Multi Page
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Shang-Jin Wei
The author is Associate Professor of Public Policy at Harvard University's Kennedy School of
Government, Faculty Research Fellow of the (U.S.) National Bureau of Economic Research, Research
Associate at the Harvard Institute for International Development, and Research Associate of the Center for
Pacific Basin Monetary and Economic Studies of the Federal Reserve Bank of San Francisco.
This paper was supported by the World Bank’s Development Research Group and the International
Monetary Fund’s Fiscal Affairs Department. It was presented at the Workshop on Integrity in Governance
in Asia, organized by the United Nations Development Program (Kristinn Helgason and Pauline Tamesis)
and the Transparency International Thailand Chapter, held in Bangkok, June 29-July 1, 1998. I would like
to thank, without implicating, Daniel Kaufmann, John Montgomery, Denis Osborne, Pasuk Phongpaichit,
Susan Rose-Ackerman, Vito Tanzi, and especially Gunnar Eskeland, for very helpful comments, and Greg
Dorchak and Deirdre Shanley for efficient library and editorial assistance. The views in the paper are my
own, and may not be shared by the UNDP, the IMF, the World Bank, the NBER, or any other organization
that I am affiliated with.
1
Summary
This paper reviews the overwhelming statistical evidence that countries with high corruption
levels have poorer economic performance. There are several channels through which corruption
hinders economic development. They include reduced domestic investment, reduced foreign direct
investment, overblown government expenditure, distorted composition of government expenditure
away from education, health, and the maintenance of infrastructure, towards less efficient but more
manipulatable public projects.
A definition of corruption used by the World Bank and the IMF, among others, “the abuse of
pubic office for private gains,” serves as a backdrop of the discussion. Whenever a public office is
abused, a public function or objective is set aside and compromised. Only if a public function is
unproductive could it be that policy goals were not harmed by corruption. Nevertheless, the
proposition that bribery can grease the machinery of commerce is often heard, and hence deserves a
careful look at the evidence. And the evidence clearly rejects this hypothesis.
While culture plays a role in determining what is considered a bribe versus a gift, the culture-
induced difference seems small. There is no evidence to support the notion that corruption in Asia,
East Asia included, has smaller negative consequences.
Corruption could be a symptom of many ills of a society. Hence, the fight against corruption
has to be multi-fronted. While laws and law enforcement are indispensable, countries serious about
fighting corruption should also pay attention to reforming the role of government in the economy,
particularly those areas that give officials discretionary power which are hot beds for corruption.
Recruiting and promoting civil servants on a merit basis, and paying them a salary competitive to
private sector alternatives help to attract high quality, moral civil servants. International pressure on
corrupt countries, including criminalizing bribing foreign officials by multinational firms, is useful. But
the success of any anti-corruption campaign ultimately depends on the reform of domestic institutions
in currently corrupt countries.
2
Introduction
“If corruption does slow down economic development, East Asia must be an exception
because while the region seems corrupt, it is able to attract lots of foreign investment and generate
growth.”
These statements about corruption are all read or heard from time to time, and it is probably
feasible to find some anecdotes to support any or all of these possibly mutually inconsistent hypotheses.
But there is a limit to what anecdotes can tell us. What does a careful examination of facts and data tell
us? This paper reviews recent studies on the consequences of corruption on economic development.
There are some very good survey papers on corruption issues, for example, see Andvig (1991),
Bardhan (1997), Kaufmann (1997b), UNDP (1997), and Tanzi (1998). This paper has two distinctive
features. First, it places relatively more emphasis on Asia. Second, wherever possible, it concentrates
on recent evidence based on systematic statistical analyses, including some from not-yet published
studies by this and other authors.
This paper is organized in the following way. Section 1 discusses how cross-country difference
in corruption may be measured. Section 2 reviews the evidence on economic consequences of
corruption, with particular attention to recent empirical research, and with an attempt to interpret them
in light of the Asian experience. Section 3 discusses the notion of cultural difference in the
consequences of corruption. Section 4 discusses factors that may contribute to the different extent of
corruption in different countries, and possible remedies to the problem. Section 5 provides some
concluding thoughts.
1
Statement similar to the one made by James Wolfensohn, President of the World Bank, Transition, 7(9-
10), p9, September/October 1996.
2
Some formal theorizing along this line can be found in Leff (1964), Huntington (1968), and Lui (1985).
