April 20, 2009

A cure for a country beset by government bureaucracy and incompetence may be some old-fashioned corruption.  In countries with robust institutions, corruption decreases efficiency.  But in weak states, graft and bribes can "grease the wheels" by enabling intelligent investors to circumvent a crooked, incapable government and invest money directly in the private sector, say researchers.

Testing whether corruption can be viewed as "efficient grease in the wheels of an otherwise deficient institutional framework" the researchers analyzed the interaction between aggregate efficiency, corruption and other dimensions of governance for a panel of 54 countries.  They found:

  • Both the weak and strong forms of the grease the wheels hypothesis are present.
  • Corruption is always detrimental in countries where institutions are effective, but that it may be positively associated with efficiency in countries where institutions are ineffective.
  • For each of the five dimensions of governance taken into account, there is evidence of the strong grease the wheels hypothesis in at least one estimation.
  • Thus, they find evidence of the grease the wheels hypothesis.

A possible policy implication of these results might be that countries plagued with a very inefficient institutional framework may benefit from letting corruption grow.  However, this interpretation is extreme and risky.  A country that would let corruption frolic may find itself stuck later on with an even worse global institutional framework, and thus end up in a bad governance/low efficiency trap.

Encouraging countries to fight corruption while also striving to improve other aspects of governance, mainly government efficiency, constitutes perhaps a safer advice.  Indeed, successful policy package should be multifaceted, while narrower reform programs may instead prove counter productive, say the researchers.

Source: Editorial, "Black-Market Efficiency," The Atlantic, March 2009; based upon: Pierre-Guillaume Méon and Laurent Weill, "Is Corruption an Efficient Grease?" Bank of Finland/Institut d'Etudes Politiques, February 2008.

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