Corruption and Government: Causes, Consequences, and Reform by S. Rose-AckermanReview by: A. K. JainJournal of Economics, Vol. 73, No. 1 (2001), pp. 119-123Published by: SpringerStable URL: http://www.jstor.org/stable/41794864 .

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Book Reviews 119

well with a rather stable regional pattern of more specialized production at existing locations.

The third chapter given special attention here is on "German manufactur- ing investment in the UK." This chapter is based on survey results of German subsidiaries. The authors (Hood et al.) follow an interesting approach when grouping the affiliates by three criteria: market scope, autonomy, and integra- tion of activities into the entire MNC. Various combinations of these criteria lead to eight strategic categories, from "slave subsidiary," "host-market pene- trator," "regional exporter" to "strategically independent subsidiary." Most of the German affiliates are oriented towards the British market or are regional exporters. The individual categories open up different opportunities for British firms as suppliers to the German subsidiaries, and they are considered to have different implications for the British economy. Although the authors are rather brief in the application of these ideas and although it seems hard to arrive at clear-cut conclusions as to which type of subsidiary would be best for a host- country's welfare, it seems that their micro-based approach offers promising perspectives for further research on the effects of FDI. Especially, international comparisons of the importance of the above-mentioned categories could lead to a better assessment of the position of various locations in the intra-firm international division of labor.

On the whole, the book offers competent information and often stimulat- ing views on important aspects of the ongoing internationalization processes. Nevertheless, a certain shortcoming remains: in view of the German deficit in inward FDI, the focus on outward FDI seems to be a little misplaced. Further- more, while much effort is put on the identification and evaluation of determi- nants, little is said about the effects of FDI in an economy-wide perspective. This is, however, not only a problem of the book under review, but is rather a shortcoming in empirical research on FDI in general as the editors rightly point out in their introductory survey.

R. Jungnickel, Hamburg, Germany

Rose-Ackerman, S.: Corruption and Government: Causes , Consequences , and Reform. XIV, 266 pp. Cambridge University Press, Cambridge, 1999. Hard- cover £35.00.

Given how long corruption has existed in human society and how long it has affected economic transactions, academics' understanding of corruption is in its infancy. Till about two decades back, most of the academic work on the role of government paid scant attention to corruption except to lament its ex- istence (some even argued that corruption could be helpful for development) and to provide anecdotal evidence. Over the last decade, however, the study of corruption has become center stage in social sciences. This is partly due

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120 Book Reviews

to recognition on the part of international organizations that have a strong in- fluence on the flow of financial and real resources to the developing world, that corruption has a profound influence on the development process. This interest has generated a large number of theoretical and empirical studies on corruption. These studies, by necessity, have attempted to estimate the impact of corruption as well as find solutions without waiting for a coherent, or a complete, theory of corruption to develop. Development of a coherent theory itself is impeded by difficulties of defining boundaries of corruption, trying to include different activities that fall under the rubric of corruption, the interdis- ciplinary nature of this phenomenon, and the urgency to find solutions to this problem. It is in this context that the contribution of Rose-Ackerman's book has to be understood.

Corruption and Government: Causes, Consequences , and Reform attempts to fill part of this vacuum by outlining the economic, political, and cultural environment that allows corruption to grow in its various forms. Corruption, above all, arises from the use of public power for personal gains. It has been, however, difficult to define where public interest stops and private interest begins. Hence, Rose-Ackerman's book is appropriately devoted to the analysis of "tension between self-seeking behavior and public values . . . (and) . . . weak and arbitrary state structures that feed (corruption)." The objective of this volume is to model and describe corruption in a way that can lead to policies for reform. The book succeeds brilliantly in providing the description and a broad framework in which corruption exists; it has been left to others to provide formal models. Above all, the most important contribution of this book is to provide a multidisciplinary framework that can be used to develop detailed models of many activities that together constitute corruption.

The book begins by setting the stage for discussion of corruption. The main problem of low-income economies is a lack of investment opportunities. While we may find all kinds of other reasons - culture included - why corruption resulting from the uncontrolled greed of those in command may be a critical obstacle to creating an environment that encourages investments. The four approaches to be followed in the book are then outlined: how incentives for corruption are created, what corruption means in different societies, how public structures create or suppress corruption, and how reform can be achieved.

In the following four chapters, the author builds the economic foundations for the analysis of the role of government in corruption. Although many of the questions addressed in this part of the book have been discussed elsewhere, these chapters provide a concise summary of the main analytical issues re- garding economic issues that involve corruption. One of the problems in the study of corruption has been the difficulty surrounding its identification and definition. In addition, from the point of view of economic model building, it has been difficult to categorize corruption within the existing economic the- oretical framework. The author highlights the types of corruption for which politics and the nature of the government becomes more important. Although

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Book Reviews 121

bribes would reduce the cost of government intervention for the individual, such cost reduction, and the corrupt activity that allows such a result, is not socially optimal.

