CAN CORRUPTION EVER IMPROVE AN ECONOMY? by Douglas A. Houston (original) (raw)

Many in the world of developmental economics believe that corruption , the circumvention of the rule of law for private gain, leads to nothing but woe for any nation's economy, under any circumstances. Transparency International makes the elimination of corruption their mission, and many large multinational firms today echo that goal by building ethical codes that prohibit employees from engaging in practices deemed corrupt, regardless of local attitudes and customs toward the practices. The World Bank makes curbing corruption a linchpin in their campaign to improve governance. Reasons given for blanket condemnation of corrupt behavior are often utilitarian: Corruption is expected to increase the economic costs of doing business by undermining the laws of the land; this, in turn, reduces productive activities and investments, with negative consequences unfolding for human development and economic growth. When legal protection of personal and property rights is strong, this argument is reasonable, but does it hold for nations that have failed to establish and consistently enforce a sound rule of law? Leff (1964) and Huntington (1968) speculated that corruption may be considered a useful substitute for a weak rule of law. In other words, the value of behaving corruptly—the value of additional productive transactions that occur—can exceed the costs of engaging in corruption. This is most likely when the legal options for doing business are quite limited. Osterfeld (1992) makes a useful distinction in sorting out corrupt behaviors that is followed in this article. He divides corrupt actions into two categories: economically restrictive and economically expansionary. Corruption may often be restrictive, rent-seeking actions, such as firms' seeking government protection from competitors. But corruption also can expand economic activity, for example, by private