Corruption for growth and development

Yes it is conventional wisdom of corruption that the latter may be reduced with the expansion of rule based and more market oriented institutions. It is also widely accepted that the role of corruption, in part, has been contributive to economic growth in East Asia. Are these compatible? By way of explaining the role of corruption for distinctive economic accomplishment for a short period in East Asia; I will develop the essay showing that it is due to other factors/reasons and not because the East Asian states lacked the aforementioned institutions and rules to tackle corruption that it was widespread but, fortunately and unexpectedly (unintentionally – D. Kang, said it!), was to their economic growth.

Caution! By definition, corruption is inherently evil!

As we will discuss below, the fact that corruption in the history of some selected East Asian countries, at macro level, has facilitated their growth does not imply: a) it harms no one in the country b) some individuals have not gained undue advantage c) it can be officially adopted by a country as a viable economic growth model d) at micro level honest and law abiding businesspersons are not disadvantaged as their competitors enjoyed special treatment by the corrupt government officials.

There are several explanations why corruption has not affected their growth rather facilitated their economic performance.

According to Wedeman (P.3), although it is widely assumed that corruption has negative consequences, the fact remains that the Chinese economy, despite the existence of corruption, has performed remarkably well. Between 1979 and 2002 the Chinese economy outperformed the rest of the world by a factor of ten, with GDP growing 500.8 per cent in real per capita terms versus a global average of 44.6 per cent. According to Shliefer and Vishny, the negative consequences of hierarchically organized high-level corruption ought to be less than anarchic low-level corruption because high-level corruption is generally more predictable and hence reduces risk and transaction costs. If so, then the apparent contradiction between "worsening" corruption and China's extraordinarily high rate of growth might be, in part, a function of reductions in low-level corruption and the forging of a collusive relationship between high-ranking cadres and the emerging business community, wherein those with political power have material incentives to facilitate profit-making by their "business partners." (Wedeman, P.28)

Mushtaq Khan (pp.1, 13) provides another explanation why, where corruption may not be harmful but rather can facilitate growth of a given country. It is related not to the extent of corruption but rather to the political structures which sustain different processes through which rights are created and reallocated. The distribution of power within the patron-client networks in which corruption is taking place is an important variable explaining the differences in the efficiency effects of corruption. Where patrons are powerful the range of rights transacted is limited and the allocation is likely to be efficiency maximizing (South Korea, Taiwan) In contrast where patrons are weak the range of rights transacted is likely to be much wider with the rights allocated according to political calculations with large efficiency costs (Philippines under Marcos, Bangladesh under Ershad).

Similarly, David Kang (pp. 25-26) in his article “Bad Loans to Goods Friends” explains how the Korean state acted in a number of developmental ways to provide public goods and nurture investment against the existence of rampant corruption. The mutual-hostage situation of political elite and business persons in Korea was a key factor in keeping corruption from spinning out of control and rather be invested. In other terms, having smaller numbers of rent seekers reduces the total social cost because property rights over the rent are more secure. Moreover, the money just was changing hands but within the country. Bribes are transfers!

David Kang, based on the above analysis, somewhere else shows the destructive effects of corruption in countries like the Philippines and Indonesia as the factors existing in South Korea were lacking.

J. S. Nye (pp. 4-5) sees some benefits of corruption amongst which relevant here is economic development (capital formation, cutting red tape, and entrepreneurship and incentives). These factors in one way or another existed in the East-Asian states’ role of corruption analysis.

Nature of the Corruption

In fact, the nature of corruption matters to evaluate its harmfulness or so.(Yun Sun (p.13) In profit sharing type of corruption non-state actors pay government officials to induce favorable policies concerning, for example, capital for investment, land for expansion, and export quotas. The rents accrue to the non-state sector rather than to the state. They amount to a share of the profits from private hands or a reallocation of private goods. This type of corruption may be the least harmful and could even lead togood social results. In China the profit sharing model was widespread during the early phases of development of township and village enterprises. In exchange for commercial privileges (access to favorable credits, supplies, marketing networks, tax rates), town-ship and village enterprises illicitly offered local officials profit shares.

When we compare the case of East Asia to that of other regions, to the extent, studies have been conducted; corruption has lead many developing countries such as those of Africa nations doom to failure.

Where the Money Goes

One factor in determining the effects of corruption is the destination of the corrupt money. If it is reinvested in the economy, capital losses will not be total. The likelihood of reinvestment in turn depends on the nature of extraction and the business environment. Thus, money from looting and rent seeking are more likely to leave the country or be consumed than gains from profit sharing. (Yan Sun, P.13)

In poor Africa the major problem is getting the money out of the country where it is milked from. It is not news that many despotic former-African leaders, such as Nigeria and former Zaire, have flown huge amounts of money to foreign banks like the Swiss Bank. (See J. S.Nye, p.4 for an example)

Another country corruption has taken to hell is Russia. We can understand from the reading of Yan Sun that opposite to the strong Chinese state which hosted widespread corruption but at the same time growing following the economic reform within existingparty-state structure, Russia was heavily affected by corruption due to its weakened and divided political system as it reforms its economy under a new structure. (See foot note 5 of his article for more readings that show the negative consequences of corruption on growth)

For Russia the nature of corruption also mattered. Rent seeking had more adverse effect in Russia than in China. Looting, such as the embezzlement and theft of public resources, is the most harmful type of corruption with no benefits in itself. Its negative effects range from fiscal deprivation to distorted income distribution. Looting was the dominant form of corruption in Russia. (Yan Sun, pp. 11-12)

Another region is India where, according to Mushtaq Kahn (p.1), there is a general perception that poverty must have something to do with the corruption of its politicians despite the small amount involved.