The foundations for the analysis of the costs of corruption are presented in a general-equilibrium framework. The author seems to identify the following as the avenues through which corruption will influence equilibrium. - Corrupt decision-makers impose a cost on the society because their discount

rate is higher than that of the society (p. 31). - Corrupt officials have a self-interest (bribes or shares in the profits) in trans-

ferring some of the society's income to private transactors - giving rise to misallocation of resources (p. 32).

- Corrupt transactions may be accompanied by higher risks (because corrupt leaders may not remain in power or they may renege on their promises). The bribers who purchase public assets, therefore, will discount these promises at higher rates than the promises of honest officials - reducing society's income from these sales (pp. 32-34).

- Attempts to implement market reforms, for example through privatization, may lead to misallocation of resources if the decisions are made by corrupt officials (pp. 35-38). In the second part of the book, one chapter is devoted to the impact of culture

on the study and remedies for corruption. Culture affects which activities are considered as corrupt, and hence, illegitimate. This definition, naturally, affects what the society is willing to control. The main contribution of this chapter is first to provide a useful framework for separating various activities that come close to corruption and then to show how closely culture is linked to economics. Examples of trust, reputation, agency, and information, all of which determine how corruption affects economic activities, have been analyzed by economists. Indeed the only formal economic models that have been developed (elsewhere) deal with these issues. The examples of the interaction between culture and eco- nomics discussed in this chapter may provide fertile grounds for future work.

Rose-Ackerman's most important contribution is in the third part of the book (chaps. 7 to 9) which deals with the politics of corruption. The underly- ing theme of this section is that like most other political contests, the level of corruption in a society results from a balancing act between the political pow- ers of those who wish to extract personal gains from their political positions and the corrective forces in the society. What matters are the perceptions and realities of powers and abilities of the contesting parties. The balancing act, and the resulting outcome, can be analyzed for the extremes of a monopoly (a kleptocracy) or for a well developed market (a well functioning democracy), or for situations in between these extremes (four possibilities identified in ta- ble 2 on p. 1 15). The important question, from the point of view of controlling corruption, is which features of (democratic or other) government "help limit self-dealing and which contribute to corruption."

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122 Book Reviews

The author offers many descriptions of how a kleptocrat - with monopolistic control over the society's resources - exploits its powers for personal gains, even in the process of privatization when ostensibly the state's control over society's assets is reduced. In Rose-Ackerman's analysis, the only constraint to a kleptocrat's actions seems to be the ability of low-level officials to extract and keep some of the rents for themselves as well as the scruples of bribe- payers. One of the challenges of academic analyses of these situations is to address the question of why more states do not regress to control by kleptocrats. The answer would appear to lie in many influencing mechanisms that out-of- power politicians and out-of-favor members of the public possess to control the long-term behavior of even the most ruthless dictators. Those mechanisms are mentioned only in passing, however, the author provides rich descriptions of how four types of corruption function within the political framework - descriptions that will be useful for building formal models.

Rose-Ackerman provides rich illustrations of the interactions between var- ious political forces in a society while describing various possibilities for corruption within democratic systems. A democratic system should control corruption due to competition between politicians, but politicians, and those who would benefit from legislative powers of the politicians, manage to find ways to circumvent the controls. Woven around the themes of the electoral system and the exercise of legislative powers, the author identifies scores of situations in which parties can circumvent controls and extract personal ben- efits that amount to corruption. The political framework used in this chapter will be familiar to the readers of Rose-Ackerman's (1978) seminal book1 on corruption. The discussion highlights many of the problems associated with the study of corruption: there are so many varieties of corruption that it is difficult to define it, the dividing line between legitimate and corrupt behavior can be very fine, and it is difficult to say what can be done about it. Once again, although no formal models are offered in this chapter, this discussion of corruption within democratic societies may well become the starting point of future model-building exercises.

The last section of the book is devoted to reform. The main themes in this section are the familiar ones: what should be the role of the international com- munity (international organizations, firms doing business in corrupt countries, and national governments), what can be achieved by insisting on an "open" government (a favorite theme of the international institutions themselves), and the importance of reforms of domestic political and administrative institutions. The issues discussed should be familiar to experts on corruption. One important conclusion from the discussion would appear to be that reforms of the political institutions - which is easier said than done - would bear the most returns.

1 Rose-Ackerman, S. ( 1 978): Corruption: a Study in Political Economy . New York: Academic Press.

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Book Reviews 123

Readers familiar with Rose-Ackerman's 1978 volume on corruption will find a very different approach in this book. This volume is much wider in scope and aims to provide details of "organization" of corruption in its various settings. The analysis of how corruption works itself out is always grounded in reality. Like the 1978 volume, this volume has the potential to become another seminal work. It is a difficult book to read and very hard to put down. Difficult because many descriptions appear to be generalizations of particular situations. Hard to put down because once one starts reading - almost any section of the book - one is impressed with the author's ability to see patterns and common elements in ostensibly unrelated phenomenon.

A. K. Jain, Montreal, Canada

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