A pro-growth anti-corruption strategy
All corruption is equal, but some corruption is more equal than others
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Corruption is costly. It harms growth – probably by quite a lot. We wrote about this a few weeks ago. But the conversation shouldn’t end there. There are many different types of corruption, each with different roots and different implications for growth.
Tossing corrupt politicians in jail is satisfying, but anti-corruption strategies must be consciously pro-growth if they are to improve the lives of ordinary people. And that means attacking the different system failures that incentivise corruption and restrict growth. We need to act with intelligence as well as determination.
The problem with the current corruption discussion is that it lacks nuance, reduced to the generic (and a little racist) image of an African politician siphoning off public funds into his Swiss bank account. The work of people like Mushtaq Khan at SOAS (see here for example) can help us move beyond this stereotype and better understand the interplay between growth and different types of corruption.1 Let’s dig a little deeper.
The barriers to doing business in low-income countries are frequently high. Gaining the myriad permits, licenses and approvals necessary to conduct lawful business can be costly and time consuming. The less ethically minded business owners often pay off government officials to bypass these barriers or at least speed up the process. Think of these officials as gatekeepers. Unless you pay them, the gates remain locked.
This type of corruption reduces investment by raising the cost of doing business, and so harms growth. But it’s important to realise that corrupt gatekeepers only exist when gates are hard to pass through. Removing the corrupt gatekeepers is pleasing from a justice stand-point. But if we stop there then doing business won’t necessarily now be easier; in fact, it may be harder.
A pro-growth anti-corruption strategy should remove the corrupt wheel-greasers, but it must then act to improve the ease of doing business. This means removing unnecessary barriers and investing in effective agencies to ensure necessary barriers (safety standards, for example) can be efficiently navigated. There is plenty of scope for automation and digitization here.
All government action, including (and especially) development policies, involves the allocation of resources or power. This might be through the award of a government procurement contract, access to cheap government loans, or the provision of tax incentives.
The opportunity for corruption here is clear, but it can co-exist alongside growth. Politicians direct government support to specific firms, those firms use the support to export and thrive, and then the bosses share some of the profits with their politician friends. This isn’t a million miles away from the relationship between government and the chaebols in South Korea in the 1970s.
The problems come in countries with weak political power structures. In these cases, politicians do not have the power to discipline firms who are content simply to coast on the back of government support without working to become more productive. These firms pay kickbacks to corrupt politicians and the economy stagnates.
In an ideal world, anti-corruption strategies would cut out the kickbacks and governments would allocate resources according to purely rational economic criteria. Homo economicus as Minister of Industry. Unfortunately, this seems unattainable, even in high-income countries – just look at the questionable access to the “VIP lane” for PPE procurement in the UK during the pandemic.
To be pro-growth when faced with the back scratchers, anti-corruption strategies should focus on ensuring government support to firms is growth-enhancing. This means support must come with conditions that are enforceable under the specific political settlement (for more details, see our previous post on political power and industrial policy). If some of the profits of industrial success flow back to political decision makers, that may be distortionary, but strong economic growth remains possible.
Political and predatory corruption.
This third flavour comes closest to the stereotypical image of corruption. Greedy people doing greedy things for greedy reasons. Greed does play a role, and some corruption occurs simply because I am powerful, and you are weak. But the reality is often more complicated.
In many low-income countries, political power structures are held together through systems of patronage. Resources flow to maintain the ruling coalition. Each powerful group within society must be taken care of. That’s why we don’t tend to see all stolen funds remain in the pockets of those at the top – at least some of it trickles downwards.2 Reaganomics for megalomaniacs.
Anti-corruption strategies must tread carefully. Removing these resource flows could well make a country ungovernable, in which case a lack of growth would be the least of the common person’s problems. But doing nothing is also dangerous, as these situations can be extremely unstable. More and more groups demanding more and more resources can emerge – particularly in countries with imperial divide-and-rule legacies. A vicious cycle ensues and the whole thing breaks down. The timeline of those in power shrinks and predation becomes the name of the game. Take as much as you can while you are in charge.
Here, instability can fester for decades and there are few good options. Khan argues the only real solution is to restructure political organizations to increase discipline and reduce fragmentation. Easier said than done, and presumably a task for politicians rather than anti-corruption officials or economists.
Changing how we view and combat corruption
Traditional anti-corruption efforts are often frustrated because they are blunt tools attacking a simplistic stereotype. A new approach is needed. Fortunately, Khan recently led the ACE (Anti-Corruption Evidence) Research Consortium, a major five-year project to radically rethink how we combat corruption in developing countries. You can read a synthesis of the key insights here.
Focusing on growth is important because, ultimately, corruption on a grand scale only starts to meaningfully decline when a diversity of productive enterprises emerge who have an interest in the enforcement of a formal rules-based society. Tackling corruption has to be in the interests of the most powerful. Not easy, but only once we properly understand the problem can we begin to solve it.
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Avid GPI readers will remember we covered his work on power and political settlements in a previous post. These issues are intricately related.
See the example of Sani Abacha as described by Paul Kenyon in “Dictatorland: The Men Who Stole Africa”: “His fortune is small in comparison with that amassed by his former boss. Abacha’s wealth is estimated to have been between $3 and $5 billion at the time of his death, more than a billion of it handled by banks in London. But, unlike Mobutu in Congo, there were no extravagant palaces, no European villas or private jets. Unlike Houphouet-Boigny in Côte d’Ivoire, there was no self-reverential monument. It wasn’t that he was abstemious in any way, or clung to some hidden moral code, just that his needs were more primitive. Sani Abacha needed oil money to pay off the ranks of officials, ministers, police commissioners and service chiefs who sustained him in power. But his purpose, once he had achieved it, seldom reached further than accumulating more wealth to keep the cycle going.”