corruption in developing countries

Olken, Benjamin A. and Rohini Pande.

Annual Review of Economics (2012) 4:479–509.

Sharkhuu MunkhbatEconomics of Development CooperationMay 11, 2013

CORRUPTION IN DEVELOPING COUNTRIES

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I. Introduction

II. Estimating Magnitude of Corruption

III.Efficiency Costs of Corruption

IV. Determinants of Corruption

V. Some Caveats: Short and Long-run Effects

VI. Conclusions

Table of Contents

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Increasing interest of the international policy community in corruption: • the OECD Anti-Bribery Convention,• the UN convention against corruption, • the World Bank Group Engagement on Governance and

Anticorruption and • the Foreign Corrupt Practices Action of US Department of

Three main questions:

I. Introduction

• the OECD Anti-Bribery Convention,• the UN convention against corruption, • the World Bank Group Engagement on Governance and

Anticorruption • the Foreign Corrupt Practices Action of US Department of Justice

and Security and Exchange Commission.

1. How prevalent is corruption?

2. What are the efficiency consequences of corruption?

3. What factors determines the level of corruption?

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1.The estimated levels of corruption are remarkably heterogeneous, so there remains little consensus about the magnitude of corruption.

3.Corrupt behavior can be modeled in line with a few general economic principles: • corrupt officials respond to monitoring and punishments • standard market forces influence the level of bribes.

I. Introduction

2.Corrupt behavior has significant adverse consequences for efficiency and equity outcomes.

There are three important findings:

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1. Perceptions:

The advantage: good coverage • much easier to ask someone’s perceptions of corruption

than to actually measure corruption directly.

The challenge: may not measure corruption accurately• perceptions of corruption fell even though actual

corruption rose

Road project: Villagers’ perceptions do not reflect actual corruption.• increasing the actual missing expenditures by 10%,• increases the probability a villager reports corruption by just 0.8%

II. Estimating the Magnitude of Corruption

Methods to estimate the magnitude of corruption:

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2. Survey: It is the most direct way of measuring corruption.

Mocan (2008) find that income and education of the individual have positive impacts on the likelihood of being asked for a bribe in developing countries.



Svensson (2003) surveyed firms in Uganda and examined how much they paid in bribes.

On average, firms in the survey report bribe payments of about 88 USD per worker, or about 8 percent of their total costs.

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3. Direct Observation: Best way to measure corruption. However, corrupt officials rarely will let corrupt behavior be observed. .

McMillan and Zoido (2004) analyzed detailed records in Peru, with signed contracts and videotapes of accepting the bribes.

After videotapes became public, on average, politicians received bribes ranging from 3,000 - 50,000 USD per month, depending on whether the politician was in the opposition party or not.



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4. Graft Estimation by Subtraction: Two measures for the same quantity, one measure before corruption takes place and one measure after corruption takes place.

The estimate of corruption is the difference between the two measures.

Olken (2007) implemented a related methods in road project in Indonesia.

He estimated that “missing expenditures”—the difference between what the village claimed the road cost and what the engineers estimated it actually cost—averaged about 24 percent of the total cost of the road.



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5. Market Inference: The theory of market equilibrium can be used in combination with data on market activity.

The study Fisman (2001) estimated firm’s stock price movement when Indonesian president Soeharto fell ill given the strength of its political connections.

On net, for the most connected firms he estimates that about 23 percent of their value was due to Soeharto’s connections.



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1. A strong negative relationship between income and corruption: richer countries may appear less corrupt.

3. Virtually all of these “hard” estimates of corruption may suffer from selection bias.


2. Among countries at similar income levels, and even within countries, there is marked heterogeneity in corruption levels.

How much corruption is there: main findings from estimates

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1. Impact on firms:

III. Efficiency Costs of Corruption

1. If bribes are charged for other types of government activities, this could increase the effective marginal tax rate faced by firms.

2. For a given effective marginal tax rate, corruption are more distortionary than tax rate and can decrease business activity of firms.

The regression of firm growth on the bribe and tax rate: • A one percentage point increase in bribes reduces annual firm growth

by three percentage points, while a one percentage point increase in taxes reduces annual firm growth by one percentage point.

• Negative impacts of bribes on firm activity are three times higher than the corresponding impacts of taxation.

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Distortions: Corruption could create additional efficiency costs through distortions. Corrupt officials need to go through a variety of more convoluted procedures to extract rents.

Price effects: If corruption increases the cost of government goods and services, this could have an effect similar to raising the price of these goods and services.

Corruption can have efficiency consequences through impacts on government provisions of goods and services.


2. Impact on Government:

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The need to keep corrupt activity secret could also introduce distortions, as procurement officials may substitute the types of goods that make hiding corruption easier.

Since corruption is secret, the government may not anticipate the amounts lost to corruption.Example: Building thinner roads than official engineering guidelines


2. Impact on Government:

Two types of distortions

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3. Impact on Correcting Externalities:


If corruption decreases the government’s ability to correct an externality, it may lead to inefficiency.

Someone can bribe a police officer instead of paying an official fine.

