The Institutional Economics of Corruption and Reform.

The Institutional Economics of Corruption and Reform

Johan Graf Lambsdorff

Cambridge University Press: Cambridge, UK, 2007, pp. 286, index.

Prof. Lambsdorff has given us a magisterial book that thoroughly surveys the comparative evidence on corruption all over the world. In it he presents an original approach to why corruption can occur and what can suppress it. A long-time contributor to this field and consultant to Transparency International (TI), Lambsdorff is credited with creating the widely used Corruption Perceptions Index (CPI) in 1995. The CPI, a composite of foreign, resident, and business opinions, correlates with more recent data on the percentage of business paying bribes, the amounts paid, press freedom and other indicators. A useful appendix to this volume gives technical details of the TI-CPI.

Corruption, defined as 'misuse of punic power for private benefit', comes about when dishonest actors collude. Raising the transaction costs of such collusion--for example, increasing the uncertainty involved--can reduce corruption, Lambsdorff argues. Since corrupt contracts cannot be enforced at law, bribery runs the risk of non-delivery, denunciation, or extortion.

To minimise corruption, one cannot simply reduce the scope of public spending because much of government is necessary. There is no robust relationship between large government size or state-owned enterprises and high corruption. Bad regulations, like protectionism and red tape to establish a business, can be at fault, but corruption may be the cause of such regulations, rather than merely the result. Because of such endogeneity--or failure to control for income or other background variables--Lambsdorff mostly dismisses usual suspects in corruption--such as low pay for officials, democratic elections, colonialism, lack of trust, and others--that have been the concern of cross-country statistical studies. Removing corruption would seem to be related to 'rule of law', and 'property rights', but China has much corruption and imperfect protection of property rights. On the other hand, Eastern European countries have improved their legal environment, at the behest of the EU and with domestic cooperation, and that has helped them continue modest growth rates since the 1990s.

Despite the lack of a precise relationship between low corruption and growth, Lambsdorff does believe that corruption reduces the effectiveness of the bureaucracy to execute projects, particularly unique ones, and to reduce environmental destruction, among other things. In numerous boxes summarising about 400 empirical studies, he covers the English-language materials (and a few in German) with exemplary thoroughness and critical good sense. In one box, for example, Lambsdorff quotes several studies linking corruption to reduced economic growth and productivity, as well as increased arms procurement and underground economy.

Several studies indicate that perceived corruption reduces foreign direct investment in the transition countries. 'Grand corruption', involving top policy makers--even authoritarian rulers--who may serve as guarantors, seems to be less inimical than unpredictable petty corruption, involving 'time-consuming negotiations with low-level bureaucrats'. But Lambsdorff has shown, using World Bank data for several dozen countries, that the unpredictability of bribes is related to the 'absence of corruption', once GDP per capita and the presence of legal alternatives are controlled for in regression analyses reproduced here. If you are about to study corruption and governance, this book is the place to start.

Of special interest also is Lambdorff's statistical study of exporters' willingness to pay bribes to sell in corruption-prone markets. Adjusted for distance, cultural and colonial links, EU membership, Italy, France, and Belgium have a significantly higher share of imports in corruption-ridden countries, such as Colombia, while Australia, Sweden, and Malaysia avoid such markets. The differences are rather small, in my opinion, and the approach would be more convincing if the regressions had been presented in fuller detail. Reputation surveys of the TI 'Bribe Payer's Index, conducted in 1999 and 2002, confirm Sweden and Australia's clean record (but not Malaysia), while Italy, France, South Korea, China, and Russia came out poorly, in the opinion of traders.

What can be done to reduce corruption? Transparency and ethnical training are hardly irrelevant. Since intermediaries are often used in international dealings on large public projects, Lambsdroff suggests certifying and auditing these agents as a signal of their honesty, as is being tried by Transparent Agents and Contracting Entities (TRACE). In addition, Lambsdorff (with a co-author Mathias Nell) proposes asymmetric penalties to break the confidence that corrupt favours will be forthcoming and to promote whistle-blowing: sanctions on the public official accepting bribes must be low but high for illicitly complying with the action sought. Contrariwise, the penalty for offering a bribe must be high but mild for accepting an illicit permit or contract. Thus, a public official can renege on a bargain with little fear that the bribe-giver will turn him in; that will discourage a continuing illicit relationship, in the opinion of these two authors. By contrast, symmetric and harsh penalties for ongoing corruption lead to a conspiracy of silence. What is needed, rather, is fear of betrayal to stimulate politicians and business people to commit to an ethic of honesty.

doi:10.1057/ces.2008.30

Martin C. Spechler

Indiana University, Indianapolis, Indiana, USA

Print Get the Mag Weekly Updates