Does corruption favor economic growth?

As opposed to what many may think, the impact of corruption on growth is still a very controversial question. Key factors such as a country’s political regime, legal structure or governing capacities make this topic a case-by-case issue. However, a large unanimity still considers corruption as a scourge for economic development as it is still a highly used practice in both advanced and developing countries. Corruption is defined as “the abuse of public office for private gains” (a definition formalized by the World Bank and the IMF). And in a general sense, corruption destroys trust and interferes with democracy and the proper functioning of an economy. Whether it is paying a bribe to gain access to public services or money laundering schemes, it has tremendous financial and social impact on us all. But is corruption always harmful for a society?

In order to assess the corruption level, the Corruption Perception Index (CPI) was established by Transparency International. It is a global coalition against corruption and it refers to the perceived levels of public sector corruption in 180 countries around the world. It is a practice that extends into many areas and has the power to alter a firm’s or a country’s structure.

Firstly, its presence in public policies often biases the outcome of the implemented policy and distorts the evaluation made ex-ante. Hence, an indirect and negative impact of corruption is observed on economic growth as public policies are implemented to improve the socio-economic situation of countries. It is referred to as the “sand-the-wheel” hypothesis. Corruption also generates costs on investment through its negative effects. Indeed, transparency and the presence of a reliable legal system are important to attract foreign investors. As a result, investment incentives are lower in countries with a high level of corruption. On top of that, it is also likely to increase income inequalities, as a positive link was identified between the degree of corruption and the inequality indicator that is the Gini index.

Corruption is especially recurrent in developing countries and thus has more severe consequences. The most populated country in Africa, Nigeria, is one of the most concerned one. Even if we cannot attribute all the blame of a weak economic development to pervasive corruption in Nigeria, it would be incorrect to ignore its delaying effect on the country’s development. For example, unemployment caused by corruption is indirectly favoring delinquency in Nigeria. According to the 2020 global ranking of the CPI, Nigeria is ranked 149th out of 180, indicating a highly corrupted country. As stated by a PriceWaterhouseCooper (PwC) study, the 2nd most renowned multinational consulting firm, “corruption in Nigeria could cost up to 37% of Gross Domestic Products by 2030 if it is not dealt with immediately”. This forecast gives us an idea of the extent of this process in the Nigerian economy.

On the other hand, a growing number of economists also support the idea of a beneficial corruption. The “grease-the-wheel” hypothesis was suggested in the late 60’s and supports a positive impact of corruption on economic growth. In highly regulated countries, bureaucratic barriers are created progressively due to time and energy consuming administrative procedures. An excessively regulated country may then lead to an economic slowdown. Corruption comes then into play to fasten these processes and helps put the barriers down. It can, thus, promote economic efficiency in a very specific context which leads to promoting investment and is ultimately beneficial for growth. For example, before the 90’s, the Indian Government had implemented highly restricted laws concerning some industrial plants in order to limit their capacity growth. This led to an increase of the use of bribery to get around these constraints and allow a higher growth of these industries. 

Corruption is commonly known as a “bad” thing by most of us and it is in most countries. However, in some specific situations, it can embody a beneficial tool for growth. Whether it is a “good” or a “bad” thing, corruption is a reality no matter the development level of the country and a phenomenon that needs to be combined on a case-by-case basis.

By Mariam Maiga and Dicle Yildirim

References: 

“Corruption Perceptions Index 2020” Transparency.org. https://www.transparency.org/en/cpi/2020/index/nzl. 

The Financial Express. “Good Corruption Vs Bad corruption.” Last modified May 31, 2018. https://www.financialexpress.com/opinion/good-corruption-vs-bad-corruption/1187707/.

Lavallée, Emmanuelle, Mireille Razafindrakoto, and François Roubaud. “Ce qui engendre la corruption : une analyse microéconomique sur données africaines.” Revue d’économie du développement 18, no. 3 (2010), 5. doi:10.3917/edd.243.0005.

PwC. Impact of Corruption on Nigeria’s Economy. 2016. https://www.pwc.com/ng/en/assets/pdf/impact-of-corruption-on-nigerias-economy.pdf.

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