corruption and public finance: an imf perspective
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European Journal of Political Economy
Vol. 20 (2004) 1067–1077
Corruption and public finance: an IMF perspective
Arye L. Hillman*
Department of Economics, Bar-Ilan University, Ramat Gan 52900, Israel
CEPR, London, UK
CES-ifo, Munich, Germany
Received 15 September 2003; accepted 16 September 2003
A review of Governance, Corruption, and Economic Performance, George T. Abed and Sanjeev Gupta, editors,
International Monetary Fund, Washington D.C., 2002, pp 564, ISBN 1-58906-116-0 Soft cover
Available online 28 July 2004
Abstract
Public finance should be a means whereby governments in low-income countries are able
to increase economic growth and end poverty. Corruption, however, reduces tax revenue and makes
public expenditure policies ineffective for achieving social objectives. The papers in this volume,
which is sponsored by the Fiscal Affairs Department of the International Monetary Fund (IMF),
describe how corruption makes public finance ineffective in promoting economic development.
D 2004 Elsevier B.V. All rights reserved.
JEL classification: H11; H26; O17
Keywords: Corruption; Public finance; IMF
1. Introduction
The people who can best describe corruption are those themselves engaged in
corruption. After the perpetrators themselves, the next best placed to describe corruption
are those who interact with the governments within which corruption takes place.
Prominent among the latter are staff members of the International Financial Institutions.
This book, edited by two staff members of the Fiscal Affairs Department of the
International Monetary Fund (IMF) and with contributions principally by IMF staff
0176-2680/$ - see front matter D 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.ejpoleco.2003.09.004
* Department of Economics, Bar-Ilan University, Ramat Gan 52900, Israel.
E-mail address: [email protected] (A.L. Hillman).
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–10771068
economists, demonstrates the extent to which issues associated with governance and
corruption concern the International Monetary Fund. The studies in the book make clear
why, when governments are corrupt, public finance is ineffective in increasing growth and
reducing poverty.
2. Corruption within public finance
In an introductory overview, the editors, George Abed, and Sanjeev Gupta, note the
only relatively recent interest of economic researchers and also the IMF and World Bank in
corruption. The attention that has come to be given to corruption is attributed to
globalization through requirements of greater transparency by governments in poorer
countries that have been recipients of private capital inflows. Previously, capital flows had
been primarily official through governments and had been motivated by political influence
sought by donors. Corruption under these circumstances was ignored: ‘‘many countries
were governed by regimes that, to say the least, did not adhere to the strictures of good
government, and most bilateral (and to some extent multilateral) donors and creditors often
refrained from asking too many questions. The economics profession, with notable
exceptions, lacking the requisite information or the will to challenge the prevailing
political order, went on to other pursuits’’ (p. 3). The end of communism focused interest
on corruption which was evident in the postcommunist states. At the same time, standards
of conduct changed for governments in developing countries, with donors becoming less
forgiving and governance indicators becoming part of the policy conditionality associated
with concessionary loans and other aid from the international financial institutions.
Nongovernment organizations (NGOs) such as, in particular, Transparency International,
placed governance and corruption at the forefront of attention. The U.S. had adopted an
anticorruption policy through the Foreign Corrupt Practices Act of 1977, with the rest of
the developed world following in 1997 with the adoption of the OECD convention on
Combating Bribery of Foreign Officials in International Business Transactions. The IMF
also contributed to reducing corruption through standards of transparency and account-
ability in the management of public funds and through requirements to safeguard the use
of IMF-provided resources and to preempt misreporting of information. This volume is
another means, through policy research, whereby the IMF focuses attention on issues of
governance and corruption.
Vito Tanzi (Corruption around the world: causes consequences, scope, and cures)
points out that corruption, defined as the abuse of public power for private benefit (p. 25),
has been endemic in human civilization. Tanzi notes that bribes should be distinguished
from exchange of gifts: cultural differences can explain different sizes of gifts but the
question is ‘‘at what point does a gift become a bribe?’’ (p. 25). He observes the link
between corruption and the size of government: corruption grew as the size of government
grew. Government regulation, taxation, procurement, and public spending for private
benefit all provide foundations for corruption. State enterprises have been, in particular,
dens of corruption. Abolishing the state would abolish corruption because all transactions
would take place in markets, and people could exchange gifts as well, if they so wished.
