Journal Issue

Institutionalized corruption Is corruption inbred in the “kleptocratic” state?

International Monetary Fund. External Relations Dept.
Published Date:
January 1999
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Corruption is widely viewed as individual acts that undermine the efficient functioning of a society. In a paper originally presented to the Conference of the International Society for New Institutional Economics and recently released as an IMF Working Paper, Joshua Charap of the IMF African Department and Christian Harm of the University of Münster challenge this view. Their paper, Institutionalized Corruption and the Kleptocratic State, argues that corruption is an integral part of the political system from which it springs. Their study focuses on the organization and activities of the rudimentary state that emerges from anarchy and examines the role of the bureaucracy and corruption in that state. While the predatory nature of the rudimentary state’s hierarchy may be alarming, Charap and Harm suggest that anticorruption efforts may do more to destabilize the country than address the roots of corruption.

IMF Survey:Corruption is commonly viewed as an aberration, but your work takes an entirely different view. What is your theory?

Charap and Harm: In this paper, we have tried to explain social aggregation. We have started from the most primitive state and asked how a structure evolves from pure anarchy. Much of the economics literature assumes—magically—the existence of some mechanism to enforce property rights. Thus, the literature discusses economic behavior under a rule of law.

We have tried to start from an earlier point in evolution. Let’s say we have a society in which some people are farmers, but others decide to steal grain rather than raise it: the Hobbesian “Each against all.” We argue that the first step of societal evolution is the creation of gangs and mafias. We look at the preferences and choices made by gang leaders and the trade-offs these leaders face in balancing the risk of “palace” (those within their gang) and “peasant” (everyone else) coups. We asked how they weigh their “take”—the amount they will extract from their populace. And we looked at their sharing rules—that is, what the leaders will share with other members.

Taking the logic of a mafia or a predatory gang forward, we try to explain how that gang takes the next step and what happens when two gangs come into conflict with each other. We argue that it is optimal for the winning gang to subjugate—not exterminate—the losing gang. If this gang expands its territory by subjugating other gangs, it eventually reaches an optimal hierarchy that is relatively stable and able to survive and maintain control over its territory. Here, subjugation is an organizational innovation that increases the span of control: “divide and conquer.”

This gang—to follow from our initial assumption—exists to feed the desires of its members and extract rents from the population in a process similar to what we see mafias or gangs doing in a more conventional sense. That, we postulate, is the beginning of a rudimentary state or nation. The characteristics and capacities of a gang’s membership and the peasantry’s ability to fight (or not) shape the characteristics of the state. And rent seeking through a predatory hierarchy is an efficient mechanism for the collection of “taxes.”

From this basic assumption also comes the supposition that the role of the bureaucracy is to extract rents. Corruption is the mechanism—the glue—that binds the gang together. Members must pass upward a share of the corruption proceeds. For example, in countries where civil servants are paid below subsistence wages, they have no choice but to steal to provide for their families. And they may have purchased their jobs with several years’ salary. If they have advanced money to the gang to buy their position within the group, they will have to be corrupt to realize their expected income stream.

The leaders retain control over the bureaucrats, and the moment they become unhappy with the performance of subordinates, they can either denounce the gang member or dilute the member’s authority by assigning that authority to others. This arbitrary and capricious leverage is very powerful, because it’s not a transparent system and it operates as a self-policing mechanism.

IMF Survey:Is there no such thing as individualized corruption—that is, corruption not dictated by the political system?

Charap and Harm: Individualized—or decentralized—corruption may exist in countries with mature political structures but inadequate enforcement mechanisms. Here, the term “corruption” is appropriate. Our contribution to the understanding of this phenomenon is that in some countries, patterns that are interpreted as decentralized corruption would be better defined as organized rent seeking.

In the kleptocratic state, we would argue that individualized corruption is most unlikely. The gang is the system—it provides a legal basis for its actions and selfpolices the system. It runs the society. A member of that society must play according to those rules, so the scope for freelance activity is limited. Violators would be in serious trouble.

IMF Survey:How does a society or a political system evolve from this rudimentary level?

