The Political Economy of Corruption ‘Grand’ corruption, generally used to define corruption amongst the top polit- ical elite, has drawn increasing attention from academics and policy-makers during recent years. Current understanding of the causes and mechanisms of this type of corruption, however, falls short of a full awareness of its importance and consequences. In this volume, leading academics and practitioners analyse the economic and political conditions that allow ‘grand’ corruption to survive. Contributions include: • Case studies of countries that have witnessed flagrant misuse of political powers. • Theoretical papers which present models of corruption and project their possible effects. • Empirical studies which raise research questions and test the theoretical models using insightful methodologies. The studies in this work not only indicate the importance of the economic implications of ‘grand’ corruption, but also provide a framework for under- standing its processes. Academics and policy-makers working in the fields of economics, political science and sociology will find this an illuminating and valuable work. Arvind K. Jain is Associate Professor at Concordia University, Montreal. His current research focuses on corruption and on international financial crises. His past research papers have dealt with corruption, agency theory and the debt crisis, capital flight, international lending decisions of banks, oligopolistic behaviour in banking, foreign debt and foreign trade in devel- oping countries, impact of culture on saving behaviour and commodity futures markets. He has previously written two books and edited a volume entitled Economics of Corruption. Routledge Contemporary Economic Policy Issues Series editor: Kanhaya Gupta This series is dedicated to new works that focus directly on contemporary economic policy issues. It aims to include case studies from around the world on the most pressing questions facing economists and policy-makers at both a national and international level. 1 Regionalism and Globalization: Theory and Practice Edited by Sajal Lahiri 2 The Political Economy of Corruption Edited by Arvind K. Jain 3 International Migration: Trends, Policies and Economic Impact Edited by Slobodan Djajic´ The Political Economy of Corruption Edited by Arvind K. Jain London and New York First published 2001 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2002. © 2001 Editorial material and selection, Arvind K. Jain; individual chapters, the authors. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data The political economy of corruption / edited by Arvind K. Jain p. cm. – (Routledge contemporary economic policy issues series) Includes bibliographical references and index. 1. Political corruption. 2. Political corruption–Economic aspects. I. Jain, Arvind K., 1945– II. Series JF1081 .P653 200100-065330 330.9–dc21 ISBN 0–415–23446–8 (Print Edition) ISBN 0-203-46838-4 Master e-book ISBN ISBN 0-203-77662-3 (Glassbook Format) Contents List of figures vii List of tables viii List of contributors ix PART I Governance and corruption: the emerging challenges of development 1 1 Power, politics, and corruption 3 ARVIND K. JAIN 2 The definitions debate: old conflicts in new guises 11 MICHAEL JOHNSTON PART II Political systems and corruption 33 3 Political corruption and democratic structures 35 SUSAN ROSE-ACKERMAN 4 Why do voters support corrupt politicians? 63 OSKAR KURER PART III Policy and political outcomes 87 5 Corruption, growth, and public finances 89 VITO TANZI AND HAMID DAVOODI vi Contents 6 Corruption and the provision of health care and education services 111 SANJEEV GUPTA, HAMID DAVOODI, AND ERWIN TIONGSON 7 Historical antecedents of corruption in Pakistan 142 AFTAB AHMAD PART IV Solutions and future research 155 8 Measuring corruption: numbers versus knowledge versus understanding 157 MICHAEL JOHNSTON 9 Legislating against corruption in international markets: the story of the US Foreign Corrupt Practices Act 180 WESLEY CRAGG AND WILLIAM WOOF 10 Controlling power and politics 214 ARVIND K. JAIN Index 220 Figures 3.1 Types of constitutional structures 38 3.2 Ranking of constitutional systems (best to worst) 40 4.1 Voting choices with corrupt parties 80 5.1 Corruption and development in ninety-seven countries 90 5.2 Corruption and growth in ninety-seven countries 91 5.3 Bribes paid and their frequency in twenty transition economies 95 5.4 Corruption and VAT productivity in