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Corruption is a bad thing. It unfairly rewards those who break the rules, gives an advantage to people who already have resources, and undermines the general welfare that can be achieved when people work together to build society.
This should be obvious, at least in theory. But we all live in the real world, where corruption at all levels is not only inevitable, but according to some economists, can even serve as a tool for the greater good.
A general look at different countries around the world may be all it takes for some people to completely dismiss the idea. It is usually easy to think that the richest and most developed economies have very little corruption, or at least impose severe penalties on those who engage in corruption, while poor undeveloped countries with systemic economic problems often suffer from corruption at all levels. This would be a pretty reasonable assumption based on many of the countries we’ve researched on this channel, but the data may say otherwise.
This is a very interesting intersection of econometrics, conventional economics, and politics, and we want to dive right into it, so as always, we need to answer a few basic questions.
Do more corrupt countries achieve better economic outcomes? If so, why do they achieve these better economic outcomes? And finally, if not, why would the data suggest otherwise?
Corruption and Growth
The difficulty in collecting data on corruption lies in its illicit nature, even in countries where it is commonplace. This task is particularly difficult in developed economies, where society has less tolerance for corruption and the consequences for those caught engaging in it are much harsher. Because of this, people who engage in corrupt practices go to even greater lengths to hide them.
At first glance, it may seem that corruption and economic growth are at opposite ends of the spectrum. However, research shows a more complex picture.
Examining the relationship between corruption and economic growth may seem straightforward – just compare economic growth per capita and a country’s international risk guide corruption ranking. However, such analyses reveal unexpected correlations.
For example, there is a positive correlation between a country’s level of corruption and its economic growth rate up to a certain point, after which too much corruption starts to harm economic development.
Important facts about corruption and growth:
- Corruption Index: Countries are rated on a scale from 0 to 6, where 0 indicates a high level of corruption and 6 indicates a low level of corruption.
- Impact on Growth: Average levels of corruption correlate with the highest per capita economic growth rates, showing the complex dynamics of corruption’s impact on economic development.
These data emphasise that corruption can play an ambiguous role in a country’s economic development, especially at certain stages of development.
The “Greasing the Wheels” Theory
The “greasing the wheels” theory offers an intriguing perspective on the potential “benefits” of corruption. According to this theory, small acts of corruption can accelerate economic development by making it easier for businesses to circumvent restrictions and achieve their goals more quickly.
Key here is the idea that bribes and other forms of corruption can help entrepreneurs and companies overcome bureaucratic obstacles, environmental regulations and security requirements, thereby accelerating growth and innovation.
Why “greasing the wheels” can work:
- Simplification of procedures: Bribes can make it easier to obtain necessary permits and licences, reducing the time it takes to launch new projects.
- Bypassing restrictions: Companies can use corruption to bypass strict environmental and safety standards, reducing costs.
- Investment incentives: Corruption can attract foreign investment to countries where bureaucracy and regulation would otherwise discourage business.
However, despite the short-term ‘benefits’, the theory also recognises that in the long term, high levels of corruption can harm the economy by reducing investor confidence, undermining the effectiveness of public institutions and ultimately slowing economic growth.
Thus, while corruption may seem beneficial in the short term for some economies, it is important to consider the long-term consequences and strive for transparent, fair and efficient systems of governance and business.
Conclusion
The study of the relationship between corruption and economic growth shows that corruption may seem beneficial in the short term, but in the long term it harms the economy.
The short-term benefits of simplifying procedures do not outweigh the long-term consequences, such as reduced investor confidence and undermining government efficiency.
Good governance and transparency are key to sustainable development. Therefore, fighting corruption and pursuing integrity must be prioritised to ensure a healthy economy and the public good.
