Material Development is Possible Even with Corruption

corruptionpicsEven before Plato penned the phrase who will guard the ‘guardians’, corruption in many forms had plagued society, and it continues to do so in spite of the fall of ‘personal rule’ and the rise of democratic rule and institutions. It is one of the oldest injustices that beset mankind necessitating a common cry by all men when secrecy and fast and loose deals prevail as the most common forms of governance. Although citizens continue to struggle with this social ill, society did manage to experience bouts of growth that served as the motivations for further modernization and development.

In the early stages of western development, this growth and development was hardly based on consensus or consultation; it was achieved through violent struggles, oppressions, exploitations, and the distribution of ill-gotten properties by corrupt states to family, friends and ‘noble men’. This is by no means an argument to downplay corruption, but a simple reminder of the historical record of the developed states that we so now admire. Interestingly, the late developers (especially the South East Asians) are emerging from equally corrupt states, but yet manage to create long periods of sustainable growth along with human, material, and structural development. It is our firm view that the most appropriate question to ask is: if there is a commonality of corruption (albeit in different forms and at different levels) exists among both stagnant and developing countries, then what accounts for the marked differences in economic performance?

To answer this most important question we must first briefly analyze this social ill called corruption. Nye (1967) and World Bank (1997) argue that when public officials violate some formal rules of conduct in pursuit of their private benefit, whether for wealth in the form of bribes or for political advantage they are considered to be corrupt.

Essentially, mainstream/neo-liberal economists view all forms of corruption as growth reducing. The argument is a popular one that goes as follows: when unnecessary obstacles are created to extract money from the citizenry, or artificial market restrictions are imposed on the least favoured groups, the most efficient user/s of resources are crowded out from market participation and the costs of doing business increases. The cumulative effect is the misuse of society’s most valuable resources and ultimately, poor economic performance.

This analysis is embedded in the neo-liberal ideology of the individual, state, and market. The state within the mainstream analysis has a pre-determined ‘right-size’ which comes with limited interventions and responsibilities. These interventions are limited to addressing the popular market failures and the provision of public goods/services. Any intervention in the market beyond these prescribed norms are considered corruption-inducing behavior. This is one of the fundamental reasons for privatization and liberalization that is ‘gently’ imposed on the underdeveloped world in the name of reducing corruption among other things. In addition to big governments or excessive intervention by the state, poor functioning judiciary and poor enforcement of anti-corruption strategies create further incentives for corrupt practices by public officials. This is the standard story and the proffered remedies lie in higher salaries for public officials, greater transparency in the allocation of public resources and more effective judicial processes for dealing with those charged with corruption (World Bank 1997, 2000). These measures are intended to reduce the incidence of corruption and the costs of engaging in corrupt acts.

Explicit in the mainstream analysis is that corruption has two basic types. The first has to do with a transfer of resources from an individual or groups of individuals to a public official in return for a beneficial claim, asset or opportunity. It is argued that this type of corruption leads to the loss of potentially investible resources in bribes, etc. which are transferred to public officials who are assumed to use them less efficiently than enterprising entrepreneurs; thus, overall investment is reduced. The second type of corruption occurs when a benefit is afforded to an individual who would not have gained it via free and fair processes. According to the standard story, both elements of corruption are damaging for growth and erodes trust in public institutions. Essentially, the two principal drivers for corruption are state intervention beyond the ‘right-size’ of government and poor disincentives for corruption.

The principal problem with this analysis is that it ignores the ‘governance type’ necessary for development and focuses only on governance type relevant for already developed countries. Alternate analyses have explained that state intervention beyond the limited market failures and public goods is necessary for underdeveloped societies to, inter alia, undertake or underwrite investments in high-risk areas, accelerate the acquisition of technology, and maintain political stability (Amsden 1989, Wade 1990, Rodrik 1995, Aoki, et al. 1997, Lall and Teubal 1998, Woo-Cumings 1999, Khan and Jomo 2000, Khan 2002, Rodrik 2002, Khan 2004). Unfortunately, these interventions are usually accompanied by various levels and forms of corruption. However, the key variable which explains the difference in economic performance of developing and underdeveloped societies (both plagued by corruption) is the differential capacity of the various states to achieve growth enhancing outcomes which, in turn, create sustained compulsions for material development.

The net effect of corruption is therefore ambiguous and not necessarily growth reducing as argued by the mainstream. On consideration of the two basic types of corruption, it is not a given that public officials are less efficient at using investible funds than entrepreneurs. In many underdeveloped societies it is the political elites that are the thriving entrepreneurs. They have access to more information, loans and political power – a prime recipe for entrepreneurial success. The transfer of assets, claims or opportunities from a public official to an individual or group of individuals need not be damaging for growth either.