3
1. Measuring Corruption
This paper focuses on corruption in the economic sphere involving government officials.
Corruption here is defined as government officials abusing their power to extract/accept bribes from
the private sector for personal benefit3. This is to be distinguished from political corruption (e.g., vote-
buying in an election, legal or illegal campaign contributions by the wealthy and other special interest
groups to influence laws and regulations), and bribes among private sector parties.
By the very nature of corruption (secrecy, illegality, variations across different economic
activities), it is impossible to obtain precise information on the extent of corruption in a country, unlike,
for instance, measuring inflation. This difficulty also precludes a precise grading of countries according
to their relative degree of corruption.
That said, one can still get useful information on the seriousness of corruption in a country by
surveying experts or firms in that country. Like pornography, corruption is difficult to quantify, but
you know it when you see it. There are several survey-based measures of “corruption perception” that
are increasingly visible now. I will describe four of them, in part because they cover relatively wide
sample of countries, and in part because they are used in the research studies that I will review below.
3
For instance, the World Bank defines corruption as “the abuse of public office for private gains”
(World Bank, “Helping Countries Countries Combat Corruption: The Role of the World Bank,” 1997).
4
(B) International Country Risk Guide (ICRG) Index.
Produced every year since 1982 by Political Risk Services, a private international investment
risk service. The ICRG corruption index is apparently based on the opinion of experts and supposed to
capture the extent to which “high government officials are likely to demand special payments” and to
which “illegal payments are generally expected throughout lower levels of government” in the form of
“bribes connected with import and export licenses, exchange controls, tax assessments, police
protection, or loans.”
5
Moreover, since different surveys cover different subsets of countries, the averaging process may
introduce new measurement errors when cross-country rankings are produced. One should also note
that, as the TI indexes in different years are derived from potentially different set of surveys, they
should not be used to measure changes in corruption level over time for a particular country.
As examples of the corruption ratings according to these sources, I reproduce below the BI, TI
and GCR indices for a subset of countries. In the original indices, large numbers refer to low
corruption (e.g., the BI-index value for Singapore is 10). To avoid awkwardness in interpretation, I re-
scale all the indices in Table 1 so that low values imply low corruption (e.g., the re-scaled BI index
value for Singapore is 1). To facilitate comparisons, I have rescaled the GCR ratings from the original
1-7 range to 1-10 range in the table.
6
Table 1: Corruption Ratings for Selected Countries
_____________________________________________________________
BI TI97 GCR97
Asian countries
Singapore 1 2.34 1.77
Hong Kong 3 3.72 2.17
Japan 2.25 4.43 2.96
Taiwan 4.25 5.98 4.60
Malaysia 5 5.99 5.67
S. Korea 5.25 6.71 6.20
Thailand 9.5 7.94 7.93
Philippines 6.5 7.95 7.94
China n.a. 8.12 5.86
India 5.75 8.25 7.30
Indonesia 9.5 8.28 7.94
Pakistan 7 8.47 n.a.
Bangladesh 7 9.20 n.a.
Non-Asian countries
Canada 1 1.90 2.37
United Kingdom 1.75 2.72 1.93
Germany 1.5 2.77 2.61
United States 1 3.39 2.41
France 1 4.34 3.51
Mexico 7.75 8.34 6.24
Kenya 6.5 8.70 n.a.
Colombia 6.5 8.77 7.41
Russia n.a. 8.73 7.61
Nigeria 8 9.24 n.a
Notes: See the text immediately preceding the table for sources on BI, TI and GCR indices. In the original
BI, TI and GCR indices, small numbers imply more corruption. All the indices in the table have been re-
scaled so that large numbers imply more corruption. For BI and TI indices, the values in the table = 11-
original scores; and for the GCR index, the values in the table = 8-original scores. The GCR ratings are
rescaled from the original 1-7 range to 1-10 range.
7
It is worthwhile to emphasize again that these indices reflect people’s self-reported perception,
as opposed to objective measures of corruption. Perception can be different from reality. However,
two things may be worth noting. First, for many questions such as how corruption affects foreign
investment, perception -- and thus perhaps our measure -- could actually matter. Second, despite the
very different sources of the surveys, the pairwise correlations among the indices are very high. For
example, according to Wei (1997b), the correlation between the BI and TI indices and that between BI
and GCR indices are 0.88 and 0.77, respectively. These high correlations suggest that statistical
inference on the consequences of corruption is not very sensitive to the choice of corruption index.
