causes and consequences of corruption: mozambique in transition

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  • Causes and Consequences of Corruption:Mozambique in Transition

    DAVID STASAVAGE

    Corruption in Mozambique in recent years has been prevalent in a numberof different areas of government activity, and there are indications that it ismore prevalent than was the case ten years ago, when the FRELIMOgovernment launched an ambitious economic reform programme. It ispuzzling that corruption has increased during this period of reform, sinceone of the principal goals of reform in structural adjustment programmes isto reduce opportunities for corruption and rent-seeking (by unifyingexchange rates, for example). This article considers what factors areresponsible for the increase in corruption in Mozambique, and what effectincreased corruption has had on the Mozambican economy. The study onwhich this article is based will hopefully help complement the growingnumber of cross-country studies on corruption, bureaucratic efficiency, andgrowth.1 While the incidence of corruption has changed somewhat inMozambique since the research for the study was completed in 1996 (andoften for the better), corruption remains a serious problem, making the studyrelevant both for comparison with other countries and for those interested indeveloping strategies for a further reduction in corruption in Mozambique.

    The apparent increase in corruption in Mozambique in the last ten yearscan, to a great extent, be explained by a change in the basic conditions fordeterrence of corruption as expressed in principal-agent models.Bureaucrats in Mozambique retain extensive control rights over economicactivity, with individuals (or individual agencies) often holding monopolyand discretionary power over provision of a particular government-suppliedservice. At the same time, structures for monitoring bureaucrats and holdingthem accountable for their actions have been dramatically weakened duringa transition from enforcement centred around the FRELIMO party to onebased on the rule of law and an independent judiciary and police force. Adecrease in real wages for civil servants and increasing inequalities in paybetween the public and private sectors have also contributed to the increasein corruption. Finally, while changes in material factors may explain muchof the increase in corruption of recent years, any study on this subject would

    David Stasavage, Centre for the Study of African Economies, Oxford University

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    be amiss in not mentioning the significance of a decline in the public serviceethic as a source of corruption.

    In addition to being more and more widespread, corruption inMozambique today has an organisational form which is particularlydetrimental to economic growth. Government officials or agencies engagedin corruption operate largely independently. They do not participate incentralised bribe-taking arrangements, nor are there commonly enforced'rules of the game', either of which might keep bribe prices within reason.There is also little evidence of the sort of networks between businesses andgovernment officials which, through repeated interaction, could reduce theuncertainties inevitably involved with corrupt transactions that areunprotected by formal property rights. In Mozambique, the absence of theseforms of organisation means that private sector operators often have littleidea when a bribe will be required for a certain service, what the bribe pricewill be, and whether an initial payment will lead to the service beingdelivered or simply to further demands for illicit payments.

    Corruption appears to have had two major effects on the Mozambicaneconomy. First, there is a distorting effect on government trade and taxpolicies. Widespread corruption in customs has resulted in high, negativeeffective rates of protection for import-substituting firms, since informalsector traders have been able to pay bribes to import goods without payingduties, while manufacturing firms in the formal sector have more commonlybeen obliged to pay duties on imports and taxes on their outputs. Second,there has been both a disincentive and a distortionary effect on investment.Without an idea of what flows of foreign direct investment in Mozambiquemight be if corruption were absent, it is impossible actually to measure thiseffect. Nonetheless, there are indications that a number of potentialinvestors have been deterred by fear of corruption, while others have chosento invest in activities which promise a high rate of return in the short termin order to hedge against perceived risks from corruption. These effects maybe most pronounced for smaller firms.

    The article proceeds by first briefly reviewing hypotheses about thecauses of corruption and its effect on economic growth, as derived fromtheoretical work on the subject. It then provides evidence on the level ofcorruption in Mozambique and the organisation of corruption. This isfollowed by a look at the sources of corruption, and finally at the effects ofcorruption on the economy

    REVIEW OF HYPOTHESES ON CORRUPTION AND GROWTH

    Most economists and many political scientists who have written about thecauses of corruption have done so using arguments derived from principal-

  • MOZAMBIQUE IN TRANSITION 67

    agent models. Three general causes of corruption appear in this literature.2

    For one, corruption will be more of a problem when governmentbureaucrats have extensive control rights over economic activity and whenindividual bureaucrats or individual bureaucratic agencies have monopolyand discretionary power over the provision of licences, registrations andother government-supplied goods and services.3 Second, the level ofcorruption will also depend upon whether officials receive sufficientrewards for service to reduce the relative returns for engaging in corruption.The most important aspect here is the level of public sector pay.4 For lower-level employees one might suggest that the principal question is whethercompensation is so low that they are obliged either to engage in corruptionor moonlight in order to make a subsistence income. For upper-level civilservants in African countries the major consideration will be whether publicsector pay is substantially less than that available for performing similarduties in the private sector. Another incentive involves the way in whichopportunities for advancement within a bureaucracy can be turned into aconstraint on current behaviour in the expectation of future rewards.5 A thirdprincipal cause of corruption is the failure of institutions to monitorbureaucrats and hold them accountable for their actions. These includeinternal services, such as customs inspectors, as well as external serviceslike the police and judiciary.

    There are important reasons to believe that the effects of corruptiondepend not just on how much of it there is, but also on how corrupt activityis organised. For one, once corruption occurs through collusivearrangements, bribe prices will be lower. Shleifer and Vishny6 suggest thatwhen officials engaged in corruption are able to collude to set bribe pricesat a certain level or share corruption proceeds (rather than acting asindependent monopolists), the distorting effect of corruption on growth willbe less marked, because aggregate bribe revenues will be maximised at alower average bribe price than that which would prevail if officials wereacting independently. This sort of arrangement could presumably involveeither centralised bribe taking and sharing, or well-enforced rules of thegame limiting the price of bribes for certain services. Shleifer and Vishnyargue that corruption in the Soviet Union was of the collusive type, and co-ordination between different bureaucrats and agencies was enforced by theCommunist Party and the KGB. In Russia today, however, the party nolonger plays the same role, collusive arrangements have been broken up andcorruption has a much more anarchic, and therefore more damaging,character.

    In addition to lowering bribe prices, the fact that corrupt activity occursthrough collusive arrangements should also minimise uncertainty. Corrupttransactions by definition are not protected by formal property rights, and so

  • 68 CORRUPTION AND DEMOCRATISATION

    in the absence of such collusion they are likely to involve greateruncertainty for businesses than would payment of a tax or legal fee inexchange for the same service.7 The existence of networks in whichbusiness representatives and government officials regularly associate mighthelp improve flows of information and reduce incentives for bureaucrats torenege on a promise to provide a particular service for a bribe, as theirreputation within the group might be damaged. Because such corruptionnetworks would need to remain secretive, however, they would still hinderinnovation to the extent that new firms are excluded from sucharrangements. Recent work on East Asian economies has emphasised theimportance of contacts of this sort between business and government.8

    THE PATTERN OF CORRUPTION IN MOZAMBIQUE

    The Level of Corruption

    It is a fundamental problem in this area of research that there is noconvincing method for measuring the level of corruption in Mozambique asa whole, or even within individual areas of government activity. The oneexception here is with the customs administration, where one can provide aquantitative estimate of how much revenue has been lost, and from this onecan make judgements about the level of corruption.9 Given the difficulty insaying anything about how much corruption there is at the national level,what the article attempts to do is to provide as much partial evidence aspossible, on the basis of 30 interviews conducted in Mozambique withprivate sector and donor representatives and based on recent reports whichhave looked at the more general issue of the business environment. Thesesources suggest that c

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