detected and the monetary sum (or equivalent) of the punishment if they are convicted. This formulation is similar to Allingham and Sandmo’s application of Becker’s model to the economics of tax evasion (1972). If the net projected gain is positive, corruption is likely to occur.
Over the last 30 years, the theoretical and empirical literature on corruption has sparked a lively debate. Krueger (1974), Myrdal (1989), Shleifer and Vishny (1993), Tanzi (1997), and Mauro (1995, 1998), for example, have claimed that corruption is harmful to economic progress. They argue that corruption alters government goals and diverts resources from public to private interests, resulting in a societal deadweight loss. Furthermore, government corruption may deter private investment by increasing the cost of public administration (because it is likely to take the form of a bribe for a public service) or by causing social turmoil and political upheaval, which may hamper economic progress (Alesina, 1992). On the other hand, Leff (1964), Huntington (1968), and Friedrich (1972) have proposed that corruption can also be advantageous to economic growth. They claim that if the government has created a package of ubiquitous and inefficient restrictions, corruption may be a low-cost way to get around them. In this scenario, it’s possible that corruption will increase the system’s efficiency and even aid economic growth.
Another argument in favor of corruption sees bribery as “speed money,” or payments designed to “mediate” between political parties who would otherwise be unable to achieve an agreement. Then, as long as the bribe reduces the amount of time spent on administrative procedures, the bribers will be better off. For example, Lui (1985) proposed a model in which bribes are used to reduce the costs of “waiting in line.” However, Kaufmann and Wei (1998) questioned the hypothesis’ empirical validity.
According to Ehrlich (1999), corruption and per capita income should be adversely associated at various phases of economic development. The distinction between corruption and crime is that corruption involves the investment of political capital as a ticket to the bureaucratic ranks, whereas many illegal actions require minimal competence. The author suggested that such an investment has an impact on productive actors’ incentives to invest in human capital. The link between corruption and the economy can thus be viewed as an organic result of competition between growth-enhancing and socially unproductive investments, as well as its response to exogenous variables, such as government interference in private economic activity.
Cartier-Bresson (1999) proposed five economic factors that promote a society’s corruption to thrive. The availability of an exploitable natural resource (e.g., oil) that allows state authorities, both administrative and political, to acquire payments is the first of these criteria. Second, the general scarcity of public assets in comparison to demand, along with policies of fixed official prices, generates opportunity for bribery-based informal rationing. Finally, poor public-sector wages are likely to be linked to widespread low-level corruption payments. Fourth, many developing countries’ high levels of state intervention/planning (e.g., protectionism, state-owned firms, price controls, exchange controls, import permits, etc.) generate chances for corruption. Finally, when they privatize and build the required legal framework of corporate and contract law, etc., economies in transition are likely to face unique challenges that lead to corruption.
The empirical research in the topic has repeatedly found a negative relationship between economic growth and the extent of corruption, with evidence for positive growth benefits being uncommon at best.
Mauro (1995) used a cross-section of nations to show that the link between corruption and economic growth is negative after controlling for a number of economic and sociopolitical factors. According to Keefer and Knack (1995), there is a negative relationship between corruption and GDP growth. Others have found comparable results, such as Hall and Jones (1999) and Sachs and Warner (1997).
Tanzi and Davoodi (1997) discovered evidence of bureaucratic misconduct manifesting itself in the diversion of public funds to areas where bribes are easiest to obtain, implying a bias in the composition of public spending towards low-productivity projects (e.g., large-scale construction) at the expense of value-enhancing investments (e.g., maintenance or improvements in the quality of social infrastructure). As a result, abuse of public office may result in not only a reduction in the amount of public funds available to the government (due to dishonest tax collection tactics), but also a misallocation of those funds.
Empirical research on the causes of corruption has concentrated on political institutions, government laws, legal systems, GDP levels, public employee wages, gender, religion, and other cultural factors, poverty, and colonialism’s past, according to Lambsdorff (1999). According to Lambsdorff, determining whether corruption causes other variables or is a result of specific features is typically challenging. Empirical study has found a link between specific types of government rules, bad public institutions, poverty, and economic inequality, based on several corruption indexes. However, conclusions on causality are hazy. The difficulty of assessing relative degrees of corruption in different countries is a fundamental barrier to cross-national comparative empirical research. However, in recent years, economists and political scientists have begun to examine the Political Risk Services6 and other business risk analysts and polling groups’ perceived corruption scores. Several econometric studies that use these indexes as explanatory variables look at the historical, cultural, political, and economic factors that influence a variety of government quality measures, including corruption (e.g., La Porta et al., 1999; Paldam, 1999; Treisman, 2000).
As a result, the majority of empirical evidence appears to support theories that hold corruption to be exclusively negative. However, because all of these empirical studies assume that corruption has a monotone impact on economic growth, they provide an insufficient test of theories that regard this influence as a distinct phenomenon based on the level of corruption.