Nathaniel Leff had proposed in 1964 that corruption could be beneficial in overriding
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–1077 1069
bureaucratic impediments to economic activity. Tanzi, however, emphasizes the costs of
corruption. People become disillusioned with markets (to the extent that free markets are
present), with democracy (where present) and with the government itself; the intentions of
government regulations and policies are subverted and property rights and the rule of law
are compromised, as are markets and incentives. Income distribution is also made more
unequal, with the poor likely to lose the most from corruption. Tanzi lists different
solutions for corruption through penalties, institutional controls (honest and effective
supervisors, good auditing offices, and clear rules on ethical behavior), transparent rules,
laws and processes, and exemplary behavior by leadership. However, Tanzi notes the
difficulties of eliminating corruption in poor countries where salaries in state employment
are low and where overemployment in the state sector is often government policy. Tanzi
concludes: ‘‘corruption is closely linked to the way governments conduct their affairs in
modern societies (and) the fight against corruption is, thus, ultimately linked with the
reform of the state’’ (p. 54).
3. Public-sector remuneration and corruption
Caroline Van Rijckeghem and Beatrice Weder (Bureaucratic corruption and the rate
of temptation: Do wages in the civil service affect corruption and by how much?,
reprinted from the Journal of Economic Development 2001) investigate the relation
between state-sector wages and corruption. The government of Singapore has paid, for
example, relatively high public-sector wages, with the objective of attracting high-
quality personnel to government employment. The high wages also preempt incentives
for bribes, which is an application of the efficiency-wage hypothesis (the high wages
deter corruption by making dismissal unattractive). High wages are not required to
eliminate corruption if the bribe potential is low. Corruption may also be inhibited by
deferred postretirement payments and by greater probability of detection, as wages
within a bureaucratic hierarchy increase. There is also a ‘‘fair-wages view’’ that
government officials have a personal preference for honesty and will choose not to be
corrupt provided that wages are sufficiently high so as to be regarded as ‘‘fair’’. The
empirical results reported by Van Rijckeghem and Weder indicate that large increases in
wages would have been required to eliminate corruption in a sample of 31 developing
and low-income OECD countries (the data cover the period 1982–1994). Further
evidence from case studies confirms rejection of the direction of causality that
government wages are low because governments feel that they do not have to pay
more because of the income from corrupt activities. With the causality running from low
wages to corruption, the conclusion is that inordinately high increases in public-sector
wages in poorer countries appear to be required if significant reductions in corruption
are to take place.
Sheetal K. Chand and Karl O. Moene (Controlling fiscal corruption) set out a model
that shows how bonus payments to tax administrators can reduce corruption; the bonus
payments substitute for bribes. A case study from Ghana is used to show how, after a
change in government in 1981, ‘‘rampant fiscal corruption was brought under control’’.
Chand and Moene propose that bonus incentives should be given to higher-level bureau-
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–10771070
crats, although the authors note that bonus payments for collecting taxes could inspire
overzealous tax-collecting behavior. The conclusion offers a view of human nature (p.
109): ‘‘Most fiscal officers, if properly trained, have a sense of professional pride and
would not condone corruption’’ and the government officials ‘‘become corrupt partly out
of necessity or because of peer group pressure’’.
4. Governments and discretionary corruption
It is often taken for granted that governments have an interest in eliminating
corruption because corruption reduces tax revenue and distorts the intent of public
spending. However, Era Dabla-Norris (A game theoretic analysis of corruption in
bureaucracies) sets out a model where corruption is discretionary and ‘‘arises when
the dictator chooses not to deter it’’ because of monitoring costs, low wages in the state
sector or ineffective tax administration. Because of multiple equilibria in the model,
identical societies can end up with high or low levels of corruption. A country can
therefore be caught in a high-corruption trap. In this type of model, high corruption is due
to ‘‘bad luck’’.
