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Is corruption really the source of our economic crisis?

The idea that corruption is the root cause of Pakistan's problems needs to be rooted in better evidence.
Updated Aug 02, 2019 12:21pm

As economic stress inflicts pain on Pakistani households and the accountability process led by the National Accountability Bureau continues, it has become an oft-repeated view that corruption is to blame for the country’s financial woes.

This line has been largely pushed by the ruling Pakistan Tehreek-i-Insaf, with Prime Minister Imran Khan using his pulpit to make the point both at home and abroad.

But is corruption really the source of Pakistan’s economic crisis? And does corruption stunt development and growth in other countries?

A global problem

Bureaucratic and political corruption is pervasive around the world and impacts both developed and developing economies.

Transparency International’s Corruption Perceptions Index (CPI), which ranks countries based on “perceived levels of public sector corruption according to experts and businesspeople”, is one of the most widely used source of information when it comes to comparing corruption across countries.

The CPI gives each country a score of 0 to 100, where "0 is highly corrupt and 100 is very clean." According to the 2018 index, more than two-thirds of the 180 countries assessed had a score of below 50, and the average score was 43. This highlights the fact that corruption is a global problem.

With a score of 88 (a drop of three points over three years), Denmark ranked first, followed closely by New Zealand on 87 (a drop of fours points since 2015). The United States, the world’s largest economy, came in at 22 (score of 71) while China, the world’s second-largest economy, was ranked 87 (score of 39). India was ranked 78 (score of 41), Pakistan 117 (score of 33) and Bangladesh 149 (score of 26).

The data does not seem to suggest a direct link between rates of economic growth and corruption. India is ranked higher than China, but has struggled to keep up with the Chinese growth rate; Pakistan is tied with Vietnam and is ahead of Bangladesh, but its economy has fallen behind both.

A divided view

Academics have spent a lot of time analysing data to better understand the linkages between corruption and economic growth. They have defined corruption as the use of public office for private gain, and years of research has been inconclusive in developing a consensus on whether corruption hinders or promotes development.

Daron Acemoglu is one of the world's leading economists and is part of the school of thought which argues that corruption may not have a negative impact on growth, that corruption enables growth as it allows entrepreneurs to bypass inefficient and cumbersome government regulations.

In his 1998 paper 'Property Rights, Corruption, and The Allocation of Talent: A General Equilibrium Approach', Acemoglu, along with co-author Thierry Verdier, focused on corruption’s impact on property rights enforcement, as weak property rights worsen economic performance. The analysis led him to conclude that “less developed economies may prefer lower levels of property right enforcement and may be more tolerant towards corruption.”

Paulo Mauro, assistant director and division chief in the fiscal affairs department of the International Monetary Fund, is an economist who belongs to the school of thought which argues that corruption has a negative effect on economic growth.

In his 2004 report 'The Persistence of Corruption and Slow Economic Growth', Mauro wrote that "studies have shown that there is a close association between corruption and slow growth" and that "countries' relative degree of corruption is highly persistent over the years." In countries where corruption is pervasive, "individuals do not have incentives to fight it even if everybody would be better off without it."

In Mauro’s analysis, this relative stickiness of corruption means that "gradual reforms are less likely to work than more ambitious, comprehensive reforms" that seek to reduce the level of corruption in a society.

Related: Are insecure property rights holding back Pakistan’s economy?

A 2007 paper 'Influence of Corruption on Economic Growth Rate and Foreign Investments' looked at the relationship between corruption and investment in European economies. Researchers found that "less corrupt countries on average receive more foreign investments per capita than more corrupt countries" from the US.

While their analysis, which focused on 39 European Union countries, found an insignificant relationship between the growth rate of gross domestic product per capita and corruption, narrowing the countries down to 21 European countries that are classified as transition countries led to a different result: over a five-year period, countries that improved their CPI score by one unit managed to increase their GDP per capita by almost 2.4 per cent. This is an important finding, given that the negative impact of corruption is most pervasive in developing economies with weak institutions.

Research on Asia, however, paints another picture. A 2016 paper 'Is Corruption Bad for Economic Growth? Evidence from Asia-Pacific Countries' looked at 13 Asian economies including India, China, Vietnam and Singapore.

The author concluded that "for most Asia-Pacific countries, policy makers’ use of anti-corruption policies to promote economic development may not be effective." The analysis was striking: in South Korea, corruption "caused an increase in economic growth" while in China, data showed that economic growth had a "significantly positive effect on corruption."

It should be noted that both these countries are case studies in how they rapidly modernised and reduced levels of poverty through high rates of economic growth.

What does this mean for Pakistan?

As Acemoglu and Verdier argue, without understanding "why the state exists, it is difficult to assess why corruption arises, what its consequences are, and whether and how it should be prevented."

Pakistan is a state with weak institutions, where political instability is the rule and bureaucratic and political corruption is pervasive. This leaves businesses and entrepreneurs with no option but to resort to unlawful practices in order to push things along and circumvent ineffective regulations and countless political, bureaucratic and judicial hurdles.

Corruption therefore ends up being the grease that makes the wheels of the economy turn; without it, there is a potential risk that the machine may come to a halt.

Read next: Why Pakistan will go to the IMF again, and again and again

This is not to say that corruption should be tolerated or that governments should abandon the pursuit of reforms against it. However, policy measures that seek to improve economic performance and reduce corruption must be informed by research that highlights why corruption is pervasive, what its transmission mechanisms are and the type of systemic reforms that may succeed in reducing the incentive for people to grease the system.

These reforms must focus on strengthening institutions that create checks and balances, promote democratic accountability and enable a free press. After all, it was a free press that got hold of the Panama Papers and brought to light how elites around the world had hidden their wealth — a lot of it ill-gotten — in offshore accounts.

In Pakistan, the perspective that corruption is to blame for the country's economic woes needs to be rooted in robust empirical evidence. Otherwise, it's just a mantra and an uninformed crusade against it might not yield positive results.


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