corruption and the public administration* vito tanzi *notes for delivery at the world bank seminar...

Corruption and the Public Administration*

Vito Tanzi

*Notes for delivery at the World Bank Seminar on Corruption June 13, 2012.

Corruption and the Public Administration

Some background: The term “corruption” derives from the Latin word

“rumpere” (to break). It implies that a rule, a principle, or something similar to

a code of conduct is broken. Therefore, corruption is a deviation from accepted and

desirable behavior.It has often been thought to be associated with the public sector. However, there are growing areas of corruptions in the private sector.


Corruption is not a new phenomenon. It is one of the oldest professions. Mentions of it are found in:

i. The Bibleii. In Arthashastra, a political treatise, written two thousands

years ago, by Kautilya, the prime minister of one of India’s states.

iii. In Gibbon’s description of the fall of the Roman Empire.iv. In Dante’s Inferno.v. In the Constitution of the United States.vi. In many literary works and operas (Tosca, Manon

Lescaux).


Attitudes vis à vis corruption vary from country to country, and from time to time.

There were times (and countries) when corruption was (or is) considered an almost natural, inevitable phenomenon.

Now, it is assumed to have negative consequences for economic growth,for equity, and for democracies. It remains prevalent and seems to have even even increased in recent years.


In the decade of the 1990s, attitudes toward corruption became significantly more negative, perhaps because of the impact of the so-called “Washington Consensus” that stressed common rules; or because of the fall of the Soviet Union.

Corruption started to be called a ”menace” to democracy and to the operations of market economies. Suddenly, there was less political tolerance and much more attention paid to corruption than in earlier years.

Role of U.S. government? Of the World Bank, the IMF, and of other international institutions? Codes of conduct based on arm’s length principle became common.


During the 1990s, the governments of several important countries (Italy, Japan, Brazil, others) fell because of corruption.

“Measures” of corruption became available. Some governments and international institutions started to

react to corruption. Various surveys indicated that political parties, parliaments

and some public institutions were the sectors more exposed to corruption.

In Italy “tangentopoli” brought about a change in the political class that had dominated that country for decades.


There was controversy on the legal definition of corruption and on acts considered corrupt.

Differences in cultures lead to differences in attitudes. The conflict between the “arm’s length principle” and traditional norms of behavior became obvious.

Examples:distinction between genuine gifts and bribes; attitudes vis à vis nepotism and clientelism.

Question: are there markets for favors in some countries?These are markets unexplored by economists.

What about the role of lobbies? As they genuine democratic expressions? Or reflections of corruption?


“Bureaucratic” versus “political” corruption: breaking of existing rules, versus fabrication of particular rules advantageous to some?

Does corruption exist only in the public sector?. What about the common space that exists between public and

private sectors? A growing concern. Enterprises with significant state controls? Italian examples?

Impact on the compensation of bureaucrats? Should corruption be related only to the breaking of specific

“rules”? What about the violation of “principles”? Tax evasion versus tax avoidance? With bureaucratic or with political assistance?


Specific examples from (a) the financial crisis and (b) from tax avoidance.

i. Corruption in the financial sector? Insider Trading? By politicians? Unloading of toxic assets? Use of asymmetric information?

ii. In the actions of regulators? (In several sectors and not just in the financial sector).

iii. Bad results due to the incompetence of regulators, or to corruption? Role of revolving doors? See Goldman Sacks.

iv. Role of political leaders? Influence on tax administration decisions? On tax laws? On regulators?


Attempts to “measure” or “quantify” corruption. Not easy and not without controversy. Numbers of corrupt acts, versus significance of them? Impact on economy? On politics? Buying of votes?.

Various “measures”of corruption became available in the past couple decades.

What do they measure? What should they “measure”? Reality or perceptions? Are they the same?

“Transparency International” and the “Corruption Perception Index”, (CPI), available since 1995, with values from 10 to one. The good, the bad, and the ugly countries.


Corruption and economic growth. Corruption and per capita income. Connection between the size of the state and the

incidence of corruption. G. Becker’s thesis.i. Level of public spending and corruption.ii. Level of taxes and corruption.iii. Other policy tools, such as regulations and

corruption.iv. Growing role of complexity in corruption.


Sectors most exposed to “bureaucratic” corruption:i. Authorizations and licenses.Role of “red tape”.ii. Outsourcing of public activities.iii. Regulations: creation and interpretation.iv. Administration of taxes.v. Discretionary decisions related to tax incentives.vi. Decisions on allocation of spending categories:hiring

and contracting; disability pensions; public housing;. other subsidized goods; public investments; settling government overdue payments.


A basic rule: monopoly power plus discretion by public leads to corruption.

However, the elimination of all discretion may be difficult (or impossible) and may lead to inefficiency.Some decisions require discretion.

At some point, efficiency and corruption may imply some trade-offs.Some minor acts of corruption may even promote efficiency.

Removing monopoly power might help, but may be costly.


Authorizations and Licenses:

i. Controls and inspections to small enterprises.

ii. Bureaucratic obstacles to small entrepreneurs.

iii. Differential costs between small and large enterprise. Use of facilitators.

iv. Fiscal federalism and regulations. A hot topic.

v. Zoning laws land use and corruption.

vi. Forced “charitable” contributions.


Public investments and bribes. Effect on quantity of investments;

quality of investments; outcome: more quantity and less quality?.

ii. Bribes and unproductive public investments:white elephants and

cathedrals in the deserts.iii. Impact on economic efficiency and on public

accounts.More spending with less growth.


Contributing factors to corruption:i. Increase in policy objectives.ii. Increase in use of tax incentives and “tax

expenditures”.iii. Increase in number of laws and in their complexity.iv. Impact of globalization and of “fiscal termites” on

taxation.Use and abuse of “transfer prices”.v. Increasing power of lobbies.Relations with politicians.vi. Increasing principal-agents problems within the tax

administration.Greek example?


Tax Systems and Fiscal Policy: Other Aspects:i. Tax amnesties and cultural attitudes vis à vis tax

evasion.ii. Sociological factors? Trust in government.iii. Wage levels, penalties and acts of corruption.iv. Concern about cross-institutional externalities.v. Effective limits to penalties, because of horizontal

equity in their applications.


Quantitative Impact of Corruption on tax systems:i. Reduction in tax revenue?.Or change in structure?ii. Reduction in revenue from income taxes.iii. Reduction in the efficiency of the Value Added Tax.iv. Reduction of the progressivity and the equity of the

tax system.v. Increase of “shadow economy” and of the burden of

taxes on the official economy.vi. Macroeconomic and equity and efficiency impact of

tax evasion.


Some other major issues:i. Corruption and the economic role of the state.ii. Importance of transparency.But what kind?iii. Importance of a clear line of separation between

public and private sector.iv. Importance of limiting complexity.v. Limiting principal -agents problems.vi. Role of anticorruption commissions?Codes of ethic?vii. Examples of political leaders?

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