Joshua Charap and Christian Harm (Institutionalized corruption and the kleptocratic
state) continue the theme of discretionary corruption in proposing that ‘‘corrupt
practices are created to satisfy a leader’s desire to foster loyalty through patronage’’.
That is, corruption may be an efficient means for the ruler or the ruling elite to maintain
support. Corruption is, in these cases, ‘‘systematic and deliberate’’ and is the ‘‘natural
result of efficient predatory behavior in a lawless world’’. This makes corrupt
bureaucratic hierarchies much like predatory hierarchies: a bandit stealing a farmer’s
crop is in principle no different from a corrupt bureaucrat extracting bribes from
citizens. The morality is the same, even if the activity of the government bureaucrat
‘‘for sometimes ill-defined reasons—has come to be considered legitimate.’’ Corruption,
therefore, reflects the presence of a principal-agent problem between government and
citizens, only if principles of democracy and individual rights have come to be
accepted, so that indeed, the citizen is the de-jure ‘‘principal’’. The term ‘‘corruption’’
therefore needs to be used against the background of the institutions that prevail, with
‘‘corrupt’’ activities being possibly simply the manifestation of predatory authoritarian
government.
5. Natural resources and corruption
Carlos Leite and Jens Weidmann (Does mother nature corrupt?: Natural resources,
corruption, and economic growth) propose that personal prizes available to be won
through appropriation of a country’s natural resources provide incentives for corruption
and rent seeking, with the most able persons in a society possibly engaging in the rent-
seeking activities. Rent seeking, in the extreme, takes the form of outright war or internal
conflict aimed at securing the income from the natural resources. With inappropriate
institutions, natural resources are therefore not a national asset.
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–1077 1071
6. Is corruption beneficial or harmful?
Corruption that allows disadvantageous government restrictions to be circumvented
is socially beneficial. Vito Tanzi and Hamid Davoodi (Corruption, growth, and public
finance), however, take exception with the ‘‘romantic’’ view that has ‘‘made corruption
an almost virtuous activity and possibly good for growth in a word stifled by bad
government’’. They point to data showing that high-corruption countries have had
lower growth. There is a question of causality, not correlation. Reasons proposed for a
link from corruption to low growth are that (1) corruption discriminates against small
enterprises; (2) corruption discourages private investment; and (3) corruption directs
talent or personal abilities to unproductive activities (seeking and extracting rents).
Growth often stems from new smaller enterprises rather than large existing (often
state) enterprises; if corruption deters development of smaller enterprises, growth is
therefore also inhibited. The evidence confirms that corruption more adversely affects
start-up and smaller enterprises. Where corruption is pervasive, the good political
connections enjoyed by large enterprises override the good business skills and
entrepreneurial spirit present in start-ups and small businesses. The large enterprises
use corruption to protect themselves from the competition of new entrants, while, at
the same time, petty bureaucrats prey upon small businesses. The data confirm that
owners and managers of small firms spend more time dealing with government
bureaucrats. The conclusion is, therefore, that small firms are advantaged by corruption
while corruption may benefit large firms. Corruption also reduces investment; and
direct foreign investment is shifted into joint ventures so that local partners can
provide protection against corruption. Corruption also increases unproductive public
investment. High corruption is also associated with lower operation and maintenance
expenditures, which explains why development projects fail to continue after aid
resources have been made available and aid-provided project managers have departed.
