The corruption debate continues

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Corruption is bad. This statement can find few dissenters from a moral or ethical standpoint. Corruption is bad for the economy. Equally unobjectionable? Many people, economists included, would concur.

And this is the premise of two recent articles on corruption in The Edge's Forum pages. The first, "Are we really that corrupt?" (Issue 939, Dec 3), by the Institute for Democracy and Economic Affairs, came to the conclusion that since the country's growth is unaffected by the perception of rising corruption as measured by Transparency International's Corruption Perception Index, corruption may not be as bad as people think.

The other article, "Do investment and growth show we are not corrupt? (Issue 941, Dec 17), by Quah Boon Huat, argued that Malaysia's growth was in fact damaged by corruption.

Neither conclusion is warranted. First, economic growth is affected by a host of factors, only one of which is corruption. It is almost impossible to make explicit all these factors — a prerequisite for isolating the impact of any one of them. Second, even if these can be made explicit, disentangling their impact can be a nightmare because they are almost certainly interrelated. And third, even if the impact of all these factors can be isolated, demonstrating the link between corruption and growth is no simple matter because the relationship between them is complex.

Economic theory will have us look at how scarce resources are misallocated because of corruption, the inefficiencies thus generated, and these inefficiencies' impact on the economy.

To conclude that corruption has an impact on growth by comparing trends then is a bit like saying that the rise in crime must be caused by foreign workers/migrants since both have been rising over the same period. Or that strong sunshine causes shark attacks.

The difficulty of establishing a direct link between corruption and growth has not stopped scholars from producing a plethora of evidence-based research. But the results have been far from conclusive. Google "corruption and growth" and you will find many studies that demonstrate empirically the negative impact of corruption on growth. Indeed, this is the position taken by the World Bank and other multilateral organisations.

These studies, however, have to come to terms with some inconvenient facts. China and India, no paragons of good governance according to all such indicators, have grown a lot faster than most "less corrupt" countries.

At the same time, the dominant view is being questioned by some scholars. One paper, by Heckelman and Powell (Corruption and the Institutional Environment for Growth, Suffolk University, 2008), found empirically that "corruption is growth enhancing when economic freedom is … limited."

Even more interesting is another paper by the University of Chicago's Maxim Mironov (Bad Corruption, Good Corruption and Growth 2005), whose conclusion was that while corruption associated with poor institutions (bad corruption) impairs growth, corruption unrelated to other governance characteristics (good corruption) is helpful to growth.

Why are the Mironov findings interesting? It is because it divides corruption into two types. The point to stress here is not whether he is right — moralists will be astounded by the term "good corruption" — but that all corruption is not the same.

Quah acknowledged as much (when he cited RJ Williams — "Corruption, like beauty, is in the eye of the beholder), but then paid no heed to it by opining "it is not difficult to recognise it when one encounters it". In doing so, a major opportunity for greater insight into the subject has been missed.

The difficulty of defining corruption is precisely why it is so hard to have any agreement on its consequences for growth in studies, however scholarly. Let us take a simple example, courtesy of Professor Robert Wade of the London School of Economics, who gave a talk at the University of Malaya some months back.

He gave two examples of corruption. The first was that of a contractor, who bribed to win a government construction contract, then skimped on construction materials to recoup the bribe he paid. The second was that of another contractor who won a contract, but raised the construction cost in the contract knowing that he would get away with it.

In the first case, the taxpayers did not immediately bear the cost burden, but the building collapsed after five years. In the second case, the taxpayers bore the increased cost burden immediately but the building stood. Thus, even for the same type of corruption, the impact may differ.

Moving beyond this simple example, there are larger questions about what constitutes corruption. Let us take crony capitalism — the government favouring one party over others, allowing that party to reap monopoly profits, or to use economic jargon, capture monopoly rent. This is surely "not difficult to recognise" as corruption.

But is this not the story of South Korean president Park Chung Hee and Chung Ju Yung, the founder of Hyundai? When Chung was selected to head one of the earliest chaebols, it was not through a process of competitive bidding. And when he was awarded contracts for the Ssoyangang Dam project and the Kyongbu (Seoul-Pusan) Expressway, South Korea's first major highway, which was completed in 1970, did he not gain from Park's patronage?

More generally, is this not the idea of "picking winners", as practised for a time by South Korea's developmental state but more recently by China's selection of "national champions"?

The World Bank defines corruption as the "abuse of public office for private gain". By this definition, the Park Chung Hees of the world have clearly used the power of public office to favour those who gained tremendously from such favours.

But what have been the consequences of this "abuse"? South Korea's rise from the ashes of war is now legend, and it is now a poster child for latecomer catch-up growth. China's national champions are making their way into the Fortune 500.

Let me end with a clarification. The point of this article is not to be an apologist for corruption, however defined. It is to demonstrate that the concept of corruption is not so clear that if you see it, you would know it.

For this reason, the rush to judgment is intellectually naïve. Linking corruption to growth is a high-risk endeavour, and however data are interpreted, there can never be a convincing economic argument made.

Cheong Kee Cheok is a Senior Research Fellow at the University of Malaya

This story first appeared in The Edge weekly edition of Jan 21-27, 2013.

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