The Political Economy of Corruption

Arvind K. Jain

• Publisher: Routledge
• Year: 2001
• ISBN:
  9781134566334
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

'Grand' corruption, generally used to define corruption amongst the top political elite, has drawn increasing attention from academics and policy makers during recent years. Our understanding of the causes and mechanisms of this type of corruption, however, falls short of its importance and consequences. This volume provides theoretical analysis of

Part I
Governance and corruption
The emerging challenges of development

1 Power, politics, and corruption

Arvind K. Jain

A concerted fight against corruption – in some cases defined synonymously with bribery – seems to have broken out around the globe in many spheres of social life where it rears its head. As this volume was being written in the summer of the year 2000, a senior Chinese official was actually sentenced to death for corruption. In the political sphere, the trial of former Indonesian President Suharto on charges of corruptly acquiring $210 million of state funds was about to begin. A Brazilian senator close to the President was impeached – an act unprecedented in the country’s history – when it was revealed that he had requested bribes for a corruption- plagued construction project. In Mexico, public disgust with corrupt politicians had finally led the people to vote PRI (Partido Revolucionario Institucional) out of office after seventy-one years of uninterrupted rule. Five British firms and fourteen others were being prosecuted in Lesotho courts for offering $3 million in bribes to officials, and the French oil-company Elf was being implicated in corruption scandals in Angola. Accusations of match-fixing and corruption were swirling around Japan’s revered national sport, sumo. In Cambodia charges of corruption had led international agencies to consider cutting funds from the organization responsible for removal of millions of life-threatening land mines.

Public awareness of, and tolerance for, corruption has seen a sea change over the past decade as information and expectations have caused people to expect more from their leaders. While much of the focus of the current struggle to reduce corruption is on making bribes more difficult to pay and accept, “corruption” involves much more than bribes. Corruption, defined more comprehensively, involves inappropriate use of political power and reflects a failure of the political institutions within a society. Corruption seems to result from an imbalance between the processes of acquisition of positions of political power in a society, the rights associated with those positions of power, and the rights of citizens to control the use of that power. Power leads to temptation for misuse of that power. When such misuse is not disciplined by the institutions that represent the rights of the citizens, corruption can follow. Therefore, the study of the politics of corruption – the intent of this volume – is a study of how the political institutions should work to strike a balance between conflicting goals that individuals might have, as well as the conflict between the goals of various individuals and groups within a society. Although corruption makes itself visible as an economic transaction, it would not exist if the political institutions were able to exert the necessary influences and controls. Since available evidence fails to find any benefit associated with corruption, it would be in the society’s interest to design systems and exert pressures that would eliminate corruption. Existence of corruption, therefore, reflects a failure of the “markets” – economic as well as political. A successful fight against corruption, which is really one part of the challenge for effective governance of societies, would seem to require a thorough understanding of the link between the political institutions and corruption. This volume attempts to understand some aspects of the political environment of societies that allow corruption to exist and grow or diminish over time.

How and why we study the link between politics and corruption is intimately tied to what we mean by corruption. Contributions to this volume begin with Michael Johnston’s survey of how and why the meaning of this term has changed through time. Over the ages, as the relationships between individuals and states have changed, our expectation of what “the state” or “the office bearer” or “the individual” has to do has also changed. Under a monarchy or a feudal system, the individual had few rights. The state was supposed to define individuals’ rights as well as the code of behavior for everyone – citizens as well as public functionaries. Corruption in that context implied failure to behave according to this moral code. Under a modern democratic system, individuals choose their values and their rulers in conformity with those values. It is therefore understood that the rulers reflect the morality of the ruled. Definition of corruption, in this context, has come to be related to the behavior of the individual who has been chosen to rule or govern. This ruler is not expected to define morality – other than in designing the legal framework – but merely to act according to the established norms. Hence the focus of contemporary discussion on corruption is on individual behavior – that of the politicians or of the bureaucrats. Politics, however, becomes important because political values, institutions, and parties play an important role in defining the values of the society and in defining the norms that individuals in positions of power have to follow, as well as in designing the control systems that determine the limits of the behavior of the political elite.