High corruption is also associated with poor-quality public infrastructure. All of these
effects reduce growth. Corruption is also higher in countries pursuing active industrial
policies that give procurement preferences to domestic enterprises. Regarding alloca-
tion of abilities, studies find that the higher is the corruption index, the more students
are attracted to studying law. This has a negative effect on growth. Corruption also
adversely affects tax revenue collection. The type of taxation matters: evidence
indicates, for example, rampant corruption by collectors of tariff revenue. Corruption
is also prevalent in the collection of individual income taxes because of the mutual
interest of the tax inspector and the taxpayer to underreport income. Higher corruption
is also associated with lower revenue collected from indirect taxes (VAT, sales taxes,
and turnover taxes). The introduction of VAT to replace other taxes, however, reduces
corruption because of the compliance requirements and interconnections between
reporting by buyers and by sellers. In high corruption countries, government tax
revenue available for public finance is low but actual ‘‘taxes’’ paid by taxpayers tend
to be high; corruption denies the tax revenue to the government, while the tax revenue
that does reach the government is spent in unproductive ways or is privately
appropriated before reaching designated public expenditure objectives. Corruption thus
makes public finance quite ineffective.
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–10771072
7. Corruption and the composition of public spending
Paolo Mauro (Corruption and government expenditure, reprinted from the Journal of
Public Economics 1998) provides evidence that corruption changes the composition of
government spending through biases that provide ‘‘more lucrative opportunities’’ for
personal gain through corruption. Corruption is linked to market structure; the scope for
receiving bribes is greater when public procurement takes place in less competitive
markets because of the higher profits available to be shared between the supplier and the
government official. Corruption is also furthered by public spending on ‘‘goods whose
exact value is difficult to monitor’’ and by ambiguity of valuation, both of which facilitate
secrecy in bribe payments. Public spending on high-technology and military equipment is
therefore susceptible to corruption: ‘‘it will be easier to collect substantial bribes on large
infrastructure projects or highly sophisticated defense equipment than on textbooks or
teachers’ salaries’’ (p. 236). For health spending, there are more opportunities for bribes
through public spending on medical equipment than on salaries of doctors and nurses. For
transfer payments, the scope for corruption increases with bureaucratic discretion in
deciding who receives payments; the scope for bribes is limited when payments are based
on age and is greater when payments are based on personal disability or unemployment.
Mauro observes that: ‘‘it seems easier to hand out a disability pension to a healthy person
than to give a teaching job to an unqualified person’’. Mauro’s empirical findings confirm
that corruption is associated with a bias against public spending on education, and suggests
a similar bias due to corruption against public spending on health care.
Sanjeev Gupta, Hamid Davoodi, and Erwin Tiongson (Corruption and the provision of
health and education services) add to the evidence linking the composition of public
spending and corruption. They find that ‘‘a high level of corruption has adverse
consequences for a country’s child and infant mortality rates, percent of low-birthweight
babies in total births, and dropout rates in primary schools. In particular, child mortality
rates in countries with high corruption are about one-third higher than in countries with
low corruption; infant mortality rates and percent of low-birthweight babies are almost
twice as high, and dropout rates are five times as high’’ (p. 271–272). It follows that
‘‘improvements in indicators of health care and educational services do not necessarily
require higher public spending’’ (p. 272). Rather, education and health care would be
improved, without changing public spending, by reducing corruption.
Vito Tanzi and Hamid Davoodi begin chapter 11 (Corruption, public spending, and
growth), with an example from Italy where capital spending had been a large part of GDP
but declined sharply after ‘‘a huge corruption scandal, popularly labeled tangentopoli
(bribe city), brought down the political establishment that had ruled Italy for several
decades’’ (p. 280). After the elimination of corruption, in Milan, ‘‘the cost of city rail
links fell by 52 percent, the cost of one kilometer of subway fell by 57 percent, and the
budget for the new airport terminal was reduced by 59 percent to reflect the lower
construction costs’’ (p. 281). This motivates the hypothesis that corruption is tied to
capital spending by government. The growth models of Harrod, Domar, and Rostow
emphasize capital spending as the path to economic growth and, as the source of a
‘‘strong intellectual bias in the economics profession in favor of capital spending (p. 281),
and emphasize the rule that ‘‘it is all right to borrow as long as the borrowing is for
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–1077 1073
investment projects’’ (p. 282). There are also political gains from following this rule since
‘‘ribbon-cutting ceremonies, when new investment projects related to roads, dams,
irrigation canals, power plants, ports, airports, schools, and hospitals are completed
and inaugurated, are very popular with politicians’’ (p. 282). Capital spending is
additionally highly politically discretionary, whereas current spending is less discretion-
ary because of inflexibility due to public spending on entitlements and other past
budgetary commitments. When subcontracting of government projects to private sector
takes place, there is political discretion in determining who receives the contract, with
opportunities for bribes (or ‘‘commissions’’) for political and bureaucratic decision
makers. The private firm that wins the contract can include the bribe or commission in
the quote for costs, with an understanding that the initial low quote can be adjusted
upward in the future or that the costs can be reduced by use of low-quality materials.
