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Removing Impediments to Sustainable Economic Development the Case of Corruption

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Removing Impediments to Sustainable Economic Development the Case of Corruption WPS6704 Policy Research Working Paper 6704 Public Disclosure Authorized Removing Impediments to Sustainable Economic Development Public Disclosure Authorized The Case of Corruption Augusto López Claros Public Disclosure Authorized The World Bank Public Disclosure Authorized Financial and Private Sector Development Global Indicators and Analysis Department November 2013 Policy Research Working Paper 6704 Abstract This paper examines causes and consequences of agent of resource allocation. What is the impact of corruption within the process of economic development. corruption on public finances and on the characteristics It starts by reviewing some of the factors that, over the and performance of the private sector? What distortions past couple of decades, have transformed corruption does corruption introduce in the allocation of resources from a subject on the sidelines of economic research to and in the relationships among economic agents in the a central preoccupation of policy makers and donors marketplace? The paper also addresses the question of in many countries. Drawing on a vast treasure trove of what can be done about corruption and discusses the experiences and insights accumulated during the postwar role of economic policies in developing the right sorts period and reflected in a growing body of academic of incentives and institutions to reduce the incidence research, the paper analyzes many of the institutional of corruption. Particular attention is paid to business mechanisms that sustain corruption and the impact regulation, subsidies, the budget process, international of corruption on development. This paper argues that conventions, and the role of new technologies. The paper many forms of corruption stem from the distributional concludes with some thoughts on the moral dimensions attributes of the state in its role as the economy’s central of corruption. This paper is a product of the Global Indicators and Analysis Department, Financial and Private Sector Development. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank. org. The author may be contacted at [email protected]. The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team Removing Impediments to Sustainable Economic Development: The Case of Corruption Augusto López Claros1 Acknowledgments This paper is part of a larger project looking at some of the key building blocks for the creation of the institutional underpinnings for sustainable economic development. The author is grateful for helpful discussions with and comments from Farshad Arjomandi, Arthur Dahl, Jose Maria Figueres, Francis Fukuyama, William Hatcher, Daniel Kaufmann, Cristina Manzano, Bahiyyih Nakhjavani, Douglas Martin, Valeria Perotti, Eduardo Rodriguez Veltze, Stephen Rutt, Federica Saliona and graduate students at the Center on Democracy, Development and the Rule of Law at Stanford University. JEL Classification: D73 Keywords: corruption, development, policies, economic growth Sector Board: FSE 1 Augusto Lopez Claros is Director, Global Indicators and Analysis, World Bank Group. The author welcomes comments on this paper ([email protected]). The views expressed in this paper are his own and do not necessarily represent those of the organization with which he is affiliated. 1. Introduction ............................................................................................................................................. 1 2. Changing Perspectives ............................................................................................................................ 2 A taboo subject .......................................................................................................................................... 2 A gradual shift in attitude ......................................................................................................................... 3 3. Corruption and Its Sources .................................................................................................................. 10 The state as regulator and rationing agent ............................................................................................. 12 Privatization ............................................................................................................................................ 16 Bribes for every taste .............................................................................................................................. 17 4. Why Is Corruption So Damaging? ...................................................................................................... 18 Impact on public finances ....................................................................................................................... 19 Undermining private sector development ............................................................................................... 20 Distortion of incentives ........................................................................................................................... 21 Worsened income distribution ................................................................................................................ 22 Uncertainty and short-term focus ........................................................................................................... 22 Secrecy and deceit ................................................................................................................................... 23 Betrayal of trust ...................................................................................................................................... 24 A contagious disease ............................................................................................................................... 25 The spread of crime ................................................................................................................................ 26 5. Reducing Corruption ............................................................................................................................ 27 Business regulation ................................................................................................................................. 28 Mindless subsidies .................................................................................................................................. 30 A better budget process ........................................................................................................................... 31 Other reforms .......................................................................................................................................... 32 Reluctant donors ..................................................................................................................................... 33 International conventions ....................................................................................................................... 35 Technology to the rescue ........................................................................................................................ 37 6. The Moral Dimensions of Corruption ................................................................................................ 39 References .................................................................................................................................................. 41 Removing Impediments to Sustainable Economic Development: The Case of Corruption Augusto López Claros 1. Introduction The past 20 years or so have witnessed a remarkable shift in our understanding of what are the factors that matter for creating the conditions for sustainable economic growth and development. While perhaps it would be a slight exaggeration to say that a revolution has taken place, there is little use denying that the focus of the economics profession has broadened in major ways, as we have come to comprehend better the role of such factors as education and skills, institutions, property rights, technology, transparency and accountability. On the whole this broader outlook has been beneficial, an implicit recognition that promoting inclusive growth will be a multidimensional undertaking and that those concerned with assisting policy makers everywhere in implementing more successful policies will have to address an expanding set of non- traditional concerns. This paper deals with one of these concerns. It examines the role of corruption and its multifaceted interactions with the process of economic development. In section 2 we begin by examining some of the factors which, over the last couple of decades, may have
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