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Monday, October 19, 2009

WHEN WE MINIMIZE THE EFFECTS OF CORRUPTION CRISIS WILL BE HANDLED ( I )

The Economics of Corruption and the Corruption of Economics:
An Institutionalist Perspective

Corruption is now a popular topic in the social sciences. This expansion of interest is
evident in economics and elsewhere, where a large number of articles on this theme
have been published in leading journals. Some organizations publish indicative data
on corruption. For example, Transparency International publishes a widely cited
“Corruption Perceptions Index” for most countries, and these data are frequently
used in statistical analyses of economic performance.
Transparency International data for 2005 suggest that corruption is
“rampant” in more than 70 countries.1 These include populous and fast-growing
economies such as China and India, which account for a large and rapidly increasing
share of the global economy. Recent empirical studies indicate that corruption has a
negative effect on economic performance (Shleifer and Vishny 1993; Mauro 1995;
Aidt 2003; Jain 2001; Pelligrini and Gerlagh 2004). The World Bank (1997) has
identified corruption as “the single greatest obstacle to economic and social
development.”2
However, much less attention so far, has been devoted to the concept of
corruption, its meaning and its definition. This means much more than the lack of
tidy terminology. As Arvind Jain (2001, 73) observes: “While it may appear to be a
semantic issue, how corruption is defined actually ends up determining what gets
modelled and measured.” Similarly, Toke Aidt (2003, F623) remarks that “the
definition of the concept determines what gets modelled and what empiricists look
for in the data.” It is argued here that this conceptual lacuna in the literature has led
some authors – particularly economists – to adopt a narrow and inadequate definition
of corruption that has led to skewed empirical measures and biased policy
recommendations.3
It is shown below that prevailing definitions of corruption unwarrantedly
and misleadingly confine the phenomenon to the public sector, despite the fact that 1044
Geoffrey M. Hodgson and Shuxia Jiang
private sector corruption is often acknowledged. In addition, the rare but real
phenomenon of “noble cause corruption” suggests that corruption is not strictly and
universally for private gain, despite selfish motives often being involved. Another
distorting factor that pervades the literature on corruption is the utilitarian reduction
of morality to matters of utility or satisfaction. Consequently, the moral dimension of
corruption has been dissolved into the hedonic calculus of individual gain or loss.
Ideological and theoretical biases, prevalent in mainstream economics and elsewhere,
have corrupted the concept of corruption.
With the exception of the rhetorical allusion to the “corruption of
economics,” this article is concerned with organizational corruption, rather than
corruption in a broader sense, such as the corruption of language or a single
individual. The following section criticizes the idea that organizational corruption is
confined to the public sector only. A much shorter subsequent section briefly
establishes that corruption need not always be for private gain. Another section
criticizes utilitarian treatments of corruption and establishes its immoral character,
leading to a specific definition of organizational corruption involving the violation of
established, normative rules. From this perspective it is argued in the penultimate
section that organizational corruption incurs social costs that cannot fully be
internalized.
Is Corruption Confined to the Public Sector?
The root of the word “corruption” is in the Latin adjective corruptus, meaning spoiled,
broken or destroyed. According to the Concise Oxford English Dictionary, a meaning of
to corrupt in the social context is to bribe, and corruption amounts to “moral
deterioration.” Neither of these definitions nor the Latin etymology of the word,
confines the notion of corruption to the public sector. Accordingly, corruption can
occur in the private sphere as well.
Prominent international organizations adopt a similarly inclusive definition
of corruption. The United Nations Office on Drugs and Crime emphasizes that
corruption “can occur in both the public and private domains.” Its Global
Programme Against Corruption (GPAC) defines corruption as the “abuse of power
for private gain” and includes thereby both the public and private sector.4 Similarly,
the World Bank does not regard corruption as confined to the public sector and has
identified several cases of corruption among private corporations. For Transparency
International, corruption is operationally defined as “the misuse of entrusted power
for private gain.”5 This too covers individuals in both the private and public sectors.
Among economists, however, a different consensus prevails.6 In his overview
article, Jain (2001, 73, emphasis added) declares “there is a consensus that corruption
refers to acts in which the power of public office is used for personal gain in a manner
that contravenes the rules of the game.” In another major survey article in a journal of
economics, Aidt (2003, F623, emphasis added) writes: “Corruption is an act in which
the power of public office is used for personal gain in a manner that contravenes the
rules of the game.”7
The Economics of Corruption and the Corruption of Economics
1045
The survey articles by Jain (2001) and Aidt (2003) accurately report and
