Corruption and Growth

Luis Rubio

There is rarely a discussion on the cause of the low growth of the economy in which corruption does not arise as an explanatory factor and more so if the discussion take place outside of Mexico. The implicit assumption is that corruption inhibits market functioning and that comprises a disincentive for investment, limiting with that its growth. Although verifiable in some cases, the argument is old and effete. In fact, there are examples, above all in Asia, which clearly belie this: countries that grow rapidly despite the prevalence of corruption. What is, then, the problem?

In his last book, Mancur Olson asks which is worse: a tyrannical and authoritarian government or the infrequent assault by some band or another of guerillas or thieves. Olson ensures us that, throughout history, it has been much better for human societies to live under the yoke of a despotic and authoritarian government than to be subject to the frequent abuses of a pack of thieves. Although some types of government can be predatory and abusive, it’s better for a tyrannical government for the economy to achieve the best possible performance, because from that it extracts a constant flow of taxes and tributes. This is not so with thieves, who gain entry into the scenario, steal all they can, destroy everything in their path and flee. In other words, a despot (a sedentary thief) maintains taxes sufficiently low so as to make the constant growth of the economy possible and can even develop incentives to attract investment and accelerate the growth of productivity, all for the sake of generating income. While the thief or guerilla assaults anyone he pleases, appropriating whatever he comes upon, the despot entertains a vested interest in medium-term economic development. Could it be the same with corruption?

Jagdish Bhagwati advances the argument and offers a simple and more convincing explanation: “A crucial difference between the two countries [India and China] is the type of corruption that they have. India’s is classic “rent-seeking” where people jostle to grab a cut of existing wealth. The Chinese have what I call “profit-sharing” corruption: the Communist party puts a straw into the milkshake so that they have an interest in making the milkshake grow larger”. This refinement of Olson’s argument much better explains what differentiates Mexico from countries with rapid growth: it’s not the corruption itself but the fact that the type of corruption characterizing Mexico is to kill the goose that lays the golden eggs. The problem is rent-seeking, not corruption per se.

The importance of Bhagwati’s argument is that rent-seeking is not exclusive to a single sector, group, or activity. The manner that he defines rent-seeking is such that it’s the same whether it concerns a business which controls a sector of the economy or a bureaucrat who “purchases” goods for Pemex and who never delivers them but both the seller and the bureaucrat divide the profit. Corruption defined as the erosion of the existing wealth entails the explanation of who killed the country’s development: unions that are predatory, entrepreneurs who control, bureaucrats who pillage, politicians who steal, and public servants who buy land where a public work will be constructed. In each and every one of these cases, the interest of the rent-seeker is getting a piece of the existing pie, which makes economic growth impossible.

Of course, not all of the country is corrupt. There are sectors that compete to the death as well as irreproachable public officials. Many companies are impeccable but confront corrupt practices by their competitors and public servants who take the lion’s share. Likewise, there are workers who go out of their way to make productivity grow because on this depends the viability of their jobs.

The problem is that much of the structure of the relationship and “interface” between government and society, as well as off the set of political decisions that were made in the past (ranging from privatizations to inflation, state monopolies and the protection of public and private enterprises) has generated a country of rent-seekers, of sectors and groups that are predatory and that exist to hoard the existing wealth and not to foment the creation of greater wealth. Therein lies the crux of the issue.

Of course, we must end corruption, but that’s much easier said than done. The cynical solution would reside in the government’s advocating the modification of the nature of the corruption so that, without affecting powerful groups, changes the dynamic of corruption: that is, try to imitate China instead of being like India in the spirit of if you can’t beat ‘em, join ‘em.

At the margin of the feasibility (and ethics) of such a proposal, the true solution lies in eliminating the factors and incentives that favor the type of corruption that characterizes Mexico. Some would propose effecting this by means of coercion (that is, creating novel instruments and mechanisms for combating it –more bureaucratic control) but the logical thing would be to incorporate competitive and transparency mechanisms into the government’s purchase programs and contracts, as well as into auctions for spectrum in telecoms and other areas where rent-seeking corruption proliferates.

The dilemma is: more control, or more competition? Perhaps that’s where the future of the country lies.