Overweight trucks are a classic example of an externality. Olken and Barron (2009) found that almost all trucks were substantially over the weight limits and paid a bribe, instead to buy an official ticket. ($0.5-$1 per payment)

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4. Impact on Individuals:


Corruption can affect individuals directly.

Hunt (2007) shows that corruption can be an additional cost on the victims of misfortune—particularly crime victims.

The study also shows that in many situations crime victims bribe more than other users who are not victims.

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I. The Incentives Bureaucrats Face


The bureaucrat will be corrupt if p(w-v)<(1-p)(b-d)w: wage from government

v: outside option

p: probability of detection

Several options for reducing corruption:• Increasing the wage for staying on job• Decreasing the outside option by increasing punishments• Increasing the probability of detection through monitoring

b: bribed: dishonesty cost

Nobody will be corrupt if p(w-v)>(1-p)(b-d)

If detected: fired, vIf undetected: w+b-d

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A. Factors affect the Bureaucrat’s Decision


1. Compensation: There is little evidence on impact of compensation. • higher public wages are associated with lower corruption. • a doubling of government relative to manufacturing wages is

associated with only 0.5 point reduction in corruption index.

2. Monitoring and Punishments: Increasing monitoring would reduce corruption. Olken (2007), in the study of roads in Indonesia, found substantial effects of the government audits, reducing corruption by 8 percentage points.

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A. Factors affect the Bureaucrat’s Decision


3. Selection: The selection of who chooses to become a bureaucrat is potentially important.• Ferraz and Finan (2010, b) find that higher salaries attract better

political candidates, though the effects show relatively modest. • a 20 percent increase in wages only leads to a 0.2 increase in the

average years of schooling and a 0.05 increase in the number of terms of experience

4. Incentives in the health and education sector are conditioned on either worker absenteeism or directly on health or education outcomes. For example, performance-based pay can reduce absenteeism and in the case of school teachers improve test scores of students.

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B. The Market for Bribes:

Strategic interactions between corrupt officials


If each agent does not fully internalize the effect of their bribes on other agents’ bribe revenues, the total amount of bribes would be higher.Olken and Barron (2009) show that the average price paid by truck drivers at checkpoints increases when the number of checkpoints declines.

If bureaucrats are competing against one another, strategic interactions could lead to lower bribes and more output.Olken and Barron (2009), traveling the road should have been free, so lower bribes would lead to greater road travel and greater social efficiency.

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II. Transparency: Three channels


1. Enabling information about government actions, citizens can better monitor government officials and political accountability can be increased.

Djankov et al (2010) examined the relationship between disclosure rules for information about parliament members and a numbers of measures of quality of government and corruption.

They found that public disclosure of information is associated with lower perceived corruption and better government.

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Reinikka and Svensson (2005) study how an information campaign to monitor local officials can reduce corruption and increase educational outputs.

They find that an increase in information resulted in an increase in spending reaching the schools and ultimately an increase in school enrollment and student learning.

2. Providing citizens with information on what they are entitled to.

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3. Allowing citizens to signal interest in a particular outcome.

Peisakhin and Pinto (2010) examined whether freedom-of-information laws can improve access to basic public goods that are otherwise attainable only through bribery.

The results suggest that requesting information under the freedom of information law is a reasonable, though imperfect, substitute for bribing an official.

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III. Technology and Communication


1. Technology can also have a substantial impact on corruption by facilitating communication, which can enable better monitoring.

Yang (2008) shows that pre-shipment imports inspection programs increased import duty collection by 15 to 30 percentage points in the first five years after implementation.

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2. Technology has played an important role in the design and administration of the tax system.

One key idea of tax enforcement is double-reporting, where the tax department compares two independent reports about tax performance

Kleven et al (2010) find that that the tax evasion rate is very small for income subject to double-reporting and much higher for self-reported income.

In a manual system actually doing the matching from all the double-reported information would be very challenging, but once the system is automated it is much easier.

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3. Technology holds promise is in procurement. Most of governments, including developing countries, have been using online procurement systems.

In context of road projects in India, Lewis-Faupel et al (2011) find that electronic procurement leads to higher quality of roads and less corruption.

Online procurement systems can potentially reduce corruption by increasing access to information and by making the procurement system more transparent.

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The long and short run effects:

V. Some Caveats

• The long-run effects of an anti-corruption policy could be smaller than the short-run effects.

• It could take time corrupt officials to learn how to manipulate a new system.

• The long run effects could be greater than the short-run effects.

• An anti-corruption policy could be more effective over time if it encourages more low-corrupt officials to select into the civil service.

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VII. Conclusions VII. Conclusions

• From the international perspective, there have been major efforts at reducing corruption and promoting transparency.

• Micro-empirical analysis on corruption has dramatically increased. • Corrupt officials respond to incentives and the threat of punishment,

even in corrupt environments. • Strategic interactions between corrupt officials affect the level of

corruption. • Information disclosures may incentivize politicians to perform better

and improve the incentives for high talent individuals to enter politics.• In some situations the long-term impacts of anti-corruption policies

exceed the short-run effects. • Researchers have identified several innovative ways of measuring

corruption and economic theory offers significant guidance on how to design anti-corruption policies.

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THANK YOU

corruption in developing countries

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