Corruption and Development

• Author: Cheryl W. Gray/Daniel Kaufmann
• Position: Interim Director, Public Sector, in the World Bank's Poverty Reduction and Economic Management Network/Lead Economist in the World Bank's Development Research Group
• Pages: 7-10

What are the principal causes and costs of corruption? This article examines these questions and suggests specific ways to enhance anticorruption efforts in developing and transition economies.

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CERTAIN CLAIMS about corruption in developing countries are often heard: bribery and corruption can have positive effects; corruption is endemic everywhere; the costs of addressing corruption are prohibitively high; and the few resources that exist should be spent on enforcement measures, such as high-profile government watchdog agencies. But, in fact, there is increasing evidence that the economic costs of corruption are enormous; levels of corruption vary widely among developing countries; controlling corruption is feasible; and strategies to address corruption need to pay more attention to its root causes-and thus to the roles of incentives, prevention, and specific economic and institutional reforms.

The past few years have seen growing public recognition and discussion of the problem of corruption, including in addresses to the World Bank-IMF Annual Meetings by World Bank President James Wolfensohn and IMF Managing Director Michel Camdessus, lengthy discussions in the 1996 and 1997 editions of the World Development Report, internal task forces on corruption in the World Bank and the IMF (which have submitted reports to their respective Executive Boards and to the joint Development Committee), the increasing influence of the nongovernmental organization (NGO) Transparency International, the Organization for Economic Cooperation and Development's (OECD) recent landmark resolution to criminalize bribery abroad, and a rapidly growing body of theoretical and empirical literature on corruption and its economic impact. Equally telling is the willingness of many public officials in emerging economies to discuss openly the challenges of corruption in their countries. In a recent survey of more than 150 high-ranking public officials and key members of civil society from more than 60 developing countries, the respondents ranked public sector corruption as the most severe impediment to development and growth in their countries.

Corruption's many faces

A general definition of corruption is the use of public office for private gain. This includes bribery and extortion, which necessarily involve at least two parties, and other types of malfeasance that a public official can carry out alone, including fraud and embezzlement. Appropriation of public assets for private use and embezzlement of public funds by politicians and high- level officials (associated with "grand" corruption in various countries, some of which are beset by kleptocracies) have such clear and direct adverse impacts on a country's economic development that their costs do not warrant sophisticated discussion. The analysis of bribery of public officials by private parties-and, in particular, its impact on private sector development-is, however, more complex. In unbundling bribery, it is useful to consider what private parties can "purchase" from a politician or bureaucrat:

* Government contracts: Bribes can influence the choice of private parties to supply public goods and services and the exact terms of those supply contracts. It can also affect the terms of recontracting during project implementation.

* Government benefits: Bribes can influence the allocation of monetary benefits (tax evasion, subsidies, pensions, or unemployment insurance) or in-kind benefits (access to privileged schools, medical care, housing and real estate, or ownership stakes in enterprises being privatized).

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* Public revenues: Bribes can be used to reduce the amount of taxes or other fees collected by government from private parties.

* Time savings and regulatory avoidance: Bribes can speed up the government's granting of permission to carry out legal activities.

* Influencing outcomes of the legal and regulatory process: Bribes can alter outcomes of the legal and regulatory process, by inducing the government either to fail to stop illegal activities (such as drug dealing or pollution) or to unduly favor one party over another in court cases or other legal proceedings.

The incidence of corruption varies enormously among different societies, ranging from rare to widespread to systemic. If it is rare, it may be relatively easy to detect, punish, and isolate. Once it becomes systemic, however, the likelihood of detection and punishment decreases, and incentives are created for corruption to increase further. This pattern of an initially rising, but then falling, cost of engaging in corrupt acts can lead to multiple equilibriums: one holding in a society relatively free of corruption, the other...