Tanzi and Davoodi observed that ‘‘experience with public-sector projects, especially in
developing countries, is full of stories about roads that need to be repaired a short time
after completion, power plants that worked at much lower capacity, and so on’’ (p.
284)—because ‘‘projects are chosen for their bribe-generating capacity and not for their
productivity. The productivity of the projects becomes almost irrelevant’’ (p. 285).
Corruption, thus, not only reduces the return to new investment but also reduces or
eliminates the returns from past investments because of the bias against current spending
on operations and maintenance. Consequently, ‘‘new projects are undertaken while the
existing structure is left to deteriorate’’ (p. 286). Public spending on operations and
maintenance may be intentionally reduced so that new replacement projects are required,
which will provide new bribe opportunities for political and bureaucratic decision
makers. The following hypotheses therefore emerge to be tested:
(1) Other things being equal, high corruption is associated with high public investment
(the hypothesis is not rejected).
(2) Other things being equal, high corruption is associated with low government revenue
(the hypothesis is not rejected).
(3) Other things being equal, high corruption is associated with low operation and
maintenance expenditures (whether the hypothesis is rejected depends on the proxy for
unavailable direct data on operations and maintenance expenditure).
(4) Other things being equal, high corruption is associated with poor quality of
infrastructure (the hypothesis is not rejected).
Hence, when corruption is present, ‘‘economists should be more restrained in their praise
of high public-sector investment spending’’ (p. 297).
Sanjeev Gupta, Luiz de Mello, and Raju Sharan (Corruption and military spending,
reprinted from the European Journal of Political Economy 2001) provide further evidence
that corruption affects the composition of public spending. They point out that bribes
account for some 15% of military spending in low-income countries. Military spending is
attractive for corrupt government officials not only because of the direct private benefits
through bribes but also because military spending allows rent extraction from the
population. That is, the purpose of military spending is not external defense but domestic
repression. The empirical estimates cover 120 countries for the period 1985–1998; data
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limitations are noted, in particular, because military spending is often part of other items in
the government budget. The empirical results reveal that ‘‘societies that are perceived as
being more corrupt have a higher share of military spending in GNP’’ (p. 314). When
effects of IMF conditionality are investigated, the finding is that ‘‘military procurement
tends to be lower in countries with IMF-supported programs’’ (p. 321). The empirical
estimates also confirm the motives for public spending on military procurement not related
to external threats; military procurement expenditures are found to be related to corruption
and domestic repression. The conclusion is that less corruption and the end of repressive
autocratic regimes will result in a more socially productive composition of public
expenditure.
8. Government decentralization and corruption
Luiz de Mello and Matias Barenstein (Fiscal decentralization and governance) note
that the literature suggests greater accountability when the same level of government
levies taxes and spends the revenue because of the closer link between the population
being served (voters if there is democracy) and political decision makers; although, also,
decentralization may allow corrupt local politicians to ‘‘capture’’ local government and
the very proximity of beneficiaries of public spending to political decision makers may
increase rather than reduce corruption. Where there is democracy, an advantage of
decentralization is that corruption may be reduced through intergovernmental (or
yardstick) competition. There are therefore countervailing influences on the relation
between decentralization and corruption. Past empirical results that are noted suggest
that corruption is greater in federal (decentralized) systems of government. In their own
empirical estimates, the authors test the hypotheses that (1) governance improves with
fiscal decentralization and (2) that the improvement is greater when more revenue is
collected at lower than higher levels of government. The empirical results broadly
support both hypotheses. However, the authors qualify the case for fiscal decentraliza-
tion as reducing corruption with warnings about the need for local government
institutions that protect against capture of local government by self-interested local
politicians and local political elites. Political freedom is required to allow ‘‘citizen
participation through civil society organizations in local development’’ (p. 361). Caution
is also advised against imposing more responsibilities in tax administration and budget
preparation, execution, and supervision than local government has the capacity to
handle.