endorse the tendency of most economists to confine their definition of corruption to
the public sphere. For example, in a widely cited article simply titled “Corruption,”
Andrei Shleifer and Robert Vishny (1993, 599) confine their attention to government
corruption only, defining it as “the sale by government officials of government
property for personal gain.” The influential study of the negative effects of corruption
on economic growth by Paolo Mauro (1995) has the unqualified word “corruption” in
its title but in the text mentions government corruption only. Likewise, Daron
Acemoglu and Thierry Verdier (2000) also have the unqualified word “corruption” in
their title but in their analysis they confine themselves entirely to the corruption of
government officials. Like many others, Daniel Treisman (2000, 399) defines
corruption as “the misuse of public office for private gain.” A. Mitchell Polinsky and
Steven Shavell (2001) confine their study to corruption in law enforcement. By
definition or default, many economists confine their attention to corruption in the
public sector. There are exceptions, and there is some discussion of private sector
corruption in the literature, but a pronounced and questionable bias remains.
A search for the phrase “corporate corruption” in the text of all the journals
of economics in the large JSTOR (The Scholarly Journal Archive) electronic database of
leading journals found only three articles in which the phrase was used, and none
later than 1977. By contrast, a search in the same journals in the same database found
25 articles using the phrase “government corruption” and 9 using “public
corruption.” The search was then widened to all items on the ISI Web of Knowledge
(http://isiwebofknowledge.com/), in all available disciplines. In the accessible text of
35.9 million items, 13 mentioned “corporate corruption,” 22 mentioned
“government corruption” and 8 mentioned “public corruption.” This shows that the
frequency of the phrase “corporate corruption,” relative to the phrases concerning
corruption in the public sector, is much less when the search is narrowed to leading
journals in economics. Mainstream economists are much more likely to consider
public sector rather than corporate corruption.
However, this dubious bias is not confined to journals in economics. An
early and influential article by the political scientist Joseph Nye (1967, 419) defined
corruption as the deviation from the formal duties of a public role for private gain.
Subsequently, in one of the few articles devoted entirely to the definition of
corruption in the literature, John Gardiner (1993, 112) proclaims approvingly
without much reflection: “All probably would agree with Nye’s emphasis on public
roles.” Similarly, Daniel Kaufmann (1997, 114) is also among the many social
scientists who define corruption as “the misuse of public office for private gain.” He is
followed by Wayne Sandholtz and William Koetzle (2000, 31) and numerous others.
Mark Warren (2004, 328-9) asks the question “what does corruption mean in a
democracy?” and then immediately confines himself to political corruption and “the
misuse of public office for private gain.” The analysis in Susan Rose-Ackerman’s
(1999, 9) important and influential book is deliberately confined to government
corruption, which is defined as payments “illegally made to public agents with the
goal of obtaining a benefit or avoiding a cost.”
1046
Geoffrey M. Hodgson and Shuxia Jiang
Two logical bases of this questionable bias are possible. One is to define
corruption in terms that confine it explicitly to the public sector. Another is to admit
a broader definition, but for some reason to bias research toward corruption in the
public sphere. Examples of both stances can be found in the literature. We also need
to explain what motivates either form of this bias.
There is, of course, a huge and rapidly growing literature on business ethics,
and moral issues are salient in the corporate governance literature and elsewhere.
Often, other ethically loaded words are used instead of the term “corruption” in these
literatures. Partly this is because of a concern with the ethical behavior of a
corporation as such, rather than corruption within organizations. Nevertheless, terms
such as “corporate corruption” and “business corruption” are in widespread use in
popular and even legislative discourse.
In sum, much of the literature on corruption in the social sciences has
restricted itself to the public sector.8 This is objectionable, for several reasons. First, it
ignores the reality of corruption in the private sphere. One need only mention the
word Enron. There are well known instances of corruption in trade unions, including
the U.S. Teamsters Union (Friedman and Schwarz 1989). Corruption has also been
found in sports, including the bribing of players or challengers to “throw” contests. In
1997, the Organization for Economic Cooperation and Development (OECD)
member states adopted a convention making business bribery abroad a criminal
offense in the home country of the bribing firm. The opening years of the twenty-first
century were marked by major cases of corporate fraud, involving U.S.-based
companies such as Enron, WorldCom, Adelphia and Parmalat. Alarm about
corporate fraud and corrupt accounting practices fuelled political pressure in the U.S.
Congress. In response, President George W. Bush signed a “Corporate Corruption
Bill” in July 2002, thus endorsing the notion that corruption is more than a purely