2. Economic consequences
In this section, we review some recent studies that systematically examine the consequences of
corruption on the economic development. Wherever possible, I illustrate the results from these studies
using examples from Asian countries.
On domestic investment
A recent story in China Youth Daily may be a representative case of how bureaucratic
corruption and extortion can kill a small business.4 Huang Shengxin, a 36 year old former soldier and
recipient of a Class III military medal, was a private business owner in Guangxi Province’s
Fangchenggang City in Southwestern China. When he left the army in 1982, he thought he would go
into the restaurant business. Through his and his family’s long hours of hard work, his “Changxin
Restaurant” had developed a good reputation and even won an official honorable designation from the
4
Reproduced in New World Times, (in English, circulated in the Greater Washington DC area) April 24,
1998, p18, which attributed it to Zhang Shuangwu, China Youth Daily without giving the original date of
8
county government. Huang himself was designated a National Outstanding Private-Sector Worker in
recognition of his success in business.
This was when the trouble began. Bureaucrats and their relatives loved the restaurant. They
paid countless visits over the years, sometimes in the name of work inspection. The problem is that
they did not pay the bills. By Huang’s account, by February 1997, the County Government of
Tanying, where the restaurant was located, owed him 80,665 Chinese yuans5 in unpaid bills. On May
20, 1997, burdened by his inability to return the restaurant to its profitable past, Huang sadly folded
“Changxin Restaurant.”
Let us now turn to some statistical evidence based on the data on a large cross-section of
countries. In a regression of total investment/GDP ratio, averaged over 1980-1985, on a constant and
the corruption index, the point estimate of the slope is 0.012 (Table IV, in Mauro, 1995, p696). To
illustrate the quantitative effect of corruption, let me do a sample calculation by taking literally the point
estimate and the corruption ratings. If Philippines could reduce its corruption level to the Singapore
level, other things being equal, it would have been able to raise its investment/GDP ratio by 6.6
percentage points (=(6.5-1)X0.012). This is quite a substantial increase in the investment.
[When Mauro (1995) used linguistic and ethnic fractionalization as an instrumental variable for
corruption in the above regression, he obtained an even larger point estimate on the effect of corruption
on investment/GDP ratio, about twice as large.]
publication.
5
Just under US$10,000 at mid-September, 1998 exchange rate of US$1 = 8.3 Chinese yuans.
9
ratings in Table 1, let me provide a sample calculation as an illustration. If India could reduce its
corruption level to the Singapore level, its effect on attracting foreign investment would be the same as
reducing its marginal corporate tax rate by 22 percentage points [=(5.75-1)x0.09/(0.01x1.92)].
Many Asian countries offer substantial tax incentives to lure multinational firms to locate in
their countries. For example, China offers all foreign invested firms an initial two years of tax holiday
plus three subsequent years of half of the normal tax rate. This research thus suggests that these Asian
countries would have attracted just as much or even more foreign investment without any tax incentive
if they could get domestic corruption under control.
In fact, Wei(1995) documented that, contrary to a cursory reading of the news, China is an
underachiever as a host of direct investment from five major source countries (the U.S., Japan,
Germany, the United Kingdom, and France), once one takes into account its size, proximity to some
major source countries and other factors. Wei(1998) suggests that high corruption in China may very
well have contributed to this.
On economic growth
If corruption reduces domestic investment and reduces foreign investment, one would think
that it would also reduce the economic growth rate. Mauro examined how the conditional growth rate
(that is, the growth rate given the country’s starting point and population size) is affected by
corruption. He found that the data reveals just that relationship.
To illustrate the quantitative effect, let me take the point estimate in Column 6, Table VII of his
paper. If Bangladesh were able to reduce its corruption to the Singapore level, its average annual per
capita GDP growth rate over 1960-1985, would have been higher by 1.8 percentage points
(=0.003x(7-1)). Assuming its actual average growth rate was 4% a year, its per capita income by 1985
could have been more than 50% higher.6
Using an instrumental variable approach, such as in Column 8 in Table VII of Mauro's paper,
6 25
(1+0.018/1.04) – 1 = 0.54. Lower assumption on its actual growth rate (say 3% a year) would result in
even greater improvement in 1985 per capita income from reducing its corruption level.
10
one would get even larger effect of corruption on growth, though the result becomes borderline
significant at the 15% level.
