Corruption: Good or Bad?

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Through his book “The Elusive Quest for Growth: Economist’s adventures and misadventures in the tropics”, William Easterly presented forceful explanations for the failure of development efforts in the last decades in the Third World’s countries. As far as the role of the government is concerned, corruption is the most detrimental growth-killing factor that government officials are tempted to commit. Easterly dedicated a whole chapter to elaborate on the scale of corruption, its impact on growth, its causes and some actions that should be taken against this damaging practice. Many of these arguments are compelling and supported by other researches but still they are not at all flawless. The paper would take a closer look at his standing on relationship between corruption and growth, the types of corruption and its contributing factors.

In line with other commonly-held perceptions of corruption-growth nexus, Easterly hold that corruption and growth are inversely related. Similarly, the investment ratio to GDP bears a negative correlation with corruption. Other growth promoting policies fail to materialize or bring expected results due to diversions of fund from public revenues. Budget deficits are closely linked with corruption as public expenditures get inflated through kickbacks. To elaborate on Easterly’s viewpoint, corruption poses an obstacle to growth through several significant mechanisms. First, it takes its toll on private investment by making the cost of business more costly. Bribe is supposed to be given to officials at various government levels in return for permission to engage in production, marketing, transportation, thus reducing the net profit of enterprises. Also, it increases uncertainty to investment due to the illegality and confidentiality of the practice, thus stifling the incentives to invest of both domestic and foreign investors. Corruption also interferes with the quantity and quality of public investment. Paying bribes to evade tax, custom duties and public utility charges causes serious revenue loss to state budget, diminishing the resource available to fund public services like education and healthcare. Likewise, public projects tend to be built out of inferior materials as contractors reduce cost to compensate for kickbacks given to officials. In addition, graft is accused of distorting components of public spending which can be diverted from public welfare (Mauro, 1998). As bribes are easier to maneuver with large projects with value being difficult to be determined, military or infrastructure projects will be voted for by corrupt officials than those spending on education and healthcare that involves relatively smaller investment, leaving those sectors to be under-allocated. All these negative impact on investment would undermine the accumulation of both physical and human capital- two major catalysts to growth. Another notable channel is through political instability which was proved to be the most remarkable channel through which corruption weakens growth (Mo, 2001). As corruption produces wealth-making opportunities for the privileged only, income inequality would be widened, inducing those disadvantaged into violent or illegal activities out of frustration. However, corruption is not always an enemy to growth but instead can be an engine of growth under certain circumstances. First, it can compensate for inefficiency in multi-layer bureaucratic systems. Paying extra money can speed up administrative process, this can save time and effort for businesses who otherwise would have to waste time queuing in line or go through lengthy administrative procedures step by step. The time saved can be dedicated to more productive activities with benefit well offsetting the bribery. Therefore, when inefficient rules limit entrepreneurial development, corruption can help grease the system by circumventing unnecessarily burdensome practices. In fact, through a statistical analysis, corruption was...
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