Government Corruption Essay

This essay has a total of 1169 words and 5 pages.

Government Corruption



Over the last few years, the issue of corruption--the abuse of public office for private
gain--has attracted renewed interest, both among academics and policymakers. There are a
number of reasons why this topic has come under recent inspection. Corruption scandals
have toppled governments in both major industrial countries and developing countries. In
the transition countries, the shift from command economies to free market economies has
created massive opportunities for the appropriation of rents, excessive profits, and has
often been accompanied by a change from a well-organized system of corruption to a more
chaotic and deleterious one. With the end of the cold war, donor countries have placed
less emphasis on political considerations in allocating foreign aid among developing
countries and have paid more attention to cases in which aid funds have been misused and
have not reached the poor. And slow economic growth has persisted in many countries with
malfunctioning institutions. This renewed interest has led to a new flurry of empirical
research on the causes and consequences of corruption.

Economists know quite a bit about the causes and consequences of corruption. An important
body of knowledge was acquired through theoretical research done in the 1970s by Jagdish
Bhagwati, Anne Krueger, and Susan Rose-Ackerman, among others. A key principle is that
corruption can occur where rents exist--typically, as a result of government
regulation--and public officials have discretion in allocating them. The classic example
of a government restriction resulting in rents and rent-seeking behavior is that of an
import quota and the associated licenses that civil servants give to those entrepreneurs
willing to pay bribes.

More recently, researchers have begun to test some of these long-established theoretical
hypotheses using new cross-country data. Indices produced by private rating agencies grade
countries on their levels of corruption, typically using the replies to standardized
questionnaires by consultants living in those countries. The replies are subjective, but
the correlation between indices produced by different rating agencies is very high,
suggesting that most observers more or less agree on how corrupt countries seem to be. The
high prices paid to the rating agencies by their customers (usually multinational
companies and international banks) constitute indirect evidence that the information is
valuable. These indices are obviously imperfect owing to their subjective nature, but can
yield useful insights.

Since the ultimate source of rent-seeking behavior is the availability of rents,
corruption is likely to occur where restrictions and government intervention lead to the
presence of such excessive profits. Examples include trade restrictions such as tariffs
and import quotas, industrial policies such as subsidies and tax deductions, price
controls, multiple exchange rate practices and foreign exchange allocation schemes, and
government-controlled provision of credit. Some rents may arise in the absence of
government intervention, as in the case of natural resources, such as oil, whose supply is
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