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« The Good Bribes | Main | High-Velocity FCPA »
Monday
Jan252010

Graft Is Good, Sometimes

Profs Art Carden of Rhodes College and Lisa Verdon of Florida State, both economists, asked: When is corruption bad for economic growth? When is corruption good for economic growth? (It wouldn't occur to us to ask the second question; that's why we read what smart people have to say.)

Carden and Verdon surveyed the literature, analyzed studies and examples that might reveal clues -- there's not much meaningful data about corruption because it usually happens in secret -- and came to some thoughtful, if unpleasant, conclusions.

In their August 2009 paper, they argue that in some circumstances, graft can actually create beneficial change. In a healthy economy, they say, corruption is bad -- it's like sand in the gears of society. But in poor and undemocratic countries, corruption can be oil in the gears. It can help bring change and economic progress. It can be a substitute for freedom by allowing entrepreneurs to beat red tape and get things done.

Here's what they say:

In relatively poor, un-free countries, corruption can overcome some of the barriers presented by formal and informal institutions that would otherwise restrict trade. Bureaucracies and regulators are in a position to exercise veto power over mutually beneficial trades—they can prevent people from picking up the bills left on the sidewalk, so to speak, and thereby reduce specialization, trade, and growth. When this is the case, corruption can increase economic growth by allowing trade.

They cite others who, looking at data from countries such as Zaire, South Korea, and the Philippines, conclude: Corruption is always detrimental in countries where institutions are effective, but it may be positively associated with efficiency in countries where institutions are ineffective.

Does it mean the Foreign Corrupt Practices Act is bad for those places that are the worst off? Are we missing what Carden and Verdon and other scholars would call the "cultural context" of corruption? Do anti-corruption laws like the FCPA and other OECD versions promote suffering in the least developed countries by preserving a miserable status quo? Is America making a cosmic mistake with the FCPA?

The paper is "Corruption Creates Growth When People Aren't Free" by Art Carden and Lisa Verdon (August 20, 2009). It's available at SSRN here.

Readers -- you're invited to give us your two cents. You might also want to look at what Andy Spalding had to say in this space last year.

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