11
bad condition, after controlling for a country’s level of development and its public investment to GDP
ratio (Column 2 in Table 5).
On labor movement
Our discussion so far has been focused on bureaucratic corruption - bribes paid to or extorted
by public officials. This is deliberate. But I want to note briefly that corruption is certainly not
restricted to this type only. Corruption between private parties is also widespread in many countries,
with serious consequences. I will use some space here to discuss its manifestation in labor union
activities.
Bribe payment to supposed agents of a labor union can compromise the collective interest of
the union. The case of meat cutters in New York City in the 1970s helps to illustrate this point.7 The
supermarkets in New York had to deal with a well-organized labor union, the Amalgamated Meat
Cutters and Retail Food Stores Employees Union, which basically had monopoly over the local labor
supply. The supermarkets were reported to make regular payments to a middleman, who in turn paid
union officials to buy labor peace. One large Midwest beef processor paid large sums to this individual
(and hence the union officials indirectly), which helped the firm to do much of the meat cutting in the
Midwest (at the expense of New York meat cutters) without encountering labor unrest in New York.
In the process, the middleman and a few labor union officials had profited, but the majority of the New
York labor union members didn’t. While this is a U.S. example, one can imagine that similar cases may
have happened in labor unions elsewhere.
Recent revelations of corruption and fraud in the election of Teamsters Union officials in the
U.S. further tarnished its reputation (which was still painfully recovering from its early unfavorable
image of mob connections), and this dealt a serious blow to the effectiveness of the union.
7
This case is taken from Rose-Ackerman (1978, p195), who attributed the original source of the story to
The Wall Street Journal, September 10, 11, 1974; and New York Times, March 14, 26 and October 8,
1974.
12
On urban bias, poverty and other consequences
The desire to extract bribes distorts the behavior in a variety of ways. In particular, less
“manipulatable” public projects often do not get into the budget adequately, even if they have high
social value. Large scale defense projects are often favored by politicians and bureaucrats because their
size and secrecy are often conducive to kickbacks.8
Defense contracts are often budgeted at the expense of rural health clinics specializing in
preventive care (Gray and Kaufmann, 1998). To the extent that rural residents tend to have lower
incomes than their urban counterparts, this corruption-induced policy bias may worsen the income
distribution, and at the same time, divert the needed resources away from the countryside.
The last example shows that poverty can be made worse and more persistent by corruption. In
fact, one can expect that corruption would make poverty worse in cities as well as in rural areas, as
poor people have less means to bribe officials and less political power in general. Rose-Ackerman
(1997) listed several channels through which poor people are hurt by corruption. (A) The poor will
receive a lower level of social services. (B) Infrastructure investment will be biased against projects that
aid the poor. (C) The poor may face higher tax or fewer services. (D) The poor are disadvantaged in
selling their agricultural produce. And (E) their ability to escape proverty using indigenous, small scale
enterprise is diminished.
Using cross-country regressions over the period 1980-97, Gupta, Davoodi, and Alonso-Terme
(1998) show that high and rising corruption, as measured by the ICRG index, increases income
inequality and poverty. Several channels have been identified in the paper through which corruption
worsens the (relative and sometimes absolute) poverty: corruption lowers economic growth, biases the
tax system to favor the rich and well-connected, reduces the effectiveness of targeting of social
programs, biases government policies towards favoring inequality in asset ownership, lowers social
8
At the writing of this paper (April 1998), a Taiwanese general in charge of procurement is under
investigation for vastly overpaying for a French-made warship in exchange for huge bribes. Similarly,
India’s arms purchase from Sweden gave birth to one of the most spectacular corruption scandals in both
countries’national politics.
13
spending, reduces access to education by the poor, and increases the risk of investment by the poor.
14
9
bribes versus gifts, or group loyalty versus self-interest, Osborne also observed that many of these
differences may not be inherently cultural. For example, seemingly greater tolerance of bribes in some
communities may be a result of the short horizons of the official due to uncertainty about the future in a
time of rapid change, or pitifully low salaries of civil servants that are regarded by the officials or
ordinary citizens on the street as “unfair” (Osborne, 1997, P22). These should not be properly defined
as “cultural.” Furthermore, Osborne documented that throughout human history, from ancient Greece,
William Shakesphere in the West, to Confucianism and Hinduism in the East, one can find repeated
expressions of distaste by scholars and ordinary people for corruption and dishonesty.