Charap and Harm: Some avenues have been suggested in the literature, but this is not really the focus of our work. Leaders who have been interested in extracting as much as they can from the populace may reach an evolutionary stage where this is no longer an optimal strategy. That is, leaders may decide that there is more to be gained from benevolence than from predation. At the point where that transition begins to occur—where the leadership finds value in being popular—there is scope to change how the society operates. At that stage, the bureaucracy, which had been created to feed the leadership’s desire for wealth, is now perverting its desires and thwarting its interests. When the interests of the leadership and the bureaucracy diverge, you have the opportunity to address “corruption” because the leadership wants to change the role of the government in the society.

In the paper, we discuss, for example, the role of crony capitalism. When leaders are predatory, it is much more efficient to have monopolized industries and to collect rents from them than to allow competition, particularly in large-scale industries. As we have seen in a number of countries, these monopolized industries are run by people close to the leadership. And the same logic applies to the monopolistic power of the state to grant or deny licenses, which can be used for rent-extraction purposes by a corrupt bureaucracy. Formal taxation—and “on-budget activity”—may exist only to mimic institutions of a modern state. If the leader is inclined to change the way the country works, the next level down is likely to be highly resistant. That would be grounds for a “palace revolution”—the elite would rebel because the leader is seeking to change the rules under which they are used to playing. Our paper looks in detail at how a leader normally seeks to minimize the likelihood of either a palace or a peasant revolution.

IMF Survey:Does the nature of corruption change as the political structure changes?

Charap and Harm: A key contribution of our paper is to argue that secure dictatorship corresponds to monopolistic corruption, whereas contested dictatorship corresponds to competitive corruption patterns. Corruption evolves along with the evolution of the political system. There is an important contrast between “corruption” and predatory behavior. There is no question that a bandit who steals from a farmer is a predator. But bureaucrats sitting behind their desks and enforcing rules designed to permit them to extract rents from the society are not necessarily performing a different function. Bureaucrats are presumed to have some legitimacy—given the legitimacy and role of the state—but that legitimacy is not necessarily appropriate. As we model it, the bureaucrats of this rudimentary state do prey on society and do collect rents from society. Corruption is not the right term, though. These bureaucrats are neither bad people perverting sensible rules nor, as much of the older literature would argue, good individuals helping people circumvent nonsensical rules. We argue that governments willfully create rules and obstacles to facilitate rent extraction. That distinction is very important.

Our paper does try to describe the role of the polity and its goals and how this manifests itself in different political situations as society evolves over time. Corruption does not cease; it survives in other forms as political systems evolve. Political corruption, in which the polity extracts rents not for private gain but to improve the probability of election, may be seen as an intermediary stage toward modern democracy. Even mature democracies may reflect the same underlying tendencies of human nature when democratically organized interest groups seek redistribution in a constitutionally legitimized setting, although one might argue that “the beast has been tamed.” Our paper is principally focused, however, on a kleptocracy. We are addressing early stages in the evolution of a political system.

IMF Survey:What are the potential gains, and risks, of efforts to curb corruption?

Charap and Harm: You have to make a judgment about where a country is in the spectrum of political development that we paint. When you have a system that has just emerged from anarchy and a predatory team holding that territory or country together, you can question the value of efforts that will ultimately destabilize the predatory team. While there are certainly reasons to dislike the predatory nature of that government, it may be creating a system of law and order that is better than the previous anarchy. You have to look at the situation in its historical and political context. As the situation develops over time and there is a real will at the top of the political leadership to change the role of the bureaucracy, then it is possible, in a more conventional sense, to “fight corruption.”

IMF Survey:In what areas would you like to see followup research?

Charap and Harm: There is scope for additional research in at least two areas. This theory could be applied to case studies to investigate more thoroughly the political economy of particular countries. Based on anecdotal evidence, our findings seem to be relevant across countries and cultures.

Another interesting avenue for research is to look at specific sectors of the economy and how the mechanics of a predatory hierarchy work in countries acknowledged to have such a system. For example, what is the interaction between the financial system, the government, the elite, and the role of government guarantees on foreign borrowing? In modern times, developing countries are able to run complex manufacturing plants, build state-of-the-art electronic components, and produce sophisticated computer software—but many seem to be unable to run sound banking systems. Why?

Copies of IMF Working Paper No. 99/91, Institutionalized Corruption and the Kleptocratic State, by Joshua Charap and Christian Harm, are available for $7.00 each from IMF Publication Services. (See page 284 for ordering information.) In addition, the Charap and Harm paper will appear in the forthcoming Institutions, Contracts, and Organizations: Perspective from New Institutional Economics, edited by Claude Menard and to be published by Edward Elgar.

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