9. Taxation and corruption
Dhaneshwar Ghura (Tax revenue in sub-Saharan Africa: effects of economic
policies and corruption) studies 39 sub-Saharan countries in the period 1985–1996.
Corruption is measured by an index composed of (1) the extent to which government
officials expect bribes when engaged in tax assessment, (2) the provision of trade
licenses, and (3) the regulation of exchange controls. Beyond the direct costs of
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–1077 1075
bribes, corrupt tax and customs officials impose social costs by ‘‘complicating
procedures for taxpayers who refuse to participate in the bribery scheme, thus forcing
them out of business or into the informal sector’’ (p. 379). Empirical results provide
‘‘strong evidence that an increase in the level of corruption lowers the tax revenue-
GDP ratio’’ (p. 383).
Jean Hendriks, Michael Keen, and Abhinay Muthoo (Corruption, extortion, and
evasion, reprinted from the Journal of Public economics 1999) set out a theoretical model
describing an encounter between a taxpayer and a tax inspector. The tax inspector can
attempt to obtain a bribe through extortion by threatening to report more income than the
taxpayer has truly earned (in the model, the tax inspector costlessly observes the true
income of the taxpayer). The government might also pay the tax inspector a commission
based on tax revenue collected. In such situations, taxpayers can be either victims of
extortion or accomplices in tax evasion. The gains from tax evasion through corruption are
regressive because high-income persons have more to gain than low-income persons. The
authors conclude that honest tax payment requires that tax inspectors receive a commis-
sion on taxes paid by high-income persons but not low-income persons. The need to
finance such a commission increases the average tax rate. The conclusion is that a
benevolent government that seeks to maximize tax revenue through honesty in tax
collection can do no better than pay tax inspectors a fixed wage and set penalties
proportional to the extent of misreporting with a proportional tax schedule. In looking for
policies that make collusion between the taxpayer and the tax inspector unattractive,
governments face a difficult task because both the taxpayer and tax inspector can, through
collusive corruption, gain at the expense of the government. Much depends on the
likelihood of detection and the penalty if detected and the intrinsic honesty in the system
(or social norms regarding corruption and tax evasion). Commission payments provide the
tax inspector with an incentive not to cooperate in underreporting the taxpayer’s level of
income. However, even without this incentive, the model shows that commission pay-
ments are required for honest progressive taxation. The commission payments however
promote extortion, by giving the tax inspector a credible reason for overstating the
taxpayer’s income.
10. Corruption and the distribution of income
Corruption affects both efficiency and income distribution. Era Dabla-Norris and
Paul Wade (Production, rent seeking, and wealth distribution) propose a theoretical
model to explain why the rich tend to focus on obtaining income from corrupt
activities. In the choice between corrupt and productive activities (the authors describe
corruption as rent seeking), individuals face a fixed cost of entry into seeking gains
from corruption through government employment but not into productive activity. An
additional incentive for the rich to enter the corrupt government bureaucracy is that
they can thereby protect their own wealth from the corrupt appropriative activities of
other government officials. The model therefore contains both supply and demand side
reasons for why corrupt government is the domain of the wealthy. The poor are
productive and are the prey. The model is motivated by evidence that the wealthy in
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–10771076
poor countries tend to perpetuate themselves and their families in government
employment and in control of government. Government officials also often have
family businesses that are related to the officials’ fields of authority. There is no law
enforcement in the model because the thieves themselves would be required to enforce
the law.
