Corruption and economic growth

Finland 1 Singapore 5 UK 11 USA 18 Uruguay 33 China 66 Malawi 83 India 83 Russia 86 Argentina 92 Pakistan 92 Indonesia 122 Haiti 131 Nigeria 132 Bangladesh 133 Source: Transparency International

We all know that corruption is bad for countries, both morally and in economic terms. Yet there seems to be no clear-cut correlation between corruption and economic growth. We struggle to explain why some corrupt regimes yield excellent economic results and others disastrous.

Transparency International publishes annual lists ranking corruption in different countries. It has just come up with a list of the 10 most corrupt rulers, according to reasonably authoritative local estimates. Numero Uno is Indonesia’s Suharto, who is estimated to have skimmed off $15-35 billion.

He is followed by the Philippines’ Marcos ($ 5-10 billion), Zaire’s Mobutu ($ 5 billion), Nigeria’s Abacha ($ 2-5 b), Serbia’s Milosevic ($ 1 b), Haiti’s Duvalier ($ 300-800 m), Peru’s Fujimori ($ 600 m), Ukraine’s Lazarenko ($ 114-200m), Nicaragua’s Alemai ($ 100m) , and the Philippines’ Estrada ($ 78-80 m).

Now, this list is neither exhaustive nor complete. Saddam Hussein and his cronies skimmed $10 million off one programme alone, the UN food-for-oil programme. The cut taken by Saudi princes could be much higher.

Which raises a major question: why do some corrupt regimes do very well, and others badly?

Consider Suharto. He presided over a golden age which saw Indonesian incomes quadruple to $ 1,000 per capita. Indonesia became a miracle economy in the late 1980s and 1990s, graduating from a mere commodity producer to a big exporter of manufactures. Poverty, infant mortality and fertility plummeted under Suharto while literacy soared. His era ended in ruins during the Asian financial crisis, but that event upended regimes from Korea to Bangkok. His achievement remains impressive.

By contrast, Mobutu left Zaire poorer and more desperate than ever. The same was true of Abacha in Nigeria and Duvalier in Haiti. The record of people like Marcos and Fujimori was mixed: both rebuilt collapsing economies amidst applause, but then corruption and maladministration seriously eroded the initial gains.

Some Western commentators believe that in the long run corruption must fall for an economy to become prosperous. I think this is probably true. If you look at Transparency International’s list of 133 countries ranked in order of corruption, you will find that the well-off Western countries all figure in the top 35. Singapore, the most successful developing country, ranks at 5. Botswana, Africa’s star performer, ranks at 30. The Scandinavians are generally the most honest (Finland is no. 1) and the USA comes a bit lower at 18. By contrast, some of the poorest countries are also among the most corrupt.

But this does not prove very much, since some of the fastest growing countries in the world are also in the bottom half of the corruption list. China comes in at 66, India at 83 (alongside Malawi), Russia at 86 (alongside Mozambique) and Vietnam at 100 (alongside Guatemala and Kazakhstan).

Maybe in the long run you need clean government to go to the top of the income ladder. Maybe rapid income growth by itself induces better accountability and governance. But one fact still stands out: clean government is not a necessary condition for rapid economic growth.

Bangladesh comes at the bottom of the list at 133. Yet it has been growing at 5 percent annually for a decade. Italy, the most corrupt country in Western Europe (rank 35) has been one of the fastest-growing.

Argentina, a very corrupt nation, is ranked at 92. Corruption is often a good predictor of eventual economic crisis. Yet when Argentina went bust, the ensuing financial panic also consumed its neighbour Uruguay, which ranks a high 33.

So we are left with a puzzle. Why does corruption co-exist with both good and bad economic performance? Why, for instance, has India over the decades grown more slowly than Indonesia, despite less corruption?

One answer was given in a survey conducted some years ago for the World Development Report. Businessmen in surveyed countries said that the main problem with corruption was that it increased risks and uncertainties. These risks declined dramatically if corruption produced reliable outcomes (as in Indonesia). If all players had to pay 10% and could sure of getting their licences, (Madam Suharto was called Madam 10%), entrepreneurs’ could treat this as just one more tax, factor it into their calculations of returns, and so invest with confidence.

What they fear above all is arbitrariness, where some entrepreneurs pay huge sums in vain while others pay little or nothing and succeed. This happens when there is much discretion in decision-making. It also happens when some decision makers are corrupt and others not (as in India). There is saying in India that we have honest politicians who take the money and do the needful; dishonest politicians who take money and do not deliver; and madmen who do not take money at all. In this lexicon, Suharto was both honest and sane, and delivered. That mattered.

Worst of all is rapacity, where the ruler extorts without giving anything in return. This seems to be the sad story of Zaire and Nigeria.

Finally, the quality of institutions seems to be very important. Where institutions work even moderately well, progress is possible even if money is skimmed off at the top. But if institutions are incapable of enforcing any rights, corruption will hasten economic collapse.

What are the implications for India? First, we can sustain 6 % GDP growth despite considerable corruption. Second, growth will be fastest in states where institutions are strongest and decision-making is least arbitrary.

What do you think?