Gauging corruption's impact on business development

Corruption in the public sphere is an obscure concept. Because it is hard to define, let alone monitor, creative methods are required to assess its economic impact and role in the poverty cycle.

by Columbia ideas@work, January 25 2006
Last Updated: 23 Jul 2013

As a roundabout way of measuring bribes and kickbacks, researchers tried to assess the value of political connections in Suharto's Indonesia in the 1990s. The idea was to look at correlations between changes in the market value of well-connected firms and changes in political power.

When Suharto's health wavered, firms with close ties to the president would see their stock prices fall. Tellingly, the study found that political connections accounted for a quarter of the value of well-connected Indonesian firms under Suharto.

Using similarly imaginative ways, a study of tax evasion in China found that the amount of smuggling from Hong-Kong to mainland China depended on the tax rate of individual stock. Items were relabelled as cheaper goods to avoid high tax levels. For example, chickens in Hong Kong turned into turkeys in China.

Similar techniques could be applied to measure bribery. A common assumption is that raising the salaries of civil servants would eradicate the problem. But in societies where bribery is not socially condemned, wage increases are unlikely to stop employees from accepting bribes. One way of assessing the relevance of this solution would be to double policemen's wages in one area but not another, drive around both places and see how many times one gets stopped and asked for a bribe.

This kind of research will be useful to measure whether corruption is detrimental to development, and if so by how much. The Asian Tigers are a good example of great economic growth unimpaired by corruption. 

Knowing how much it costs to get things done might be less damaging to the economy than when corruption brings uncertainty.

Source: Gauging corruption's impact 
Professor Ray Fisman, associate professor of finance and economics at Columbia Business School
Columbiaideas@work January 25, 2006 (US)

Review by Emilie Filou

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