Sanjeev Gupta, Hamid Davoodi, and Rosa Alonso-Terme (Does corruption affect
income distribution?, reprinted from Economics of Governance 2002) show empirically
that corruption changes income distribution to the disadvantage of the poor in poor
countries. Higher corruption is associated with greater income inequality and with
increased poverty; also, growth of income of the poor is higher in countries that are
poorly endowed with natural resources. The study complements other empirical studies
that have shown how corruption adversely affects public expenditure and taxation by
showing how corruption affects income distribution; that is, beyond the various ineffi-
ciencies due to corruption, inequality is increased by corruption. The tendencies for
capital-intensive budgetary expenditures arise because corruption decreases labor demand.
The rich, at the same time, have greater means to pay for the benefits available through
corruption and have the means to pay the costs of entering government and of controlling
government authority, which are the sources of the corruption, and provide the benefits
from corruption.
11. Corruption in transition economies
George Abed and Hamid Davoodi (Corruption, structural reforms, and economic
performance in the transition economies) assembled and used a comprehensive database
to investigate the evolution of corruption in 25 transition economies over the period
1994–1998. They find that the ‘‘corruption perception index is higher in countries that
lived longer under a central planning system, have lower per capita GDP, and have made
slow progress in structural reforms’’ (p. 536). In the final chapter (Improving governance
and fighting corruption in the Baltic and CIS countries: The role of the IMF), Thomas
Wolf and Emine Gurgen observe how corruption was endemic and present in different
forms1 and describe how the policy content of IMF-supported programs in the decade of
transition sought to contribute to improving governance by ending policies and
procedures such as subsidies and tax concessions that were primary sources of
corruption.
1 The reported forms of corruption included: abuse of tax-free status and preferential trading rights for
charitable institutions and sporting groups; refusal to give permits for foreign-owned hotels; bribes for import
contract registration based on the number of pages, with short contracts rejected; individualized surcharges on the
sale (or allocation) of foreign exchange; a state energy company headed by a close relative of a senior official and
responsible for licensing all oil imports; the sale of a large public utility ‘‘at an absurdly low price to an investor
with connections to government officials who negotiated the deal’’ (p. 541); and also ‘‘low-interest bank credits
were given to dubious borrowers’’ (p. 542) with failure to repay resulting in banking crises. Corruption was also
endemic in privatization procedures.
A.L. Hillman / European Journal of Political Economy 20 (2004) 1067–1077 1077
12. An evaluation
Because the edited volume consists of papers by different authors, there is at times an
overlap in literature surveys. In addition, the extended descriptions of how the empirical
results were obtained and the robustness and diagnostic tests that were done, while
necessary, may be of more interest to econometrics practitioners than to economists whose
primary interest is in the results that were obtained.
Where rent seeking appears, there is sometimes limited appreciation of conceptual
contributions of the literature on rent seeking. The focus of the analysis of rent seeking is
the efficiency loss that a society incurs when personal abilities are attracted to unproduc-
tive quests for personal gain through influencing decisions about distribution. Corruption
and bribes do not necessarily imply social loss from rent seeking. Social loss requires rents
to be contestable.2 Statements about social losses from rent seeking therefore require
reference to contestability; in the absence of contestability, politically determined income
transfers may change distribution but there is no associated social loss. Corruption
therefore does not necessarily imply rent seeking.
The IMF has produced a volume of papers that academic researchers will overall find
encompassing and interesting. The papers in the volume offer an excellent point of
departure for an investigation of how corruption compromises the effectiveness of public
finance and contributes to development failure in low-income countries.3
References
Easterly, W., 2001. The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics.
MIT Press, Cambridge, MA.
Hillman, A.L., 2002. The World Bank and the persistence of poverty in poor countries. European Journal of
Political Economy 18, 783–795.
Hillman, A.L., 2003. Public Finance and Public Policy: Responsibilities and Limitations of Government. Cam-
bridge Univ. Press, New York.
2 The extent of social loss depends on different considerations. For a review of the literature on the social loss
from rent seeking, see Hillman (2003).3 The volume might be read in conjunction with Easterly (2001) who describes development failure from the
perspective of his World Bank experiences (for a review of Easterly’s book, see Hillman, 2002).