Thursday, December 9, 2010

Corruption and bribes

The chart below shows the percentage of respondents in selected countries who willingly paid bribes to different service providers. The frequency of offering bribes for personal gains is strongly associated with the level of economic development. The highest percentage of paid bribes accures in those countries where the quality of institutions is very poor. The absence of judicial independence leads to the lack of trust, spread of uncertainty and costlier contract enforcement. In such conditions, corruption increases network and transaction costs. Thus corruption is a substitute for tax system. In terms of economic costs, corruption reduces economic growth by increasing the cost of transparent contractual relations. If corruption is persistent to a lesser extent, corrupt behaviour such as paying bribes is costlier since the probability of being caught is higher. Property rights and the rule of law together with judicial independence play an essential role in fighting corruption. Poorly defined property rights increase the risk of expropriation and therefore provide an incentive to pay bribes. Establishing a robust system of the rule of law is the best safeguard in tackling the persistence of corruption.

Source: The Economist (link)


  1. Ursula
    In relation to corruption etc I would be very interested in your reaction to the paper by Philippe Aghion et al which I discussed recently on my blog here

  2. Winton,

    congratulations on your post. A very thoughtful and insightful analysis of the role of trust in the institutional setup.

    My contention is that former socialist countries didn't experience the transition to market economy but into crony capitalism marked by the absence of the rule of law which further downsized the level of trust. Incredibly low levels of trust had disastrous consequences for the economic performance as it established corruption and the power of informal networks (such as former communist elites transformed into modern oligarchs). The informal networks had access to insider information on privatization and stock market. In turn, these networks accumulated vast sums of wealth overnight. This was made possible only because the integrity of judicial system in protecting property rights and safeguarding the rule of law was miserable. Consequently, significant wealth and income inequality led to the spread of believes in deregulation and liberalization as exerting nagative effects. Negative externalities caused by the access of new elites to insider information led to the negative perception of the virtues of market economy. Radical institutional uncertainty also established corruption and bribe paying as substitutes for normal market transactions as well as for the tax system. That is why it is no surprise that former socialist countries increased the income per capita gap compared to the Western world in the early phase of transition.

  3. Thanks Ursula. I hope you write more on this topic in future.

  4. This comment has been removed by the author.