governmental phenomenon.
Second, there are several ways of defining the boundary between the public
and private sectors, leading to classificatory problems if corruption is definitionally
restricted to the public sphere. Consider a private corporation of which the state owns
51 percent of its share capital. Is it part of the public or the private sector? Does
corruption within it magically cease if this state ownership drops from 51 to 49
percent? Some organizations – including nearly all British universities and the newly
devised “foundation hospitals” in England – are formally private, but largely
dependent on state funding and consequently come to some degree under state
control. Are these in the public or the private sector? In response, one can refine the
definition of the public or private sector, but that is beyond the point. We should be
interested in the reality of corruption, whether or not these institutions are formally
defined as public or private.
Third, institutions that in some nations are private can be public elsewhere.
In some countries, postal services, railways and universities are entirely run by the
state. University professors and other functionaries in these sectors are essentially civil
servants or state officials. Yet elsewhere, one can find instances where these services
are privatized. An act of bribery involving an official within the French university,
postal or railway systems would be corruption by most definitions. But would it cease The Economics of Corruption and the Corruption of Economics
1047
to be so if it occurred in the private equivalents of these institutions elsewhere, in say
the United States? An affirmative answer would be absurd. Furthermore, France
might have more corruption than another country with similar levels of dishonesty,
simply because the public sector is larger. Once again, restricting the definition of
corruption to the public sector leads to severe anomalies.
Fourth, corruption is typically contagious and does not respect sectoral
boundaries.9 Corruption involves duplicity and reduces levels of morality and trust.
Once it takes root, it tempts others with its pecuniary gains and reduces incentives to
conform to the rules. As levels of morality and trust are lowered, it becomes more
difficult to resist corrupt practices. Virulent corruption can spread quite easily from
the private to the public sector, or vice versa. Corruption involves negative
externalities that traverse sectoral boundaries, by undermining legal and moral norms
and facilitating further corrupt acts. Consequently, empirical studies of the levels of
corruption should be comprehensive and unconfined to the public sphere.
Given the absurdity of restricting the study and definition of corruption to
the public sector, one may ask why so many social scientists define it in these limited
terms? Political scientists may plead that their very role is to study political
institutions, but this does not warrant the confinement of the definition to this
terrain.
Economists do not even have this excuse. One possible reason for their
biased concern with public sector corruption is the widespread influence of
individualistic and libertarian ideology. A primary target in this ideology is the abuse
of power by politicians. The misuse of power by directors of large corporations does
not raise the same level of concern among leading individualistic and libertarian
thinkers such as Milton Friedman and Friedrich Hayek. According to this stream of
thought, most voluntary contracts between consenting adults are moral and
legitimate, as long as they do not harm others. Ignoring the negative externalities of
corruption, it has been further argued from a libertarian perspective that bribery and
other forms of corruption in the private sphere have potential benefits, and are
expressions of entrepreneurial activity. By contrast, corruption in the public sector
involves the misuse of powers within questionable state institutions. In sum, the bias
toward public sector corruption in the literature partly reflects an ideological notion
that the private sector is the zone of largely unconstrained individual liberty, whereas
the state represents its antithesis and must be subject to rigorous scrutiny,
confinement and restraint.
From this individualistic and libertarian perspective the temptation is to see
the solution to the problem of corruption as the reduction of the size of the state,
particularly if corruption is defined as essentially a state phenomenon. As an extreme
case, Nobel Laureate Gary Becker is quoted in Business Week as declaring: “if we
abolish the state, we abolish corruption” (Tanzi 2000, 112). Of course, this would be
true if corruption was definitionally confined to state institutions, but it is not
particularly helpful or feasible. The alternative statement “if we diminish the state, we
diminish corruption” would sustain the view that extensions of privatization and
market competition are generally effective cures for a corrupt polity. Is such a
proposition tenable?

(TO BE CONTINUED)

BY Geoffrey M. Hodgson and Shuxia Jiang
The authors are from the Business School, University of Hertfordshire, UK and the College of Economics, Xiamen
University, China. They are very grateful to Jitendralal Borkakoti, Michael Dietrich, Jane Hardy, David Reisman and
others for helpful comments on earlier versions of this paper.

FIRST POSTED AT JOURNAL OF ECONOMIC ISSUES
Vol. XLI No. 4 December 2007

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