Institutions, Governance and the Control of Corruption

Corruption—the appropriate of public resources for private purposes—is a modern phenomenon insofar as modern states are founded on the principle of the strict separation of public and private. This was not the case for much of human history, where “patrimonial” rulers regarded the public domain as a species of private property. Corruption needs to be distinguished from both rent-seeking and patronage/clientelism—in the first case, because many rents have perfectly legitimate uses, and in the second because clientelism involves a reciprocal exchange of favors and can be regarded as an early form of democratic participation. Moving from a patronage-based state to a modern-impersonal one is a fundamentally political act, since it involves wresting power away from entrenched elites who use their access to the state for private purposes. This is what happened during the Progressive Era in the US, and also what explains the relative success of anti-corruption bodies like Indonesia’s KPK.

Corruption is often intertwined with international organized crime and is facilitated by money laundering. Self-reinforcing spirals of corruption occur when organized crime infiltrates state institutions. Criminal activity may become so intertwined with corrupt politics and legitimate business, that it is difficult to tell them apart. Cooperation among countries, international institutions, and enforcement agencies is essential. Otherwise, the proceeds of corruption and organized crime will be hidden abroad or in cyberspace. Hence, the anti-corruption agenda should include limits on money laundering and disclosure of the beneficial owners of shell companies. Global institutions, such as the World Bank and the International Monetary Fund, need to strengthen their existing efforts in these areas.

The chapter is in the nature of a partial overview, with a focus on some issues as yet rather inadequately discussed in the literature on Corruption and Development. After discussing different types of corruption and their differential implications for policy, it goes into the specific issue of the complexities in the relationships between economic and political liberalization and the incidence of corruption.

Different indicators show that Italy is an outlier in terms of corruption. As developed a country as Italy should have a much lower level of corruption. All the factors scholars have found to be affecting corruption fail to explain this puzzle. I start instead from the assumption that corrupt exchanges thrive when parties can trust each other both to comply with their obligations and not to snitch. Could Italians enjoy a greater ability to cooperate successfully in illegal markets, and could this ability to make their illegal pacts stick explain their anomalous propensity at striking corrupt deals? One could think of mafia enforcement, which certainly helps. Yet, corruption occurs also outside the regions with heavy mafia presence—it seems rather a white-collar affair in which threats are unnecessary and no blood is spilt. I consider a special bonding mechanism, the sharing of compromising information (SCI), and—relying on evidence from case studies and an experiment—I illustrate how SCI works in bringing about cooperation in other illegal markets. But why should Italians be in a better position to rely on SCI to pursue their corrupt deals? The answer, I contend, lies in the peculiarity of Italy’s judicial system, which is at once inefficient yet independent, and jointly these features make it exploitable by villains as a cheap, reliable and unwitting enforcing mechanism for their deals.

This paper considers how public resources are distributed across groups and how this depends on the institutional environment. It shows how executive constraints and openness should matter to this and argues that a key role for institutions is to protect politically excluded groups. It develops an approach to judging political institutions based on the idea that cohesive institutions play a role when there is uncertainty about the allocation of political power. Using spatial data on night light, it shows inequality is lower with executive constraints. In addition, politically excluded groups do better within countries when such constraints are in force.

Despite a large body of evidence on the policies and institutions needed to generate growth and reduce poverty, many governments fail to adopt these policies or establish the institutions. Research advances since the 1990s have explained this syndrome, which this paper generically calls “government failure”, in terms of the incentives facing politicians, and the underlying political institutions that lead to those incentives. Meanwhile, development assistance, which is intended to generate growth and reduce poverty, has hardly changed since the 1950s, when it was thought that the problem was one of market failure. Most assistance is still delivered to governments, in the form of finance and knowledge that are bundled together as a “project”. Drawing on recent research on the politics of government failure, the paper shows how traditional development assistance can contribute to the persistence of government failures. It proposes a new model of development assistance that can help societies transition to better institutions. Specifically, the paper suggests that knowledge be provided to citizens to build their capacity to select and sanction leaders who have the political will and legitimacy to deliver the public goods needed for development. As for the financial transfer, which for various reasons has to be delivered to governments, the paper proposes that this be provided in a lump-sum manner (that is, not linked to individual projects), conditional on the governments following broadly favorable policies and making information available to citizens.

Political corruption is widespread across many developing countries and it is considered a major impediment to economic development. But we have limited evidence on the effectiveness of anti-corruption policies. This chapter summarizes the extent to which government audits of public resources reduces corruption in the context of Brazils anti-corruption program that randomly audits municipalities for their use of federal funds.

Low trust in government and the widespread sense that public institutions are corrupt appears to be a global phenomenon, and a challenge to effective governance. We use the Global Corruption Barometer with responses from individuals in 117 countries to probe what drives citizen perceptions of corruption and propensity to pay bribes. Our analysis of the role of particular individual characteristics on perceptions of corruption (including age, gender, self-reported income level, education and employment status) suggests that there is at least somewhat of a common sense across individuals of how corrupt a particular service is in their country, but other—largely unobservable—factors account for most of any particular individual’s responses. A second analysis of the relationship between country averages of perceptions of corruption and country-level explanatory variables (including GDP per capita, democracy, inequality, the probability of bribe payment as well as a service performance measure for each service) shows a strong negative association between GDP per capita and perceptions of corruption and a strong positive association between bribe payments and perceptions of corruption. We find little evidence of association between service performance measures and country averages of corruption perceptions in a given sector. We repeat the same analyses on the individual and the country levels using bribe payment as our dependent variable. Our findings suggest that GDP per capita lowers perceptions of corruption through its influence on bribe payments. A plausible conclusion from that interpretation would be that the one reliable tool we appear to have to reduce perceptions of corruption is development and associated increases in GDP per capita itself.

This paper develops a structural approach for modeling how respondents answer survey questions and uses it to estimate the proportion of respondents who are reticent in answering corruption questions, as well as the extent to which reticent behavior biases conventional estimates of corruption downwards. The context is a common two-step question, first inquiring whether a government official visited a business, and then asking about bribery if a visit was acknowledged. Reticence is a concern for both steps, since denying a visit side-steps the bribe question. This paper considers two alternative models of how reticence affects responses to two-step questions, with differing assumptions on how reticence affects the first question about visits. Maximum-likelihood estimates are obtained for seven countries using data on interactions with tax officials. Different models work best in different countries, but cross-country comparisons are still valid because both models use the same structural parameters. On average 40% of corruption questions are answered reticently, with much variation across countries. A statistic reflecting how much standard measures underestimate the proportion of all respondents who had a bribe interaction is developed. The downward bias in standard measures is highly statistically significant in all countries, varying from 12% in Nigeria to 90% in Turkey. The source of bias varies widely across countries, between denying a visit and denying a bribe after admitting a visit.