Corruption is generally seen as a major social problem, and is particularly prevalent in many developing countries (DCs), but also to a lesser degree in middle income and advanced economies. We frequently read in the media about new political leadership in all sorts of places promising to fight corruption in order to improve the social, political and economic environment, from China and Angola to South Africa and Mexico, to take some fairly recent examples.
Unfortunately, such battles against corruption in DCs frequently end in failure, an outcome that is demoralising, not least for the populations of the countries concerned, but also for those external actors who set great store by these kinds of reforms.
Corruption is often conceived of as a moral issue, but some heterodox economists have argued that it is frequently much more than this. They contend that it is more a political and structural problem symptomatic of societies undergoing change as new social forms struggle to emerge. This is typically the case in poor countries experiencing a socioeconomic transformation towards capitalism.
International institutions such as the World Bank have for some time made the case for governance reform in DCs which they argue, based on their econometric evidence, is one of the bases for successful development. The so-called ‘good governance’ agenda includes policies which aim to reduce corruption by reducing state intervention in the economy which encourages rent-seeking, and through such acts as increasing salaries for civil servants so that they are less likely to seek additional and often illegal sources of remuneration. It also includes the promotion of democracy and civil society, the enforcement of property rights and so on.
But if the good governance agenda policies do not in themselves encourage the structural transformation in society and the economy that is the hallmark of successful development then they may be hard to achieve or sustain. This includes fighting corruption.
Indeed, if much corruption in DCs is structural or systemic, then simplistic market reforms such as liberalisation and attempts to reduce the role of the state in the economy may have little effect, or even make things worse.
A more nuanced approach to corruption in DCs holds that it is the transition to capitalism that creates the conditions in which much of the observed corruption can potentially flourish. However, although by itself corruption is a negative outcome of this process, not all forms of corruption are associated with damaging social and economic outcomes. A brief look at modern heterodox theories of rents and rent-seeking is useful in this regard.
Rents and rent-seeking
In economics, rents are “incomes that are higher than the next best income that an individual or group can earn”, while rent-seeking is the “use of resources to influence public officials to create, allocate or transfer rents in ways that benefit the rent-seekers” (Khan 2006).
While mainstream neoclassical economics has typically argued that all rents and the associated rent-seeking are socially damaging, such as in the case of monopoly rents or redistributive transfers that create inefficiencies and reduce national income, heterodox economists have for some time made the case that rents can be socially beneficial (Khan and Jomo 2000). This could be the case if they create incentives for firms to engage in learning how to use new technologies, or for innovators to create new technologies in the first place. Some redistributive transfers can create political stability in a society, when the alternative of instability could lead to uncertainty, undermining some of the conditions for investment and growth.
Rent-seeking can take legal or illegal forms. Legal forms of rent-seeking can be seen in rich countries in the form of lobbying, contributions to political parties or the creation and work of think tanks. Corruption is a form of illegal rent-seeking. If particular kinds of rents are socially beneficial, then although the resources used in rent-seeking are taken as a cost, there are ways in which the net outcome of the overall process (the social benefit of the rent minus the rent-seeking cost) can be positive for society. The creation of learning rents by the state will create incentives for rent-seeking, and this could take the form of corruption. While we may disapprove of the corruption itself, it could nevertheless lead to net social benefits, when account is taken of the more productive firms and higher output and welfare that are achieved.
So rents that lead to or are generated by corruption can be enhancing or damaging for growth and development. The outcome will tend to be dependent on the particular country, sector or firm context.
The structural causes of corruption
Unfortunately, the problem of endemic corruption in DCs can become associated with the creation of damaging rents. Countries undergoing a transition to capitalism will have an emerging capitalist class which does not yet have the legitimacy to engage in legitimate rent-seeking in order to protect its newly acquired property rights. When the class of capitalists is small, their rents are also hard to present as socially acceptable. While their activities can be potentially socially beneficial, their newly acquired resources may have been acquired partly by chance, which reinforces such attitudes.
A further structural reason for corruption in DCs is the limited ability of their governments to raise fiscal revenues which can be used for transfers in order to achieve political stabilisation. Rich countries typically tax and spend up to around 40% of national income, but poor countries lack the base of productive firms which can generate taxable incomes.
Reducing corruption significantly in DCs requires overcoming these structural factors, which in turn
“requires the emergence of a legitimate and viable capitalist class that can protect its assets and rents via legal rent-seeking, and the collection of enough fiscal revenue to maintain social cohesion and political stability through transparent and legal transfers to broad classes of citizens, rather than through illicit transfers to targeted clients.” (Khan 2006)
Reducing corruption and accelerating development
To sustainably reduce corruption, states need to acquire the capacity to create and manage growth-enhancing rents for learning and technology acquisition and transfers to maintain political stability in ways so that corruption and rent-seeking more generally can be controlled within limits and do not adversely affect the allocation and management of these developmental rents.
Broadly speaking, successful economic development creates the preconditions for sustained anti-corruption strategies to be effective. The danger of anti-corruption strategies proving ineffective in the absence of the necessary structural change is that this can lead to social disaffection and attacks on state capacities that prevent the state accelerating social and developmental transformations.
Khan (2012) distinguishes between the market-enhancing approach to governance reform adopted by the World Bank and other international institutions and the growth-enhancing approach of heterodox institutional economics, as touched upon above.
The limited number of really successful late developers such as South Korea, Taiwan and Singapore adopted interventionist industrial policies and managed to catch up and become rich countries within a few generations. However, most DCs have different institutional starting points due to their different political and social histories. Their governments therefore find it hard to replicate the policies of the East Asian developmental states.
With many differing country contexts, more incremental and experimental approaches are needed in order to be effective in accelerating development, improving governance capabilities and gradually building support for such positive processes across society in a sustainable fashion.
Extensive market failures which constrain development in poor countries can be overcome not by comparing them to an idealised free-market and reducing the role of the state as far as possible, but by targeted interventions which build competitiveness in particular sectors. This can then create the conditions for institutional, political and governance reforms. If they are successful in accelerating development, this approach can become self-sustaining.
Khan, M. H. (2001), The New Political Economy of Corruption, in B. Fine, C. Lapavitsas and J. Pincus (eds), Development Policy in the Twenty-First Century: Beyond the post-Washington Consensus, Routledge, p.112-135.
Khan, M. H. (2006), Rent-Seeking and Corruption, in D. A. Clark (ed), The Elgar Companion to Development Studies, Edward Elgar, p.510-520.
Khan, M. H. (2012), Beyond good governance: An agenda for developmental governance, in Jomo, K. S. and A. Chowdhury (eds), Is Good Governance Good for Development?, Bloomsbury, p.151-182.
Khan, M. H. and Jomo, K. S. (eds) (2000), Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia, Cambridge University Press.