Corruption in Economic Development: Beneficial Grease, Minor Annoyance, or Major Obstacle?

28 Pages Posted: 20 Apr 2016

See all articles by Shang-Jin Wei

Shang-Jin Wei

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); Tsinghua University - School of Economics & Management

Date Written: February 1999

Abstract

Corruption is a major obstacle to economic development. It reduces domestic investment, discourages foreign direct investment, inflates government spending, and shifts government spending away from education, health, and infrastructure maintenance toward less efficient (more manipulable) public projects.

International pressure against corruption is useful, but more critical is reform of domestic institutions and a focus on the incentive problem. Abuse of power by public officials should not pay.

Wei reviews the overwhelming statistical evidence that countries with high levels of corruption experience poor economic performance.

Corruption hinders economic development by reducing domestic investment, discouraging foreign direct investment, encouraging overspending in government, and distorting the composition of government spending (away from education, health, and infrastructure maintenance toward less efficient but more manipulable public projects).

The World Bank and the International Monetary Fund, among others, define corruption as the abuse of public office for private gains. Whenever a public office is abused, a public function or objective is set aside and compromised. Only if a public function is unproductive are policy goals unharmed by corruption.

But one often hears that bribery greases the machinery of commerce, so Wei studied the evidence-which clearly rejects that hypothesis.

Culture shapes the difference between a bribe and a gift but culturally induced differences seem small. There is no evidence to support the notion that corruption in Asia, including East Asia, entails lesser consequences.

Corruption can be symptomatic of many social ills so the fight against it must be multifaceted. Laws and law enforcement are indispensable, but countries serious about fighting corruption should also reform government's role in the economy, especially in areas that (by giving officials discretionary power) are hotbeds of corruption. Recruiting and promoting civil servants on the basis of merit and paying them a salary competitive with similar jobs in the private sector helps attract moral, high-quality civil servants. International pressure on corrupt countries, and also to criminalize the bribing of foreign officials by multinational firms, can be useful. But anti-corruption campaigns cannot succeed without reforming domestic institutions in the corrupt countries.

This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to study questions on accountability and governance. The author may be contacted at shang-jin_wei@harvard.edu.

Suggested Citation

Wei, Shang-Jin, Corruption in Economic Development: Beneficial Grease, Minor Annoyance, or Major Obstacle? (February 1999). World Bank Policy Research Working Paper No. 2048. Available at SSRN: https://ssrn.com/abstract=604923

Shang-Jin Wei (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Tsinghua University - School of Economics & Management

Beijing, 100084
China

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