When corruption is good for the economy

August 7, 2014, 5:53 PM UTC
Photo: mark hooper—Getty Images/Uppercut

Americans, and citizens around the world, have corruption on the mind.

A recent Gallup poll showed that from 2006 to 2013, the percentage of Americans who believe “corruption is widespread throughout the government” has increased from 59% to 79%, while a separate poll showed that majorities in 108 of 129 countries agree.

Economist Jakob Svensson has defined corruption as the misuse of public office for private gain and, by this definition, it’s easy to see why it upsets us so much, as it constitutes a theft of resources that belong to all of us. And when corruption is widespread, it can have devastating effects on a society. In a paper published in the Journal of Economic Perspectives, Svensson surveys the literature on the economic effects of corruption, and they can be severe. He notes that there is a strong negative correlation between the wealth of a nation and its level of corruption, and that this corruption often harms the poorest in a society. Svensson offers several recent examples of such egregious malfeasance:

A conservative estimate is that the former President of Zaire, Mobutu Sese Seko, looted the treasury of some $5 billion…. The funds allegedly embezzled by the former presidents of Indonesia and Philippines, Mohamed Suharto and Ferdinand Marcos, are estimated to be two and seven times higher…. An internal IMF report found that nearly $1 billion of oil reserves, or $77 per capita, vanished from the Angolan state coffers in 2001 alone. This was about three times the value of the humanitarian aid received by Angola in 2001—in a country where three-quarters of the population survives on less than $1 a day and where one in three children die before the age of five.

Of course, most corruption is nowhere near as outrageous, and there are times when the presence of corruption can actually lead to just outcomes. According to Chris Blattman, an associate professor of political science at Columbia University, this might be why economists have not been able to link levels of corruption to growth rates. While overall wealth is associated with lower levels of corruption, there is very little evidence that corruption leads to slower economic growth. Writes Blattman:

Why might this be so? One reason: Most of us fail to imagine that corruption can also grease the wheels of prosperity. Yet in places where bureaucracies and organizations are inefficient (meaning entrepreneurs and big firms struggle to transport or export or comply with regulation), corruption could improve efficiency and growth. Bribes can act like a piece rate or price discrimination, and give faster or better service to the firms with highest opportunity cost of waiting.

Could this seemingly benign corruption be helpful in the U.S.? In an article in this week’s New Yorker, Malcolm Gladwell, without necessarily calling it corruption, argues it could, as he compares the Italian Mafia of the early 20th century with organized crime in cities today. Gladwell argues that throughout American history, waves of immigrants were denied access to the sorts of institutions that would have enabled upward mobility, and when that happened, these groups turned to crime, what sociologist James O’Kane calls “the crooked ladder.”

But, in the 1970s, as the U.S. government got serious about cracking down on organized crime in general and the drug trade in particular, that crooked ladder was destroyed, leaving today’s downtrodden minorities with one fewer avenue to gain wealth. It was once common to bribe police officers to turn a blind eye to the drug trade, illegal gambling, and prostitution. But America’s zeal for stamping out crime and vice has transformed the unwritten armistice between organized crime and the authorities to an all-out war, in which minority youth are imprisoned and subsequently forced back into a life of crime due to the stigma against felons.

On a national level, we can see how corruption can actually make Congress more efficient. For four years, the House of Representatives has been operating under a ban of so-called “earmarks,” or spending provisions tacked on to a larger bill that fund pet projects of a specific congressman that bill sponsors are trying to woo. This is, of course, bribery by any other name: “Vote for this bill and we’ll give you something you want.” At the same time, since earmarks have been banned, Congress has been unable to get much of anything done, leading politicians on both sides of the aisle and countless commentators to beg for their return.

Most of the time, corrupt officials are like parasites that feed off society and benefit only themselves. Furthermore, as corruption becomes more prevelant, ethical people lose faith in the system and are sapped of their drive to work honestly. But it’s important to understand that because we live in an imperfect world, a bit of controlled corruption can function as a lubricant to overcome some of our worst problems.