We do not have enough good, detailed country studies on the interaction among culture,
corruption and economic development. Pasuk Phongpaichi and Sungsidh Piriyarangsan’s book,
Corruption and Democracy in Thailand, bravely as well as brilliantly offers an in-depth study of
corruption in Thailand. At the beginning of the book, the authors reviewed many early studies of the
subject, many of which attribute Thai corruption to cultural heritage (see their description of the work
by Lucien Hanks (1982), Fred Riggs (1966), Edward Van Roy(1970), Thinapan Nakata (1977), and
Clard Neher (1977). With a large-scale survey, the Pasuk-Sungsidh book concludes that Thai people
do have a higher limit than those in many other countries on the amount of money officials may take
from the private sector before it is considered corruption.
In the previous section, we cited evidence that foreign investors on average invest less in more
corrupt countries. Some may suspect that East Asia must be an outlier since it seems such a popular
destination for foreign investment. Let us note here that, yes, foreign investment in East Asia has been
big, but East Asia is a large market and has been growing faster than the world average. Many East
Asian countries also have low wages. On these factors alone, East Asia naturally attracts more foreign
investment. To see whether foreign investors are less sensitive to corruption in Asian host countries,
one needs to control for these factors. A section in Wei (1997) did exactly that. The evidence shows
that there is no support for the Asian exceptionalism hypothesis. Instead, investors from the major
9
See also Rose-Ackerman (1998a) for an illuminating discussion of bribes versus gifts.
15
source countries are just as averse to corruption in East Asia as elsewhere. Putting it differently,
among East Asian host countries, foreign investors still prefer to go to less corrupt countries other
things being equal. One should note that the paper does not compare whether domestic and foreign
investors may have different degrees of sensitivity to corruption.
16
Tanzi’s excellent survey (1998) offers a number of concrete descriptions of where opportunity
for corruption may arise as a result of government (over-)regulation. For example, in the taxation area,
he pointed out that the more difficult it is to understand the laws, the more likely there is corruption;
the more discretion given to tax administrators over the granting of tax incentives, determining tax
liabilities, and selecting audits and litigations, the more likely there is corruption.
Similarly, the size of government spending and the procedure used in allocating the expenditure
also significantly affects the opportunity for corruption. Also, if a government is involved in providing
certain goods and services at subsidized prices, say foreign exchange, credit, public housing,
educational opportunities, or water and electricity, then officials with the duty to decide also have the
opportunity to pocket a fraction of the implicit subsidy (e.g. the difference between the market value of
the goods or services and the price the government is asking), in the form of bribes extracted from the
recipient of the subsidized goods or services.
In the papers both by Mauro (1995) and by Kaufmann and Wei (1998), it is shown that the
corruption index and the index of government regulation is positively correlated.
Many countries in Asia have been pursuing active industrial policies. Industrial policies by their
very nature involve discretion on the part of government officials, in terms of which industry to
support, which firms within an industry to support, how to allocate subsidized loans, grants, tariff
rebates, and so on. Ades and Di Tella (1997) argue that, logically, industrial policies can promote
corruption as well as investment. Using data on indices of corruption and industrial policy across a
number of countries, they then show that corruption is indeed higher in countries with more active
industrial policy. The negative effect of corruption induced by the industrial policy seems large
(probably on the order of 56% to 84% of the direct beneficial effect), and therefore should not be
neglected in any cost-benefit analysis of industrial policies.
Before leaving this subsection, it should be pointed out that, while less discretion by
government officials reduces the scope for corruption, we are not advocating abolishing all the
regulations. Many regulations and even bureaucratic discretion serve useful functions in the society.
The point is rather that we should be mindful of the implications for corruption when designing
17
government regulations.
18
of the least corrupt countries in many surveys.]
The view that high salaries to civil servants help to deter corruption is certainly not restricted to
Asia. For example, according to Tanzi (1998), Assar Lindbeck (1998) attributes the low corruption in
Sweden during the 1870-1970 period partly to the fact that high-level government administrators
earned 12-15 times the salary of an average industrial worker.
Systematic and statistical examination of the evidence on the connection between corruption
and public sector wage is a relatively recent undertaking. In a cross-country regression study cited
above, Rauch and Evans (1997) did not find robust support for the role of high salaries. But the World
Bank’s World Development Report 1997 and the working paper by Van Rijckeghem and Weder
(1997) do report evidence that countries with poorly paid public officials tend towards higher
corruption.
