Corruption is a phenomenon of great economic significance and one that is finally attracting the attention that it deserves. Newspaper articles in many countries have been reporting with increasing frequency stories purporting to show cases of corruption.
The paper defines corruption as noncompliance with principle of the arm’s length relationship, which states that personal or family relationships ought not to play a role in economic decisions by private economic agents or by government officials. This principle is essential for the efficient functioning of markets.
The normative theory on the role of government implicitly assumes that the arm’s length principle is respected by government officials. The theory of pure competition also assumes that the arm’s length principle prevails in relationships among economic agents. However, in the real world, economic relations, are often influenced by personal or other kinds of relations and this influence distorts the working of markets. The paper argues that cultural factors may be important in determining the extent to which economic decisions and relations, including those between government officials and private individuals, are affected by personal relations. In some societies it will be difficult for individuals to resist pressures for favorable treatment coming from related individuals. Once a distinction based on relationships begins to be made, corruption, as defined above, often follows.
The paper argues that corruption is stimulated by government-determined conditions that encourage some individuals to get around obstacles or to attempt to get favorable treatment by bribing those who control particular public sector instruments. These bribes are often presented as gifts. The more pervasive is the role of the public sector (through regulations, taxes, etc.), and the more personalized are relations among individuals, the greater will be the scope for corruption. The paper also argues that, ceteris paribus, corruption is likely to grow with time because of the learning-by-doing quality that it entails. Individuals who begin to bend the rules will progressively find it easier on moral or practical grounds to break them; others, who, in a different environment, might not have succumbed to corruption, will begin to imitate those who have. When it is assumed that “everyone does it,” corruption will no longer convey the stigma that it does in some countries.
The paper discusses the economic consequences of corruption for the allocative, redistributive, and stabilization role of the government and concludes that a reduction in the scope of corruption can come mainly from a drastic reduction of the pervasive role of the state in the economy.