Nova workboard

a blog from young economists at Nova SBE

Public Corruption – Rule of Law or Rule of Deception?

The corruption of the best things gives rise to the worst, David Hume

Corruption, a planet-wide phenomenon, has been around since the dawn of mankind due to our capacity to lie and deceit in our own self-interest. It has evolved, become more complex and more systematic, affecting how enterprises are run and even interfering with national affairs and how countries are governed. It has been proven by multiple studies that it hinders economic growth and the development of several of the poorest economies on the planet. Being a social phenomenon, such phenomenon should be analysed under a holistic perspective, joining contributions from the myriad of social sciences existing today. Nevertheless, we will undertake a more emphatic focus on the economic interpretation of corruption in society. On this post, I will assess the multiple forms how public corruption may present itself and how economics may hold the key to understand its causes and mitigate its action and its effects.

First, let us begin on how should we define corruption. Corruption may be defined as behaviours which deviate from formal norms for private gains and/or as the use of public or private office for private gains, according to Mishra and Bardhan, respectively.

On the one hand, one example model of corruption is an over-regulated economy where bureaucrats are given powers of discretion to interpret and impose such regulations. These powers present an opportunity to engage in deviating behaviours, i.e, corruption. Bureaucratic corruption manifests in the form of speed money, where bureaucrats quicken certain procedures taking as counterpart extra money; or in the form of dismissing illicit activities provided there is a monetary gain.

On the other hand, we verify the existence of political corruption, where the legislative process is conditioned via embezzlements to create laws suitable to particular firms, distortioning the government’s role in the economy. Such link between the private sector and the law-making process is not directly observable or inquired about, as people involved will not have the incentives to disclose such information. Nonetheless, according to Fisman and Miguel event studies in Finance have enabled us to see evidence of such phenomenon. When governments linked to private interests come across news, harmful to their integrity and stability, stock indexes of such countries usually fall due to added uncertainty in the economic activity. However, companies on the country’s respective index which have more profound ties to the government at that moment will suffer greater decreases in their stock prices and, consequently, bigger losses.

To understand these manifestations of corruption, we must understand the underlying reasons for it to happen. An economic interpretation of such causes lies on inadequate incentives and organisations which lead agents to engage in particular behaviours to attain a higher individual utility. These strategies can be persistent over time, depending on the importance of corruption externalities on the economy, specifically the fact that if more agents tend to be corrupt, the expected cost of being corrupt will become smaller, thus inducing more corruption in the economy and an overall non-compliant behaviour, which would be sustainable in the long run.

Since incentives and organisations set the stage for corruption to happen, we can use these as tools to promote an anti-corruption environment, discouraging individuals to engage in corrupting activities. For example, we have the establishment of what is known as an efficiency wage to public servants so as to induce more efficient and less deviating activity. By earning a higher wage, the bureaucrat will be less interested in increasing its income through illicit manners, relying on the steady and legal efficiency wage. Also, we may have a decomplexification of the legal system, reducing bureaucratic power by decreasing the need to resort to bureaucrats and more competition in public services, disabling potential corruption opportunities by bureaucrat’s more often than not monopoly power in some services. Moreover, public disclosure and transparency of government’s activities will give rise to a more favourable perception of the public towards corruption levels in the country and induce more compliant behaviour overall. Finally, a tight and thorough monitoring activity will mitigate the magnitude and spread of such activities.

In conclusion, corruption is present in public institutions, in one way or another, hindering population’s welfare and the economy’s potential growth. Being based on incentives and organisations, public policy constructed on such aspects may have interesting impacts regarding the decrease and progressive elimination of corruptive activities done by individuals.

#720, Gonçalo Pinto

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Author: studentnovasbe

Master student in Nova Sbe

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