What is important here is not the absolute level of civil servants’wages, but their values relative
to the best private sector alternatives. In Van Rijckeghem and Weder’s paper, given the constraint of
data availability, they take the average civil servant pay relative to average manufacturing sector wage,
as their measure of officials’incentive to resist corruption.
Using a regression technique, they found a negative and statistically significant correlation
between public sector’s relative wages and the extent of corruption involving government officials.
Based on their point estimates, they also calculated, for each country in their sample, the ratio of public
to private sector wages that is needed in a literal calibration of their regression in order to reduce the
corruption to Singapore level, which has the lowest corruption grade (this is called “calibrated ratio to
reduce corruption to Singapore level” below). It maybe instructive to reproduce the part of their Table
6 below that reports the actual versus the calibrated ratios for the Asian and other selected countries in
the sample. Like all other projections in this paper, the numbers below are meant to be illustrative and
not to be taken literally.
19
Table 2: How Much Increase in Civil Servants’ Legal Pay Is Needed
if one takes Van Rijckeghem - Weder (1997) calculation literally?
________________________________________________________________
Country Public Sector relative to Manufacturing Sector Wage
Asian Countries
A few things are particulary worth noting in the table. First, to really eradicate corruption (or
to reduce it to the Singapore level), one needs to raise the public sector’s pay by a substantial margin
(sometimes by 500% or even 900%). Although government officials in Asia are comparatively better-
paid than some of their African and Latin American counterpart and hence a smaller increase is needed,
the 60%, 200% to 500% increase may be still fiscally infeasible for these countries. Second, we do not
know for sure if the warranted salary increase should raise the pay to the government officials above
20
their private sector alternatives.10 If they do, there is a serious equity issue even if these governments
have the money (or have the ability to transform most of the currently illegal bribes to the incremental
taxes needed to raise the civil servants’ legal pay). Third, if civil servants are paid a higher salary than
their private sector alternatives, many people may pay a bribe to be chosen for these public jobs. So the
high pay policy itself may create new type of corruption. Fourth, extortion and bribe-taking practices
could have become part of the bureaucrats’work culture and habit, so that increased legal pay may not
do much to reduce corruption, at least initially.
Fortunately, one need not draw such a pessimistic conclusion from this exercise if one realizes
that the public sector wage is but one of the elements in a successful anti-corruption campaign. We
now turn to another important component below.
D. Legal system, “watch-dog” organization, “hot-line,” client surveys, free press and democracy.
In any fight against corruption, the ability for a country to detect acts of corruption and to
prosecute those guilty of committing them is essential to deter corruption.
There are several channels through which detection and punishment capacity is realized. Let
me mention seven of them here: (A) An independent and impartial judicial system, (B) an official anti-
11
corruption agency such as Hong Kong’s Independent Commission Against Corruption (ICAC), (C)
existence of grassroots “watchdog” organizations, (D) a telephone “hot line” as those in the United
Kingdom and Mexico that allow citizens to complain directly to the government, (E) public opinion
surveys such as those carried out by Public Affairs Center in Banglore, India or by the World Bank’s
Economic Development Institute in other countries that register the public’s attitude, particularly those
10
One should note that the true private sector alternatives for senior government officials with comparable
skills and responsibilities are likely paid a lot more than the average wage in the manufacturing sector. But
the manufacturing sector wage is the only wage data available on a consistent cross-country basis. The
assumption in the study is that, across countries, the manufacturing wage and the salaries of the private
sector alternative of government officials are highly positively correlated.
11
See Quah (1989 and 1993) for a discussion of Hong Kong and Singapore’s anti-corruption measures
along this and other lines.
21
of the poor, towards corruption, (F) freedom of the press to bring to light any official corruption, and
finally (G) democracy that serves the dual purpose of throwing corrupt officials out of power by the
populace and protecting those individuals and organizations that dare to expose corrupt officials. All
of these channels are potentially important. There are some case studies and much anecdotal evidence
that demonstrate both effectiveness in specific countries and time periods, and suggestions on how to
implement them. It seems possible that the extra revenue collected by the government as a result of the
actions of the various anti-corruption bodies can exceed the cost of these bodies.
While the intuition for the importance of these channels seems straightforward, so far there is
very little systematic statistical analysis of their relative importance for a broad sample of countries.
Such will be a very fruitful future research topic.
