Effects on Efficiency - 1

Effects on Efficiency

There is a strand in the corruption literature,
contributed both by economists
and noneconomists, suggesting that, in
the context of pervasive and cumbersome
regulations in developing countries,
corruption may actually improve
efficiency and help growth. Economists
have shown that, in the second-best
world when there are pre-existing policy
induced distortions, additional distortions
in the form of black-marketeering,
smuggling, etc., may actually
improve welfare even when some resources
have to be spent in such activities.
The argument for efficiency-improving
corruption is a simple extension
of this idea. As Nathaniel H. Leff
(1964, p. 11) puts it simply: “if the government
has erred in its decision, the
course made possible by corruption may
well be the better one.” As noneconomists
usually point out, corruption is
the much-needed grease for the squeaking
wheels of a rigid administration.
Samuel P. Huntington (1968, p. 386)
states it bluntly: “In terms of economic
growth, the only thing worse than a
society with a rigid, over-centralized,
dishonest bureaucracy is one with a
rigid, over-centralized, honest bureaucracy.”
Even without pre-existing distortions,
one may look upon corruption as part of
a Coasean bargaining process in which a
bureaucrat (who is in the illicit business
of selling property rights to a public resource
in the form of issuing permits
and licences) and the private agent (the
prospective buyer) may negotiate their
way to an efficient outcome. If in a
bribery game there is competitive bidding
by private firms for a government
procurement contract, and the corrupt
official awards the contract to the highest
bidder in bribes, then allocation efficiency
is maintained, as only the lowest-
cost firm can afford the largest
bribe. (This, of course, assumes that
other goals of the program are not violated:
this bidding procedure is clearly
not acceptable in the case of University
admissions, for example.) That the producer
surplus lines the pocket of the
bureaucrat and does not go to the public
treasury (as would have happened in
an open auction for the contract) does
not seemingly affect the allocation efficiency.