Are corruption, governance, and development interlinked?

It must have been a coincidence that President Elbegdorj’s publicized rebuke of the Anti-Corruption Authority for being ineffective, deliberately or not, in stanching corruption in Mongolia came only days after a report released by Transparency International (TI)
saying corrupt businesses all over the world cost billions, hurt commerce, and impair development, and all this certainly quite deliberately. Taking some liberty with venerable terms, these were micro- and macro-expressions of concern at the same phenomenon. 

The TI reports how in developing and transition countries alone, companies colluding with corrupt politicians and government officials have supplied bribes estimated at up to USD40 billion annually. With business executives themselves indicating that corruption raises project costs by at least 10 per cent, ultimately it is citizens who pay. It is no surprise that the sheer economic power of some companies and business sectors is used to manipulate political decision-making. Failure to regulate such influence nurtures kleptocratic systems and stunts growth. 
One way corruption impacts development is by determining the character of public investment. Corrupt officials are more likely to invest in large infrastructure projects that offer greater opportunity of collecting rent. This leads to a skewed pattern of public expenditure, away from health, education and environmental protection to roads, airports or military hardware.

All this would be familiar to us in Mongolia, but is there really any empirical evidence that corruption affects economic development? The question is tricky as measurement of economic development is always easier than measurement of governance and correlating the two will never be conclusive. Jeffrey Sachs makes the point that virtually all poor countries have governance and corruption indicators that are below those of the high-income countries but refutes the argument that this is the only reason why aid does not achieve the expected results.

A longer quote from him may be in order. “Governance and higher incomes go hand in hand not only because good governance raises incomes, but also, and perhaps even more important, because higher income leads to improved governance. As a country’s income rises, governance improves for two major reasons. First, a more literate and affluent society is better able to keep the government honest by playing a watchdog role over government processes. Newspapers, television, books, telephones, transport, and now the internet, all of which are vastly more available in rich countries, enhance this watchdog function and empower civil society. Second, a more affluent society can afford to invest in high-quality governance. When governments are backed by ample tax receipts, the civil service is better educated, extensive computerization improves information flows, and the public administration is professionally managed.”

Problem is that there are various indicators of governance, and a strong and positive correlation between per capita income and governance does not characterize all of them. To me the more important issue is: Does this correlation establish causation, and if so, in what direction is the causal relationship? Does better governance lead to a benign effect on per capita incomes? Do higher incomes lead to governance improvements? Or is the correlation entirely spurious and are there other factors that lead to improvements in both economic development and governance? The jury is still out on causation and is unlikely to ever come in. Proponents of better governance tend to argue that good governance is good for economic development but the statistical support for such a strong assertion is weak.
This is not to deny that however defined, measured and quantified, good governance is desirable. It is “good“ rather than “bad“. Hence, it is an end in itself and need not be looked upon as a means to trigger economic development. We should look at better education and health outcomes no differently. Higher literacy levels have a positive impact on economic development and so do lower levels of mortality and morbidity. But even if that were to be not the case, better education and health are desirable outcomes, and governance is no different. And it is for this reason that the assorted governance indicators perform a useful function. However, in using these indicators, a caveat is in order. Since there are serious subjectivity issues in evolving such indicators, how much credence should we attach to cross-country comparisons? Such comparisons which determine ranks should be taken with a pinch of salt.

How do we ensure improvements in governance? Do we have to wait for income and literacy levels to increase or are there other ways? In Mongolia, there appears to be a great deal of variation across strata that are fast forming. There is also a great deal of cynicism about all the three main organs of state, the executive, the legislature and the judiciary. John Kenneth Galbraith spoke of the secession of the successful in a slightly different context. The relatively richer sections of society, the relatively successful, can afford to secede.

But if the three organs of the state are to deliver, or deliver better, countervailing force has to be exerted by civil society. And the catalyst for civil society action or pressure invariably has to come from the successful sections, who are more educated and more literate, and also more aware of their rights. They must add their power to that of the nascent and still very tentative civil society in Mongolia to insist on right to information laws, citizens’charters and transparency and accountability in public expenditure.

Corruption has many dimensions, and no single solution can eliminate all forms of corruption. But discretionary and arbitrary administrative-cum-executive decisions have also been curbed by such pressure, and bribery and corruption reduced. All machinery requires oil and grease and the government machinery is no different.
The difficulty of keeping the system clean is highlighted by Transparency International’s admission in an earlier report that even Japan and Canada have below-par enforcement standards vis-а-vis accepted guidelines for bribes from foreign businesses. TI found only one prosecution in each country against more than 40 in Germany, 19 in France and 16 in Switzerland.

By Tirthankar Mukherjee