To repeat what has been highlighted above, the fundamental difference between growing nations and stagnant ones is the achievement of sustainable growth within a socio-political environment marred by corruption in growing nations but lack of growth accompanied by corruption (a deadly mix indeed) in stagnant ones. In poor and stagnant countries, individuals or group of individuals who benefit from cozy relationships with the government undertake elementary investments, as opposed to high-value, industrial investments as in the late developers in South East Asia and the BRICS countries. The presence of sustained and quality growth with large accompanying employment in these countries is hardly because of transparency and low corruption as demonstrated in an article on our blog (https://caribansreason.wordpress.com/2013/12/24/hither-thou-shalt-come-but-no-further-a-reply-to-comments/). Rather, it results from an unyielding belief in building local capacity and establishing some variant of industrial development, coupled with the understanding that at low levels of development this cannot be achieved in a laissez faire manner. Hence, the need for strategic state intervention.

The mainstream analysis also fails to identify additional drivers of corruption many of which cannot be adequately remedied by neo-liberal anti-corruption solutions. Since all poor and underdeveloped countries endure fiscal constraints redistribution to powerful political groups is not usually done through legal fiscal reallocations. To safe guard political stability or appease supporters, redistribution often involves off-budget transfers. Buying influential elements within the political opposition are also undertaken under similar means. This type of political corruption is hard to prove and address in any serious manner. This is mostly absent in rich states due to their large private sectors which serve as a viable tax base and thus facilitates legal redistribution easier. Additionally, calls for greater redistribution are done within a narrow margin since all stakeholders hardly wish to harm the dominant private sector with higher taxes. Additionally, official development assistance and projects, in poor countries, are often plagued with corruption by ensuring that the identified ‘at risk’ areas are those dominated by political supporters. This form of corruption is also difficult to solve domestically, certainly reducing the responsibilities and capacities of the state will hardly address this form of corruption.

The mainstream analysis fails to account for the transfer of assets through non-market means: theft and land grabs, ‘priority’ allocations of public land and ‘land reform.’ These are all avenues of corruption and big corruption too! To sufficiently address these issues would require significant change in political responsibilities between the executive and legislative branches that may not even adequately address corruption if it comes at the price of a reduced state capacity to create compulsions of growth. The latter is historically proven to be the only adequate method to significantly reduce corruption.

High levels of corruption is the outward manifestation of a deeper problem: a state that failed or continues to fail to forge material development by creating avenues for various forms of industrial growth with the objective of providing high value employment that requires highly trained human capital. In the absence of this, brain drain will persist, incompetence will be widespread, and all the accompanying elements of underdevelopment will choke a country. This has been the historical record of all now developed countries and those that are now emerging, in spite of the fact that they were certainly highly corrupted. Corruption is a part of the story of sub-standard public works, but we believe gross incompetence across the board especially when measured against the Western benchmarks is a more powerful explanation. This incompetence can, in turn, be explained by massive brain drain. The emerging states, on the other hand, obsessed with education, particularly scientific education, invested massively in their human capital. So even when contracts are awarded to party loyalists, REST ASSURED, THERE IS ABSOLUTELY NO QUESTION OF THAT LOYALIST’S COMPETENCE! In Guyana, however, a different reality presents itself.

References

Amsden, Alice 1989. Asia’s Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press.

Aoki, Masahiko, Hyung-Ki Kim and Masahiro Okuno-Fujiwara (eds) 1997. The role of Government in East Asian Economic Development: Comparative Institutional Analysis. Oxford: Clarendon Press.

Khan, Mushtaq H. 2000a. Rents, Efficiency and Growth, in Khan, Mushtaq H. and K. S. Jomo (eds) Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia, Cambridge: Cambridge University Press.

Khan, Mushtaq H. 2002. Corruption and Governance in Early Capitalism: World Bank Strategies and their limitations, in Pincus, J and J. Winters (eds) Reinventing the World Bank, Ithaca: Cornell University Press.

Khan, Mushtaq H. 2004. State Failure in Developing Countries and Strategies of Institutional Reform, in Tungodden, Bertil, Nicholas Stern and Ivar Kolstad (eds) Toward Pro-Poor Policies: Aid Institutions and Globalization, Proceedings of Annual World Bank Conference on Development Economics, Oxford: Oxford University press and World Bank.

Lall, Sanjaya and Morris Teubal 1998. Market Stimulating Technology Policies in Developing Countries: a Framework with Examples from East Asia, World Development 26 (8): 1369-85.

Rodrik, Dani 1995. Getting Interventions Right: How South Korea and Taiwan Grew Rich, Economic Policy 20: 53-101.

Rodrik, Dani 2002. Institutions, Integration and Geography: In Search of the Deep Determinants of Economic Growth. Princeton NJ: Princeton University Press.

Wade, Robert 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton: Princeton University Press.

Woo-Cumings, Meredith (ed) 1999. The Developmental State. Ithaca: Cornel University Press.

Word bank 1997. The state in a changing world. World development report 1997. World bank: Washington DC.

World bank 2000. Helping countries to combat corruption: Progress at the world bank since 1997. World Bank: Washington DC.

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