CORRUPTION AND GROWTH

CORRUPTION AND GROWTH

W. Easterly

Chapter 12 from The Elusive Quest for Growth W. Easterly

A Summary

In a Nutshell

Corruption as theft retards growth. So to do bribes paid to get licences to produce etc.  as they act as a direct tax on production [although only in the case of corruption without theft where the government goods are more expensive – Shleifer]. Corruption and growth are inversely related, as are corruption and investment.

He distinguishes between decentralized and centralized corruption as having different effects. [This is the same as the Shleifer independent monopolists point.] This has the effect of implying that under certain conditions it may be better to have strong dictatorship as opposed to a weak democracy. This is really just another way of saying that a strong state can prevent corruption, or at least can centralize it such that it is not as dangerous for growth.

What are the determinants of the level of corruption?

  • Weak government – see above
  • Foreign Aid – a resource to be captured, especially in ethnically heterogeneous economies.
  • Institutional quality – checks and balances good incentives for workers, little red tape.
  • Property rights – strong contracts mean that payments are not necessary to maintain property rights. Expropriation risk increases corruption as people pay not to have their property expropriated.
  • Macro policy – e.g. an overvalued exchange rate means an incentive to create a black market. Trade policy/restrictions leads to incentives to get around them etc.
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