Different definitions, and hence coverage, of what corruption means may sometimes change the focus of debate from solving problems to sorting out the relative importance of various strategic issues that must be resolved, or, in other words, what has to come first. Our interest in corruption arises from a desire to improve the quality of life of people in different societies and address questions of social inequality. Who should be responsible for a society’s progress and to what extent should a society attempt to eliminate inequalities – caused either by factors outside individuals’ controls or by individuals’ own actions and choices?¹ It is apparent that the underlying issue here is the relationship between power and wealth. These ideas interact with each other at least at three different levels within a society. Michael Johnston discusses the importance of understanding these interactions and traces some of the changes in the relationship between these two through history.

First, and most important, ownership of wealth affects the process and outcome of discussions on what will form the moral values of society. From the ancient times to the most modern – as recently as the Seattle and Washington demonstrations – corruption has been equated with a decline in the moral values of a society. Certainly the focus of contemporary demonstrations against “globalization” is based on a perception that “wealth” has a greater influence on determining who has the power to set the rules of the society than it should.

Second, pursuit of wealth leads wealth-owners to collaborate with holders of political powers to circumvent the spirit, if not the letter, of the rules by which a society has accepted to be governed. It is often difficult to identify this type of collaboration and it is especially difficult to assess when such collaboration violates the norms of the society. Naylor (1998) provides an example of such collaboration for one industry in a situation where it is easy to conclude that such violations have taken place. It is often, however, difficult to separate where the interest of the society ends and the benefit for the “wealth” – at a cost to the society – begins. Sometimes what is in the interest of a private entity may coincide with public interest but, at other times, it may only be couched in terms of “public interest.” It becomes especially difficult to establish the link when the power-holder is not compensated for its decision in any observable manner.²

Third, wealth and power intersect in the behavior of an individual functionary who (mis-) uses public power toward ends for which it was not intended and is compensated by the wealth-owner who benefits from the misuse. The compensation can take many forms, the most common form being bribery. This interaction comes closest to the current tendency to define corruption narrowly in terms of the use of public power in exchange for bribes.

Democratic societies give equal power to citizens to choose their representatives but we know of no democratic society that does not allow, de facto, disproportionate power to “wealth” to influence outcomes within a society. One of the outcomes of this unequal distribution of power is unequal distribution of income and wealth. Societies differ in the extent to which unequal distribution of income, or wealth, is accepted by the populace. Even when the unequal distribution of power results from the application of the rules of the system, the poor regard the lack of income equality resulting from the consequences of unequal distribution of power as corruption. This, as Johnston points out in the first of his two contributions in this volume, is also how corruption had been defined historically. The change in the meaning of corruption – from all encompassing values of the state to the behavior of particular individuals – may be partially justified by the change in the relationship between those who govern and those who are governed. When the rulers chose themselves (kings, dictators), then they were held responsible for what values they chose for the society and how well they implemented those values through their decisions. In a modern, democratic, system, however, people elect those who will govern. Such an election ensures, at least in theory, that those who are chosen to govern represent the values of the public at large. The issue here is the extent to which unequal distribution of power within a society results from the tension between the transparent and fair application of “the rules of the game” and behind-the-scene manipulations – accompanied invariably with payments in some forms to the holders of the powers – or corruption. Hence, our focus narrows down to the behavior of the individual politician.

This volume focuses on the last two of these three interactions between wealth and power. While there would be little doubt that the first interaction between wealth and power – interaction that defines the moral codes of the society – is probably the most influential in determining the welfare of a society, we make the assumption that in a democratic society, election of the ruling elite represents the best compromise on what should be the governing values of the society. Our objective in this volume is to address some questions about the nature and functioning of political institutions that determine how much corruption will exist in a society, given that there is an agreement on the underlying values for governance. Good governance of societies will require addressing the relationship between power and wealth at the macro level – where unequal power distribution leads eventually to unequal distribution of income and wealth – as well as at the micro level where the individual behavior of those in power leads to poor implementation of agreed upon policies. The focus of this volume is on the micro aspect of corruption – how power is misused to accumulate personal wealth.

