Corruption and Growth

The connection between
corruption and economic growth

is one of the most important topics

though it's a very difficult
set of questions to untangle.

The available evidence is difficult
to interpret for a few reasons.

First, is low corruption
causing economic growth

or is it also that economic growth
is causing corruption?

We can find a correlation and
we suspect that

the causation runs both ways,

but it's very difficult to figure out

how much it's corruption
causing growth rather than vice-versa.

The second problem
in the data is, it seems,

that some kinds of corruption
are more likely to harm

economic growth than others.

Yet, the data we have
for corruption or aggregate data.

They suggest how corrupt
an economy is overall,

but they don't disentangle how much
of the bad forms of corruption

that economy has relative to
the less harmful forms of corruption.

A very general problem is that
if a country is corrupt,

it's very likely to offer
bad or misleading data.

In fact, the data themselves
may be corrupt.

This should hardly come as a surprise.

So when we're trying
to rank corrupt countries

on the basis of their correctness,

sometimes, maybe,
we just don't know.

Finally, in some ways,

it's at least possible that
a growing modernizing economy

will in some ways
become more corrupt.

If you imagine a very,
very poor economy,

maybe there's just not
that much to fight over,

or there's not that much to bribe for.

But, as that economy grows, again,
corruption opportunities increase,

and you may see at some margins
positive correlations between

economic growth and corruption,

but it would be wrong
to conclude that somehow

the corruption is causing the growth.

Rather, it's the case that,
possibly, at some margins,

some amount of growth makes
some corruption a little bit easier.

In part, we interpret the data we do have
through the lens of economic theory,

and serious economists who study
this area or who work in this area,

they believe with virtual unanimity
that corruption really does harm growth.

And they believe this because
of a mix of evidence and theory,

and, of course, the evidence is
viewed through the light of theory.

Before discussing
that evidence just a bit,

there's one trap we'd like
to warn you against,

and that is, it can always
appear that, at some margin,

bribery or corruption might be
good for economic growth,

but don't be mislead.

Let's a simple example.

Let's say that, to start a new business,
you need to pay a bribe.

You could then say, "Ah, well,
bribery is good for business,"

and in a very limited sense, of course,
that's going to be true,

but that's missing the point.

The fact that you have to pay
the bride is what's bad for business.

So, even though you might
have a mental model

or some particular acts of corruption,
may quote-unquote

"grease the wheels",

you should not from that conclude that
corruption is good for economic growth.

Probably it's not.

The most frequently cited paper
on this topic is called

"Corruption and Economic Growth",
and it's by Park Hung Mo.

He finds a very definite correlation
between higher corruption levels

and lower rates of economic growth.

He also finds the most
important channel

for how growth and
corruption are connected

is through political instability.

That is, corruption is
correlated with political instability

and political instability,
in turn, harms growth.

It should be noted that this paper,

like a lot of other work
in macroeconomics,

can't really prove that
these relationships are strictly causal.

Another well-known paper
in the area is by Mauro;

it's called quite simply
"Corruption and Growth".

He shows that corruption is associated
with lower levels of investment.

And to give an example of the magnitude:
if Bangladesh could be less corrupt,

at a level comparable to,
say, that of Uruguay,

their investment rate
would rise by a full five points.

A number of papers on
African economic growth

consider the relationship with corruption.

Some typical results would be
that corruption is associated

with lower growth,
lower per capita income,

higher inequality,

and that corruption hurts
the poor more than the rich.

Really, no one of these papers
would be considered decisive evidence,

but when you put
the entire body of evidence together

with a very strongly
established body of theory,

again, to reiterate,

virtually all economists
are strongly of the opinion

that corruption significantly
discourages economic growth.