Corruption and the rule of law

Last week, on a tour of Bundelkhand, Rahul Gandhi evoked his father's famous refrain about only 15 paise of a rupee spent by the Centre reaching the intended beneficiaries. To rub in his claim about Mayawati's incompetence and corruption in the state administration, Gandhi went a step further and degraded the number to 5 paise.

The fact that politicians, no matter how corrupt a stock they come from, always publicly denounce corruption is just another evidence of how widespread the notion of 'corruption=bad' is. But is it always so?

A paper by Douglas Houston in the Cato Journal argues that the belief, though widespread, might not be true for societies that have failed to establish a sound rule of law. Houston created a mathematical model to simulate the effect of corruption on the economy, and uses data from 119 nations to populate his study.

Here is what the study, titled Can Corruption Ever Improve An Economy? [pdf link], finds:

The primary results from this study are that corruption has significant restrictive as well as expansionary economic effects. The relative magnitude of the two forces depends on the degree to which laws protecting property are enforced in a nation. When protections are weak, corruption can play a significant expansionary role for a nation.

Most policy discussions proceed on the assumption that whenever public officials use their public authority for private gain the economy will be damaged. However, corrupt behavior can also affect an economy positively by substituting for bad governance (emphasis mine).

And here is some advice for governments and international donors who make the curbing of corruption the linchpin of their campaigns:

Corruption should not be indiscriminately attacked in poorly governed countries. It often is symptomatic of the poverty of legal protections. Rather than attempt to increase the cost of corrupt behavior, the appropriate policy in these circumstances is to focus on reducing the cost of engaging in legal transactions.

On too many occasions, I have quarrelled with people who justified the expediency of bribery. I can see all of them now, giving me the "bola tha na!" look.