E. International Pressure
There are two kinds of international pressure that can be brought to bear on the corruption
problem. First, international organizations such as the United Nations Development Program, the
World Bank, the International Monetary Fund, the Asian Development Bank, and the like, can provide
moral suasion, pressure as well as technical assistance12 to induce or help countries in their fight against
corruption. Various conferences on good governance and corruption organized by the UNDP, the
World Bank and so on are useful. Cutting off loans or threatening to cut off loans by the IMF or
World Bank on the ground of corruption in recipient countries may be even more effective on the
margin in some cases.13
The second channel is concerted international effort to criminalize the offering of bribes by
multinational firms to host countries’ officials. Until December 1997, the United States has been the
only major source country of international direct investment that has an enforced law -- The Foreign
Corrupt Practices Act (FCPA) of 1977 -- that prohibits its companies from bribing foreign officials.
12
Proper procurement guidelines are an example of this.
13
There is little data on this, perhaps because the battles are often not fought in the open.
22
For most other major source countries in the OECD, not only has it been not illegal to bribe foreign
officials, but bribes have been, up until very recently, tax-deductible.14 The U.S. law has not been very
effective in reducing corruption in foreign countries, perhaps because companies from other countries
are too eager to pick up the business that the U.S. firms miss due to the law.15 Thus, corruption-prone
foreign officials do not feel enough pressure to change their behavior even if they are genuinely
interested in attracting foreign investment into their countries. An international treaty that bans foreign
corruption can strengthen the collective ability of all major multinational firms not to pay bribes. They
would be more likely to resist demands for bribes if they can be confident that they will not lose
business to their competitors as a result.
It should be pointed out that we should not have any romantic hope on the degree of
effectiveness of international pressure. First, the mandates of almost all international governmental
organizations place some limits on how much anti-corruption objective can be pursued in the
organizations’ activities. If the World Bank were to suspend lending to countries with severe
corruption ratings according to the Transparency International, it would have to stop half or more of its
loans. This would conflict with the survival tendencies of the organizations, and contradict its other
very important objectives, even though these objectives themselves may be jeopardized by corruption.
Second, and more importantly, domestic efforts and domestic institutions ultimately determine
the success in reducing corruption. If government officials do not intend to seriously reduce
corruption, they would simply not request a loan if the international organization requires corruption
reduction as a prerequisite.
So while the international pressure is useful and should be applied whenever and wherever
14
Britain has a 1906 (?) law that can be interpreted as prohibiting its firms from bribing foreign officials.
But it is effectively unenforced.
15
Hines (1995) found that the U.S. firms do invest less in more corrupt countries. Wei (1997a) found that
U.S. firms are not very different from those from other OECD source countries in this regard, and hence,
U.S. firms’behavior may not be attiributable to the FCPA. A Wall Street Journal article (September 29,
1995), “Greasing Wheels: How U.S. Concerns Compete in Countries where Bribes Flourish?” suggests
that some firms may indeed evade the requirement of law.
23
possible, it should be regarded as supplemental to other domestically-based reforms.
5. Concluding remarks
While one may think of examples in which some firms/people are made better off either by
paying a bribe or the opportunity to pay a bribe, the overall effect of corruption on economic
development is negative. This is just as true in Asia as elsewhere.
Systematic research conducted recently by a number of authors find that the more corrupt a
country, the slower it grows. There are several channels through which corruption hinders economic
development. They include reduced domestic investment, reduced foreign direct investment,
overblown government expenditure, distorted composition of government expenditure away from
education, health, and the maintenance of infrastructure, towards less efficient public projects that have
more scope for manipulation and bribe-taking opportunities.
While culture plays a role in determining what is considered a bribe versus a gift, the culture-
induced difference seems small. There is no evidence to support the notion that corruption in Asia,
East Asia included, is any less harmful than corruption elsewhere.
The fight against corruption has to be multi-fronted. While laws and law enforcement are
indispensable, countries serious about fighting corruption should also pay attention to reforming the
role of government in the economy, particularly those areas that give officials discretionary power
which are hot beds for corruption. Recruiting and promoting civil servants on a merit basis, and paying
them a salary competitive to private sector alternatives help to attract high quality, moral civil servants.
International pressure on corrupt countries, including criminalizing bribing foreign officials by
multinational firms, is useful. But the success of any anti-corruption campaign ultimately depends on
the reform of domestic institutions in currently corrupt countries.
24
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