ISET Economist Blog

Is Some Degree of Corruption Good for Growth? – It Could Be.
Friday, 15 February, 2013

It is a commonly accepted view that corruption is bad for economic growth. It leads to an inefficient allocation of resources by contradicting the rules of fair competition and by setting wrong incentives. Patronage and bribery are two components that define the notion of corruption and which cause the inefficiencies associated with it. Patronage often leads to the unfair delegation of the power of decision-making to economic agents who do not possess the relevant skills to make good decisions. In the absence of patronage, ceteris paribus, the power of decision-making would be delegated to more qualified economic agents. It turns out that the opportunity cost of delegating decision-making power through patronage is higher than the benefits of such delegation, which is inefficient in the sense that it decreases social welfare. Bribery is yet another “evil” which in theory could help implement bad decisions, that is decisions that are beneficial for few but Pareto deteriorating for society.

As intuitive, logical, and familiar as the arguments against corruption may sound, people often do not take into account the fact that counterarguments exist. We like to think that corruption is straightforwardly bad. This is because political thought has portrayed corruption as an unethical activity – it has become a commandment that corruption is unacceptable in any shape or form; even mentioning the word “corruption” elicits bad feelings. So, in order to get rid of those biased bad feelings and to enable us to start thinking about its advantages, let us for a moment retitle “corruption” in our minds and call it “a favor”.

Although uncommon, the notion that corruption might be sometimes good is not a new idea. Heckelman & Powell (2008) did a cross-country study in which they examined the effects of corruption on economic growth. They found out that corruption could be either harmful or beneficial to growth depending on a given institutional environment. When the size of government is big and regulatory and bureaucratic burdens are harsh, then corruption has a positive effect on growth. Thus, according to their results, reduction of corruption is favorable for growth only when political and, more importantly, economic institutions are strong. The argument is rather simple: with weak institutions and no corruption, it usually takes many burdensome procedures, much time, and additional monetary costs for economic agents to implement any decisions. If, on the other hand, those economic agents were able to pay bribes to avoid such time and monetary costs they would become more efficient and competitive.

The case of Georgia, I believe, is similar to the “weak institutions – a bit of corruption is good” situation. Gwartney & Lawson’s “Economic Freedom of the World Annual Report 2012” measures economic freedom in 144 countries based on five major areas: the size of government; legal system and property rights; sound money; freedom to trade internationally; and regulation of credit, labor, and business. The overall index ranks Georgia 42, which puts the country in the pool of Albania, Costa Rica, Bulgaria, Rwanda, the Bahamas, etc. Among those five areas, the index ranks Georgia lowest in the size of government (83). This indicates that the size of the government is quite large and thus, bureaucratic burdens are present. Marshall & Cole’s “Global Report on Conflict, Governance and State Fragility 2011” provides yet another index for measuring the strength of political and economic institutions. According to that index, Georgia is moderately fragile in the economic effectiveness indicator. Overall, Georgia’s political and economic institutions are considered to be “low fragile”.  These two indices indicate that, despite the favorable institutional reforms which took place during the past decade, Georgia still suffers from institutional inefficiencies and lacks economic freedom.

To support the hypothesis that, in Georgia’s situation, a bit of corruption would help, we can refer to a specific case. According to several Georgian entrepreneurs with export-orientated businesses, the fact that Georgia is the only incorrupt country in the region frequently works against Georgian exporters. For example, when products are being exported to Azerbaijan or Kazakhstan, or need to go through those countries, Georgian exporters face problems at the borders because of a lack of Caspian Sea ferries or corruption in the port of Aktau. If exporters want to pass these borders without delays, they have to pay bribes. However, because of the harsh regulations currently in place, Georgians cannot pay such bribes. This directly affects product prices and the competitiveness of Georgian goods on external markets. This case also makes us think about corruption and institutional strength in broader terms. When assessing the advantages and disadvantages of corruption we should not only consider institutional problems inside the country but should also think about such problems on a regional level.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.