Question

What is the relationship between corruption in a country (i.e. a governmental official taking a bribe) and economic growth? Is corruption always bad?

Answer 1

Corruption can influence the distribution of resources in two ways. Second, it may alter the evaluation by private investors of the relative merits of the different investments. This effect is the result of corruption-induced changes in the relative prices of goods and services, as well as in the capital and factors of production, including entrepreneurial talent. Second, corruption can lead to misallocation of resources when decisions on how public funds are to be spent or what private investment is to be allowed are made by a corrupt government agency.

Misallocation is based on the probability that a dishonest decision-maker would find possible 'corruption payments' as one of the decision criteria. The ranking of projects on the basis of their social value that vary from the ranking on the basis of the corruption income that the agent expects to earn.

In more scattered local bribery settings, at least the majority of bribing companies obtain preferential treatment from public officials, allowing them to expand rapidly. Their non-bribing (or less often bribing) rivals are likely to be more effective in terms of productivity and development and are more likely to comply with regulatory regulations than they would otherwise be out of the market. Under less scattered bribery settings, both companies bribe in a similar manner. Bribery serves as an extra fee or an rise in operational costs that only hinders the efficiency of the company.

In many countries, corruption is not seen negatively, but is seen as a positive force and represents a value system that gives preference to family and clan loyalty over that to an impersonal institution. For these cases, it may be so necessary to preserve stability and reinforce the bond that binds a state together that removing it which would be difficult in any case would have dire consequences.

In China , for example, while corruption is deeply ingrained and pervasive, it does not automatically decide the distribution of key resources in most instances. Although it helps to reduce productivity, raise costs, and can yield startling results at times, despite the country's low overall level of development, it does not have a major impact on growth (though this will change as the world grows richer). On the contrary, it can actually serve as a lubricant to bypass stifling regulations and to smooth the establishment of the trust required for businessmen to have enough faith in officials to want to invest at times.