The essence of a well-functioning political system is that it allows policy decisions and outcomes to be influenced by all interest groups. Different political systems, however, differ in the extent to which they allow this to happen. Systems differ in their design – how things are supposed to happen – and in their implementation – how things actually happen – in other words, what imperfections are allowed to exist. Some systems are more efficient at allowing an aggregation of interests from various segments of the society than others. Systems also differ in mechanisms and instruments available to various groups as a means of exerting pressure when they want their interests followed. An outcome of “inclusive policy-making” also depends upon the incentives faced by the politicians and the citizens. When a segment of the society feels its interests have not been served by the political system, it will try to circumvent the accepted political processes and explore weak points within the system that will serve its interests. One of the weak points may be the existence of corrupt decision-makers. Corruption, thus, will depend upon the combination of the rents that an interest group can see itself earning through policy changes, costs (corruption-related payments) it has to incur to change policies, and the enforcement-related costs, that is, the cost of penalties associated with being discovered.³ Political systems may even allow some interest groups to exert influences that will transfer the costs of policy changes to groups with less political influence. Policy changes will show up either as regulations or as government expenditure policies. This leads to two areas of study that concern the link between corruption and political systems. First, we examine how the design of political systems influences corruption outcomes, and second, we study how corruption influences policy outcomes.

Susan Rose-Ackerman, in Chapter 3 of this volume, examines some characteristics of democratic systems that determine the extent to which the design of the political system affects the development of corruption in the society. Democratic systems differ in terms of how leaders are elected and which of them are elected directly by the population, and the roles that political parties play in determining who acquires the positions of power. These differences lead to different manners in which various systems incorporate interests of certain sectors within the society in the policy-making process. Individuals and sectors whose interests are ignored do not, of course, accept those outcomes passively. They use other means available to them to influence the political processes. Elected representatives have to keep those possibilities in mind while making their legislative choices. The political equilibrium, including the level of corruption within a society, thus depends upon the extent to which the design of the political system within a society conforms to the public’s expectations from their politicians.

Political markets that do not function well have at least two consequences related to corruption. First, unsatisfied groups, and groups with limited access to decision-makers, have an incentive to resort to corruption or other means to achieve their goals. Second, groups that are able to exert disproportionate influence can expect to receive some benefits from their access to policy-makers. Three contributors to this volume follow these themes.

Corruption, as mentioned earlier, can be a rational response for some sectors of a society that do not believe their best interests are being served by the political system. Oskar Kurer, in Chapter 4 of this volume, examines some situations in which citizens will embrace corruption in order to further their own interests. When political markets are imperfect, voters may opt for the second best solution of a corrupt politician who serves their interest rather than an honest politician who represents others as well. Politicians, of course, may exploit voters’ ignorance as well as their uncertainties. Kurer’s contribution identifies situations where some segments of a society will embrace corruption as a solution to imperfections in the political system within a partial equilibrium framework.

The first two chapters in the third part of this volume examine the influence of corruption on the policy decisions of politicians. The underlying premise of these chapters is that it is legitimate for all segments of a society to attempt to influence the policy-making process in order to increase the level of rents associated with their activities and assets. Such influence, however, may be exerted either openly through public debate – as should happen in corruption-free societies, or by sharing the excess rents with policy-makers, that is, with corruption. Vito Tanzi and Hamid Davoodi review evidence on the effects of corruption on selected policy outcomes. They examine how corruption can affect budgetary decisions as well as policies that influence how rents are created for organizations of various sizes. In highlighting how firms of various sizes are affected by corruption, these authors point to the importance of process by which political decisions are made: firms that have access to the policy-makers will consistently benefit from regulation.

Sectors of society that cannot offer payments to corrupt decision-makers can often receive less than their share of the available resources than would be justified in a corruption-free society. Sectors such as education and health tend not to have private rents associated with them while also having returns that accrue over long periods of time. For these reasons, interest groups representing these sectors can find it difficult to have their interests incorporated in policy-making process within a corrupt political system. It would be easy, and costless, for politicians to ignore these sectors. In Chapter 6 of this volume, Sanjeev Gupta, Hamid Davoodi and Erwin Tiongson examine the influence of corruption in the distribution of government services on the health services. Their study points to the vicious circle that exists around corruption: corruption reduces government revenue, which even if the provision of government services is corruption free, will lower the level of services; in view of lower services, some individuals may have incentive to not use these services – in which case they will avoid paying taxes – creating an underground economy and further reducing the government revenues. This study highlights the importance of effective political institutions – a sector of the economy that does not yield rents for identifiable interest groups will otherwise receiv...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Figures
• Tables
• Contributors
• Part I Governance and Corruption: The Emerging Challenges of Development
• Part II Political Systems and Corruption
• Part III Policy and Political Outcomes
• Part IV Solutions and Future Research