Why developing countries can't afford corruption

• Pages: 148-149

Page 148

For many years, a tale of corruption would be met with a sigh, a shrug, or perhaps a wink. No more.

As research and country experience increasingly document the true cost of corruption, the economic benefits of good governance look increasingly attractive. In a recent address at a joint luncheon of the National Economist Club and the Society of Government Economists, Shang-Jin Wei, Advisor in the IMF's Research Department and a Senior Fellow at the Brookings Institution, made the case against tolerating corruption.

As globalization extends its reach and picks up its pace, the cost of corruption is drawing heightened scrutiny from investors, host countries, international agencies, and academics.

Why the growing interest?

For one thing,Wei said, the end of the Cold War has reduced the importance of geopolitical considerations in aid allocations. There is now considerably less incentive to tolerate "governance-challenged regimes," such as those of Ferdinand Marcos's Philippines or Mobutu Sese Seko's Zaïre (now the Democratic Republic of the Congo).

There are business reasons, too, for taking a hard look at the costs of corruption. Given increased globalization, investors have options. They can pick and choose where to invest, and the new math of globalization encourages them to factor in such things as the high costs of bribes. Studies indicate, for example, that moving from a relatively clean government environment, like that of Singapore, to one as corrupt as, say, Indonesia under Suharto, could entail costs for foreign direct investment equivalent to a 50 percent increase in the marginal corporate tax rate.

More corrupt economies are also now seen as more prone to financial crises, because they are more likely to depend on short-term foreign loans-the type of capital most likely to flee a country in the event of a shock. Research by Wei and Gaston Gelos, another IMF economist, suggests that portfolio investment is also negatively affected by corruption and that fund managers typically favor less corrupt countries.

Advanced countries have also taken steps to discourage or at least not abet corruption. In 1999, OECD countries (and some non-OECD countries as well) signed a treaty banning bribery by their firms of foreign government officials. Out is the tax incentive for bribery under the old system, and in is the...