Corruption and its alternatives: A takeoff theory of good governance

Corruption is a function of its return relative to engaging in productive activities. This paper presents an approach for thinking about the institutional features of societies and the resulting amount of corruption. The empirical results suggest that political competition is more important than competition in information-producing industries. The rent-seeking view of the relation between government and corruption is rejected in favor of the Becker (1983) model of political competition. The paper suggests that societies that continually stay open to productivity-enhancing activities will eventually enter a takeoff stage of anti-corruption efforts analogous to the eventual improvement in income distribution that occurs in successful industrialization. Corruption is a topic that has soared in importance in the development community in recent years. Its role as an impediment to modernization has been empirically documented by Mo (2001) and Mauro (1995). Its capacity to distort public resource-use decisions has been demonstrated by Tanzi and Davoodi (2000), and has been interpreted as rent-seeking by Krueger (1974). Its endogenous generation has been traced in Mohtadi and Roe (2003) and Barreto (2000). Another influential theoretical approach has been that of Murphy, Shleifer and Vishny (1993, hereafter MSV), who in the Hirshleifer (1991) tradition depict the amount of rent-seeking as a function of the relative return to appropriative as opposed to productive activity. The relation between technological progress and corruption is one that merits more study. This relation, suggested by but not explicitly explored in earlier work, has powerful implications for corruption control. It suggests that policies that increase productivity can endogenously control corruption by decreasing the desirability of producing rent-seeking opportunities. This paper derives precise conditions whereby progress in productive technology makes corruption control more worthwhile, and tests whether these conditions hold. The empirical results allow for re-interpretation of the expected effectiveness of corruption control at various stages of development. Sections 1 and 2 explore endogenous corruption where production is available as an alternative, Section 3 tests the model and Section 4 re-interprets corruption control in light of the findings. 1. The returns to parasitism One empirical fact about corruption readily suggests itself – that it is inversely