The fact that corruption hinders the development of the private sector is now widely accepted, to the point that many practitioners tend to rank it as one of the most serious obstacles to business (see box 2.4).
This recognition is comparatively recent, however. For decades, busi- ness communities accepted bribery as, at worst, a normal business practice (with official blessing) or, at best, an inescapable requirement to “do as the Romans do” in the most affected countries. Economists, for their part, tended to view corruption as a reasonable response to bureaucratic ineffi- ciency (see Leff 2001). In this interpretation—the “grease hypothesis”—
paying bribes softens the consequences of ill-designed or ill-implemented policies and regulations by allowing some reallocation of resources toward the most efficient firms. Thus, corruption is a (mitigating) consequence of underdevelopment.
Box 2.4. Expert Opinion: Corruption as the Number One Obstacle to Private Sector Development
The International Finance Corporation (IFC) is the private sector arm of the World Bank Group. In 2001 the IFC surveyed its staff to tap their first- hand knowledge about the investment climate in the IFC’s countries of operation. More than 400 staff members responded to the questionnaire for their countries of expertise. Results are available for 45 countries.
Among 21 features of the environment for private sector develop- ment, respondents pointed to the incidence of corruption in the private sector as the main issue in 29 of the 45 countries and as the second most important issue in another 8.
As is shown in the figure, the IFC findings agree very well with Transparency International’s Corruption Perceptions Index, which relies on a broader statistical base and looks at the prevalence of cor- ruption from a broader perspective than that of the investor alone.
IFC and Transparency International Corruption Ratings Compared
Source: IFC Economics Department and authors’ calculations.
1.0 1.5 2.0 2.5 3.0 3.5 4.0
1 2 3 4 5 6 7 8 9 10
Transparency International Corruption Perceptions Index, 2000
IFC rating
In the 1980s and 1990s, however, economists and political scientists such as Rose-Ackerman (1996) and Klitgaard (1991) developed the oppo- site view: that corruption has adverse consequences for development.
Their position is increasingly supported by evidence. The grease hypoth- esis does not recognize that grand corruption actually reduces bureau- cratic efficiency rather than enhances it; the possibility of corrupt behavior distorts the incentives of bureaucrats, who act to create reward- ing opportunities for themselves rather than to further the public good.
From the perspective of the private sector, corruption amounts to an extraction that is much more detrimental to business development than are legal mechanisms such as taxes (Shleifer and Vishny 1993). Not only is corruption often unpredictable; even when it is “organized,” its arbi- trariness and lack of transparency make it harmful.
Insights from Recent Research
Since the mid-1990s, empirical cross-country assessments based on sur- vey data have confirmed the negative alchemy between corruption and development.8Among the most relevant findings for the present study are the following:
• Corruption depletes domestic investment (Mauro 1998).
• Corruption affects the composition of capital flows and substantially reduces flows of foreign direct investment (Wei 2000b).
• There is no Asian exception (see below).
• Corruption, like red tape, not only impedes macroeconomic perfor- mance but also holds back the performance of individual firms (whose vulnerability differs depending on their characteristics).
• Other things being equal, firms paying more bribes spend more time negotiating with bureaucrats and pay a higher cost for capital (Kaufmann and Wei 2000).
The acquisition of this knowledge about the macroeconomic conse- quences of corruption was made possible in part by the creation of instruments for measuring corruption consistently. Political risk agencies began developing indexes of corruption in the 1980s. Transparency Inter- national, a nongovernmental organization (NGO), introduced its widely used Corruption Perceptions Index in 1996. As implied by its name, this index, which is based on a series of surveys, does not measure corruption by its outcome; rather, it presents an average perception of how serious corruption is, on a scale from 1 (worst) to 10 (no corruption). Kaufmann, Kraay, and Zoido-Lobatón (2002) have shown that there is a high degree
of consistency among the various perceptions indexes, even though they use different methods and survey different populations. The Political and Economic Risk Consultancy (PERC), based in Hong Kong (China), is producing a yearly in-depth analysis of corruption in Asian countries, with a rating similar to Transparency International’s and broadly consis- tent with it.
Is There an Asian Exception?
Debate persists on whether some form of organized corruption may be less harmful than disorderly corruption, as common sense and anecdotal evidence seem to suggest (Campos 2002). A popular idea before the Asian financial crisis was that in East Asia corruption is more orderly and less harmful to development than in other parts of the world. Some East Asian countries have consistently scored below average on the corruption scale (see table 2.2) but have nevertheless attracted considerable foreign direct investment (FDI) and have experienced significant growth.
Economists who have looked at this issue in the aftermath of the Asian crisis could not find support for the Asian exception, although the debate is not closed.9Wei (2000b) disproves the notion that corruption depletes FDI in the East less than elsewhere, once other factors that explain FDI flows are taken into account. And surveys of firms worldwide show that Table 2.2. Corruption Perception Indexes in Selected East Asian Economies, 2001 (from 1, most corrupt, to 10, no corruption)
Transparency Political and Economic International rating Risk Consultancy ratinga
Singapore 9.2 9.3
Australia 8.5 n.a.
Hong Kong (China) 7.9 6.6
Japan 7.1 7.8
Taiwan (China) 5.9 4.6
Malaysia 5.0 4.6
Korea, Rep. of 4.2 3.7
China 3.5 2.9
Thailand 3.2 2.3
Philippines 2.9 1.9
Vietnam 2.6 1.2
Indonesia 1.9 1.3
n.a. Not applicable.
a. Rescaled according to Transparency International convention.
Source: Transparency International, “Annual Report 2001.”
East Asian entrepreneurs rate corruption as a serious problem among business constraints just as much as do their counterparts elsewhere (see table 2.3).