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Can Economic Growth Make Corruption Worse?

May 9th, 2012

flickr / Nir Nussbaum

When we talk about economic growth and corruption, it is often in one direction: corruption hurts economic growth. One of the major reasons for this is that corruption increases risk and uncertainty for businesses and investors and provides a distinct disincentive for their investments. Lower investment levels lead to less economic growth.

Less frequently, we say economic growth is an antidote to corruption. But this is also almost certainly true. The reasoning is somewhat complex and indirect, though. Economic growth does not directly ameliorate corruption. Rather, economic growth leads to better access to education, awareness of rights, empowerment of citizens, and then sometimes leads to improvements in human development indicators and therefore less corruption.

There may also be one other direct link. In a recent paper studying the relationship between economic growth and corruption in India, Bhattacharyya and Jha (2011) argue “economic growth creates additional resources which allow a country or a state to fight corruption effectively.”[1]

So what if economic growth is not coupled with an effective anti-corruption government policy and without an improvement in human development? Could it actually worsen corruption since it increases the amount of funds available for venal officials to steal?

We unequivocally see this is the case with oil wealth (which is not synonymous with economic growth, although it can result in growth of GDP). Oil wealth is certainly both a product and a driver of corruption. U4 explains corruption in resource-rich countries is “political and bureaucratic…involving both abuse of office on the part of key decision-makers and corrupt acts among lower level officials tasked with policy implementation.”

It is clear natural resource wealth is fundamentally different from other, healthier, forms of economic growth. But we also know some countries with certain kinds of governance structures are more susceptible to corruption. While even democracies with strong human rights records can fall victim, corruption has a particular stranglehold on countries with limited transparency, free press, and human rights. When those types of countries experience economic growth and do not try to rein in corruption, does the level of corruption increase or decrease?

I haven’t found any definitive literature either way, but my hunch is it’s the latter.

Look at China. While the People’s Republic has experienced massive economic growth over the last decade and has improved educational opportunities for its population, it has by and large not improved its record on human rights or transparency.

Meanwhile corruption has also gotten worse. A lot worse. China ranks highest in the world in illicit financial flows, illicit outflows from the People’s Republic of China have surged from an annual US$169 billion in 2000 to US$344 billion in 2008. A report from China’s own central bank estimates that “up to 18,000 corrupt officials and employees of state-owned enterprises” have absconded with 800 billion yuan, or $123 billion, of state money since the 1990s. An editorial in China’s business magazine Caixin notes: “As a rule, corruption thrives in an authoritarian regime. A leader with exceptional self-discipline may be able to stay above board. But, at this stage of its development, China offers too many temptations, and the collusion of money and power is commonplace.”

More economic development means more money for everyone: the government, businesses, and individuals. But more money also means more opportunities for venal officials to cut themselves a piece of the pie. That can be a police officer who “fines” a man with a new car who hasn’t really broken any rules, a politician who secretly skims off the top of an infrastructure project, or a customs official who charges a fee for letting an essential import through. And without effective government controls, what’s to stop them?

 


[1] I feel compelled to point out the paper used a very suspect proxy as a measurement of economic growth: forest cover. While this approach may or may not be valid, their unusual proxy measure certainly throws their results into question.

Image: AttributionNo Derivative Works Some rights reserved by Nir Nussbaum

Written by Ann Hollingshead

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