Corruption and development: the importance of political economy

DSC00236aCorruption 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.

References

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.

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5 thoughts on “Corruption and development: the importance of political economy

  1. A fascinating post, thank you. I’m unsure about the idea that corruption is less prevalent in advanced capitalist countries than in middle income nations. In Romania, Nicolae Ceausescu used to preside over what critics termed ‘socialism in one family’ (a mocking nod to the old Stalinist formula of ”’socialism’ in one country”). The moves by President Trump and Prime Minister Boris Johnson in relation to the inclusion of family members in their power networks make me think we can see the emergence of ‘capitalism in one family.’ Both the Trump administration and the Johnson Cabinet seem prepared to follow policies based on certain narrow interests, while neither government appears to be a stickler for respecting established constitutional norms. Further, the developments in the media and the social media leave Western countries exposed to (and possibly involved in) corrupt practices. It leads me to conclude that it is hard to keep up with the evolution of feral elites.

    • Which measures by Trump and Johnson do you refer to specifically, and in which ways are they illegal? Why are they corrupt? How do they contrast with presumably non-corrupt practices of (would be) presidential dynasties (Kennedy, Clinton and Bush)?

    • Thanks for your comment. Glad you found it interesting. I think some of the forms of behaviour of elites you mention may be disagreeable or even morally distasteful, but not necessarily illegal. They may be borderline corrupt, or lead to corrupt activities which we are not (yet) aware of. They may lead to forms of rent-seeking (which can be classed as corruption, but not always). The use of public office or position to obtain private benefits is probably never far away even in rich countries, but it can still lead to socially beneficial rents and economic activity. Ideally we would have the beneficial rents without the rent-seeking cost, but perhaps this is too much to ask for of an imperfect humanity. Rent-seeking in richer and better functioning democracies (not necessarily the same thing) may persist but take legal forms rather than illegal corruption. We may of course think that much rent-seeking, whether legal or illegal, is wrong.

      • Having said all that, in Mushtaq Khan’s framework, rent-seeking can take many forms, including class struggle for improved rights, or a fairer distribution of income and wealth, resulting in rents generated by new policies on the part of government. So his theory includes the political economy of corruption, but goes well beyond it, and is a way of explaining many aspects of political economy in general.

      • I agree with you, Nick.

        Let me add this, borrowing the term “blinkered” from your excellent post “The blinkered vision of free market economics”: https://peofdev.wordpress.com/2019/08/05/the-blinkered-vision-of-free-market-economics/

        All economics and any political model become blinkered when they assume the form of ideology.

        The regressive green left’s economics/political model is just as blinkered as the neo-liberal doctrine, and inevitably comes to the same conclusion: let’s depoliticise, meaning: stop political competition getting in our way.

        Ideologies do not understand or ignore the political nature of society and its economy, putting themselves above the need and the right for people to voice their interests and compete for the fair reconciliation of their differences.

        After all, ideologies have an ultimate solution to offer – like (i) free markets or (ii) the dictatorship of the proletariat and then communism (the Marxian end of history), or (iii) decarbonisation to save humankind from doom.

        Regardless of their persuasion, ideologies betray the same pattern: they advertise easy solutions based on reasoning on a very high level of abstraction (with contrary evidence available mostly from lower levels of abstraction).

        Inspection from the point of view of lower abstraction shows that

        (i) power relationships between human beings will always exists (hence, communism is a false promise),

        (ii) free-markets are not interlocked as promised in a way that is capable of achieving general equilibrium and all the bliss supposedly associated with it, and

        (iii) captive climate “science” buries the overwhelming evidence against catastrophic warming under an avalanche of crude stereotypes whose veracity depends on the rate at which they are repeated and regurgitated and their prevalence in the media (rather than on genuine empirical scientific research).

        Further to rent-seeking:

        There is a microstructure of rent-seeking – or to use a better term: “political striving”.

        For not all rent-seeking is rent-seeking in a profit-maximising sense, much is belief-based or opportunistic or desperate (like the failed gamble of the German automotive industry to curry favour with the greens) or silly or manic (like the German passion to destroy its economy to make a contribution to global cooling that is not measurable with modern instruments – and chronically failing to achieve that preposterous goal), while explicitly exempting the largest emitters of CO2 (China, India etc.) from restrictions.

        The more fundamental category is “political striving”, the attempt to create conditions conducive to what one perceives to be desirable given one’s specific aims and concerns.

        “Political striving” is an irreducible part of the human condition – indeed, I find it problematic to replace it by a term with a derogatory ring to it (“rent-seeking”).

        “Political striving” is driven by the omnipresence of what I call “political scarcity” – the lack of agreement among human beings that calls for reconciliation of some form – by killing one another or by finding a compromise.

        Political scarcity is more fundamental than economic scarcity. Before any economic actions can take place and before any economic institutions can function one has to take care of political scarcity.

        Ideologies do not understand this, and even less do they understand that the best way to deal with political scarcity is to foster a robust system of political competition.

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