Good Ezines

A campaign against corruption must go beyond words, indeed beyond new laws. Institutional adjustment is needed to limit the scope of corruption (and more generally, to enhance efficiency).

A rough formula holds: we will tend to have corruption when there is monopoly plus discretion minus accountability. Therefore, by “structural reforms” we mean actions that:

- Limit monopoly: promote competition in the public and private sectors, avoid monopoly-granting regulations when possible (especially exchange controls and quantitative restrictions on imports), open the economy to international competition, and so forth.

- Clarify official discretion: simplify rules and regulations via “bright lines,” help citizens learn the way the system is supposed to work (through brochures and manuals, help desks, laws and rules in ordinary language, publicity campaigns, the use of citizen service-providers, etc.), improve oversight of officials’ actions, and so forth.

- Enhance accountability and transparency: private-sector involvement in many ways, including citizen oversight boards, hot lines, ombudsmen, inquiry commissions, etc.; the systematic generation and dissemination of information about public service effectiveness; external audits; self-policing by the private sector; clear standards of conduct and rules of the game; greater competition and openness in bidding, grant-giving, and aid projects.

Institutional adjustment builds on the insight that systems are corrupt, not just people. Corruption is a label covering many different phenomena, and within each category of corrupt activities are many questions of degree. The beginning of wisdom in an anti-corruption effort is to disaggregate.

It is impossible to avoid ethical questions when one speaks of corruption. And yet, this is what successful reforms must try to do. They must focus on corruption as a crime of economic calculation. They must analyze systems rather than condemn individuals, understanding the formula corruption = monopoly + discretion – accountability.

Not all kinds of corruption are equally harmful or equally easy to prevent. It is important to combine economic analysis with political assessment and ask, “What kinds of corruption hurt the most, and whom? What ways of fighting corruption are most effective, and what are the direct and indirect costs?”

In the case of one African country, there is evidence of corruption in several sectors: tax and customs bureaus, the state peanut, the development bank, and perhaps in social services like education. Several donors have made much of the foregone revenues due to inefficiency and probably bribery in customs and taxes. But before we equate foregone revenue to social costs, we must ask who gets the money that is now foregone and how they are spending it. The foregone revenue does not disappear from the face of the earth, nor perhaps even from the country in question. There are redistribution effects, most likely undesirable ones. But as old “revisionist” writers on corruption used to say, perhaps the most dynamic economic elements of the society are those who benefit from this kind of corruption, leading to more economic dynamism.

We must also investigate the extent to which various kinds of corruption “block” economic activity, or in contrast the extent to which there a “market price” with low transactions costs and low uncertainty. Sometimes a corrupt equilibrium has long delays, sometimes what looks like bureaucratic efficiency.

We should focus on the external support and incentives generated by corrupt activities of various kinds, not the amounts of money that changes hands. As they used to say of government officials in Mexico, “They waste a million to save a thousand.” Of particular importance is corruption that undercuts financial and banking systems or systems of justice. The external support can be huge here. A corruption activity leads to policy distortions.

For political reasons, it is good to begin an anti-corruption campaign where citizens perceive it to be most evident and most annoying, or where the political leadership has given a field particular salience, or one believes that corruption is undercutting economic reform.

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