eighty-three countries 105 6.1a Corruption without theft 113 6.1bCorruption with theft 113 6.2 Corruption and the provision of government services in seventy-one countries 116 6.3a Corruption, quality of health care, and child mortality in sixty-two countries (circa 1997) 118 6.3bCorruption, efficiency, and dropout rates in fifty-three countries (circa 1997) 118 6.4 Corruption and child mortality 126 6.5 Corruption and social indicators 127 Tables 5.1 Average of measures of tax structure and their determinants, 1980–97 102 5.2 Determinants of tax structure 103 6.1 Baseline regressions, 1985–97: cross-sectional analysis 122 6.2 Corruption, health care and education services, 1985–97: cross-sectional analysis 123 6.3 Child mortality and corruption, 1985–97: cross-sectional analysis 124 6.4 Dropout rates and corruption, 1985–97: cross-sectional analysis 125 6.5 Cross-sectional analysis with dummy variables, 1985–97 129 6.6 Social indicators and low and high graft, 1985–97: cross- sectional analysis 130 6.7 Social indicators and variance-weighted corruption, 1985–97: cross-sectional analysis 131 6.8 Descriptive statistics: country averages, 1985–97 136 6.9 Health indicators and corruption, 1985–97: panel data analysis 137 7.1 Economic disparities: East and West Pakistan (1949–68: selected years) 144 7.2 Educational disparities: East and West Pakistan: number of educational institutions and enrollments 145 8.1 Pearson correlations among CPI scales 161 Contributors Aftab Ahmad studied constitutional law in his native Pakistan. He currently lives in Canada and has been a consultant to the Government of Pakistan as well as some large multinationals. Since his retirement, he has devoted his time to enjoying his family and to analyzing events in Pakistan. Wesley Cragg is the Gardiner Professor of Business Ethics at the Schulich School of Business, York University (Canada) with a cross appointment to the philosophy department. He is responsible for encouraging and coordinating research and curriculum development on the ethical dimensions of public, para-public, not-for-profit, and private sector management in the business school. He has published widely in applied ethics, philosophy of law and punishment, philosophy of education, and moral, social, political, and legal theory. His current research includes issues in business and occupational ethics, environmental ethics, and the use and effectiveness of voluntary codes in the regulation of international business transactions. Hamid Davoodi is an Economist at the Fiscal Affairs Department of the International Monetary Fund. Prior to joining IMF, he worked at the World Bank, where he was a member of the 1997 World Development Report team. He was previously a research associate at the Federal Reserve Bank of San Francisco and a visiting lecturer at Georgetown University. He has written articles on decentralization, growth, and corruption published in Journal of Urban Economics, and The Welfare State, Public Investment and Growth (Shibata and Ihori, eds). Mr Davoodi holds a PhD in Economics from University of Wisconsin at Madison and a BSc in Economics from London School of Economics. Sanjeev Gupta joined the International Monetary Fund in 1986 and is currently Chief, Expenditure Policy Division of the Fiscal Affairs Department, a position he has held for around five years. Before joining the IMF, he was Secretary of the Federation of Indian Chambers of Commerce and Industry. He has also been Lecturer at Punjab University, Fellow at the Kiel Institute of World Economics and Professor at the x Contributors Administrative Staff College of India. His more recent books are: Social Safety Nets: Issues and Experiences, edited together with Ke-young Chu, and Economic Policy and Equity, edited together with Vito Tanzi and Ke-young Chu. In addition, he has authored or co-authored over sixty papers on fiscal, international finance, and economic development issues that have been published in journals such as Journal of Finance, Journal of Development Economics, Journal of Policy Modeling, Defence and Peace Economics, Energy Economics, Weltwirtschaftliches Archiv, and World Development. Mr Gupta holds BA degrees from Delhi and Oxford; an MA from the University of New Brunswick; and a PhD in economics from Simon Fraser University. Arvind K. Jain has been a faculty member at Concordia University in Montreal since 1990. He earned his PhD from the University of Michigan, Ann Arbor.