It is easy to explain why countries with
rampant corruption tend to have poor economic performance: corrupt officials
steal funds from the economy and steer resources to easy-to-corrupt, wasteful
projects. However, it is not easy to explain why some countries achieve high
economic growth despite corruption. We offer an explanation: a high level of
trust between bribe payers (e.g., business people) and bribe-takers (e.g.,
corrupt officials) can make corruption less harmful or even
efficiency-enhancing to the economy. Here is the logic:
Society A has a high level of trust, and
Society B has an extremely low level of trust. In Society A, corrupt officials
feel safe to take bribes from almost anyone, including strangers, because the
briber would not turn them in. Furthermore, it does not matter whether the
briber pays first or whether the bribee delivers the government project first.
So logically, this bribery and corruption relationship can reach a broad “bribery
market” and thus become efficient. A corrupt official can solicit bids from
many potential bribers and can sell his power to award the lucrative projects
he controls. Logically, the briber who pays the highest bribe tends to be the
most efficient project developer with the lowest cost, making corruption
efficiency-enhancing.
In contrast, in Society B, the corrupt
official trusts no one outside of his family, but he is powerful, and he
controls many public resources. There are two ways in which he can enrich
himself in this low trust society: he can give lucrative projects to his family
members, who may not know how to complete them, therefore wasting public
resources, or he can impose high fees and taxes on the people and the firms in
the society and steal the proceeds from the state coffers. Either way, his
corrupt act is pure extortion, a dead weight on the economy.
What kind of societies have both a high
level of trust and a high level of corruption? Societies that do not have
strong rule of law and rely on an extensive private relationship (such as
“guanxi” in China) meet these two conditions. Due to the
concentration of power, the corruption level is high in China (Corruption
Perception Index=3.1 in year 2000 (1=most corrupt, 10=least corrupt). Due to
its guanxi culture, the level of trust between friends is high (54.4% trust
level in 1999-2004, 0=lowest, 100=highest). Businesspeople can be introduced through
a friend and a friend’s friend to the right official who controls the project
they want to have. Due to the lack of the rule of law in China, all successful
business people must rely on private networks to do business, making them loyal
to their friends, minimizing cheating between briber and bribee. So, the
powerful official feels safe to award the project to the highest bribe payer,
who, ceteris paribus, tends to be the most efficient developer of the project. This
is why China has been growing fast, even though corruption is high. From 1990
to 2000, China’s economy grew 10.3% annually.
If a society has a high level of
corruption and a low level of trust, then the economy tends to be dragged down
by corruption. A good case of such a society is the Philippines. Like China,
the Philippines has a high level of corruption (Corruption Perception Index=2.8
in year 2000). But unlike China, the Philippines does not have a strong culture
of guanxi (8.6% trust level in 1999-2004). The lack of an extensive private
network makes taking bribes from a stranger very risky. Thus, as shown in
Society B, powerful Filipino
politicians such as the late president Ferdinand Marcos and his cronies, who
did not trust any outside business people who might be efficient, simply
imposed fees on all businesses and stole from the state coffers, making
corruption a pure deadweight on the economy. From 1990-2000, the Philippines’
economy grew 3.3% per annum.
While corruption is more efficiency-enhancing in China than in the Philippines, it is still bad for the society because the corrupt officials still take the much-needed resource from the society into their pockets, and the relatively lower risk in taking bribes encourages officials to control more aspects of the economy so that they can extort more bribes. Finally, the close collusion between businesspeople and officials makes corruption hard to detect and eradicate.
The Rise of China, Inc. By Shaomin Li
Bribery and Corruption in Weak Institutional Environments By Shaomin Li
Shaomin Li is Eminent Scholar and Professor of International Business at Old Dominion University’s Strome College of Business. He is the author of Bribery and Corruption in Weak Institutional Environments and The Rise of China, Inc. ...
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