Corruption hits economic growth – and markets can do nothing to stop it

Sepp Blatter’s resignation as president of Fifa comes after a week of scandal for the global football body. Among soccer fans, sadly, the organisation has become a byword for sleaze. England spent £21m on the campaign to secure the 2018 World Cup. The height of our attempts to influence the delegates seems to have been the offer of a free breakfast with Prince William in Zurich. Little wonder we only obtained one vote in addition to our own.

 

Economics has a great deal to say about corruption. Does it, for example, tend to increase or reduce the level of GDP per head in a country? The answer might seem obvious, but economic theorists are nothing if not imaginative. For example, in almost a caricature of rational choice theory, it has been argued that allowing government employees to solicit bribes provides them with an incentive to work harder. To be fair, however, the overwhelming consensus is that corruption is bad for the economy.

 

A key figure in the debate is Paolo Mauro, for over 20 years a senior economist at the IMF, and now a fellow of the Peterson Institute in Washington, DC. His 1995 article in the Quarterly Journal of Economics has become the classic empirical investigation of the impacts of both bureaucracy and corruption on growth. He constructed a detailed database across 67 countries, summarised in a bureaucratic efficiency index. This combined data on red tape, the independence of the judiciary, and corruption.

 

Mauro divided his sample into six different groups, depending upon the level of his index. There is coincidentally a very strong correlation between membership of these groups and whether or not a country has actively supported Sepp Blatter in Fifa. The African countries, for example, are almost all in the bottom two groups in terms of efficiency, and the top two are made up of Western Europe, America, Canada, Singapore and Japan.

 

The negative impact of corruption on growth is strong. The results of Mauro’s sophisticated statistical analysis are not straightforward to present. But as an example, if Nigeria could somehow move from the most corrupt of his six groups to the third most corrupt, its economic growth rate would improve by as much as 1 per cent a year. If the country had done this over the whole period of its independence from the 1960s, income per head would be 65 per cent higher than it is now.

 

The problem, of course, is that a culture of bribery and corruption is self-reinforcing. In a corrupt society, it is in the collective interest to move to a much lower level of corruption. But it is not really in any individual’s interest to try and do so. If you take bribes, you will lose them. And if you expose bribes, you will be ostracised, maybe even killed. This clash between the collective and the individual interest means that markets cannot solve the problem. I rarely praise the bureaucrats of the OECD in Paris, but their anti-bribery campaigns deserve support.