Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

were made on the basis of patronage, rather than merit. The government chief whip (equivalent to the majority leader in the US Congress) was then actually called the patronage secretary of the Treasury, because distributing patronage was his main job.[7] In the USA, the ‘spoils’ system, where public offices were allocated to the loyalists of the ruling party regardless of their professional qualifications, became entrenched in the early 19th century and was particularly rampant for a few decades after the Civil War. Not a single US federal bureaucrat was appointed through an open, competitive process until the 1883 Pendleton Act.[8] But this was a period when the US was one of the fastest growing economies in the world.

The electoral process was also spectacularly venal. In Britain, bribery, ‘treating’ (typically done by giving free drinks in party-affiliated public houses), promises of jobs and threats to voters were widespread in elections until the Corrupt and Illegal Practices Act of 1883. Even after the Act, electoral corruption persisted well into the 20th century in local elections. In the US, public officials were often used for party political campaigns (including being forced to donate to electoral campaign funds). Electoral fraud and vote-buying were widespread. Elections in the US, where there were a lot of immigrants, involved turning ineligible aliens into instant citizens who could vote, which was done ‘with no more solemnity than, and quite as much celerity as, is displayed in converting swine into pork in a Cincinnati packing house’, according to the New York Tribune in 1868.[9] With expensive election campaigns, it was no big surprise that many elected officials actively sought bribes. In the late 19th century, legislative corruption in the US, especially in state assemblies, got so bad that the future US president Theodore Roosevelt lamented that the New York assemblymen, who engaged in the open selling of votes to lobbying groups, ‘had the same idea about Public Life and Civil Service that a vulture has of a dead sheep’.[10]

How is it possible that corruption has such different economic consequences in different economies? Many corrupt countries do disastrously (e.g., Zaire, Haiti), some others have done decently (e.g., Indonesia), while still others do very well (e.g., the US in the late 19th century and post-Second-World-War East Asian countries). In order to answer the question, we need to open the ‘black box’ called corruption and understand its inner workings.

A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth. If the minister (or some other public official) taking a bribe from a capitalist is investing that money in another project that is at least as productive as that which the capitalist would have otherwise invested in (had he not had to pay the bribe), the venality involved may have no effect on the economy in terms of efficiency or growth. The only difference is that the capitalist is poorer and the minister richer – i.e., it is a question of income distribution.

Of course, it is always possible that the money is not used by the minister as productively as by the capitalist. The minister may blow his ill-gotten gains in conspicuous consumption, while the capitalist might have invested the same money wisely. This is often the case. But it cannot be assumed to be so a priori. Historically, many bureaucrats and politicians have proved to be wily investors, while many capitalists squandered their fortunes. If the minister uses the money more effectively than the capitalist, corruption may even help economic growth.

A critical issue in this regard is whether the dirty money stays in the country. If the bribe is deposited in a Swiss bank, it cannot contribute to creating further income and jobs through investment – which is one way in which such odious money can partially ‘redeem’ itself. And, indeed, this is one of the main reasons for the difference between Zaire and Indonesia. In Indonesia, the money from corruption mostly stayed inside the country, creating jobs and incomes. In Zaire, much of the corrupt money was shipped out of the country. If you must have corrupt leaders, you at least want them to keep their loot at home.

Whether or not the income transfer due to corruption results in a more (or less) productive use of the money paid out as bribes, corruption can create a variety of economic problems by ‘distorting’ government decisions.

For example, if a bribe allows a less efficient producer to get the licence to build, say, a new steel mill, it will lower the economy’s efficiency. But, once again, such an outcome is not a foregone conclusion. It has been argued that the producer who is willing to pay the highest bribe is likely to be the most efficient producer – as the producer who expects to make more money out of the licence would be, by definition, willing to offer the bigger bribe to secure the licence. If that is the case, giving the licence to the producer paying the highest bribe is essentially the same as a government auctioning the licence off and is thus the best way to choose the most efficient producer – except that the potential auction income goes to the unscrupulous official, rather than to the state exchequer, as it would have done in a transparent auction. Of course, this ‘bribing as an unofficial (and efficient) auction’ argument falls apart if the more efficient producers are morally upright and refuse to pay bribes, in which case corruption will allow a less efficient producer to get the licence.

Corruption may also ‘distort’ government decisions by hampering regulation. If a water company supplying sub-standard water can continue the practice by bribing the relevant officials, there will be negative economic consequences – a higher incidence of water-borne diseases that will increase health care costs and, in turn, reduce labour productivity, for example.

But if the regulation was an ‘unnecessary’ one, corruption may increase economic efficiency. For example, before its legal reform in 2000, opening a factory in Vietnam required the submission of dozens of documents (including the applicant’s character references and medical certificates), including 20 or so issued by the government; it is said to have taken between six and twelve months to prepare all the paperwork and get all the necessary approvals.[11] In such a situation, it may be better if the potential investor bribes the relevant government officials and gets the licence quickly. The investor wins by earning more money, it may be argued, the consumer gains by having his demand satisfied more quickly, and the government official gains by getting richer (though there is a breach of confidence and the government loses legitimate revenue). For this reason, it has often been argued that bribery may enhance the economic efficiency of an over-regulated economy by re-introducing market forces, if through illegal means. This is what the American veteran political scientist Samuel Huntington meant in his classic passage: ‘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.’[12] Once again, bribery that lets enterprises subvert regulations may or may not be economically beneficial (if still illegal and at best morally ambiguous), depending on the nature of the regulation.

So the economic consequences of corruption depend on which decisions the corrupt act affects, how the bribes are used by the recipients and what would have been done with the money had there been no corruption. I could have also talked about things like the predictability of corruption (e.g., is there a ‘fixed price’ for a certain kind of ‘service’ by the corrupt official?) or the degree of ‘monopoly’ in the bribery market (e.g., how many people do you have to bribe to get a licence?). But the point is that the combined result of all these factors is difficult to predict. This is why we observe such vast differences across countries in terms of the relationship between corruption and economic performance.

Prosperity and honesty

If the impact of corruption on economic development is ambiguous, how about the latter’s impact on the former? My answer is that economic development makes it easier to reduce corruption, but that there is no automatic relationship. Quite a lot depends on the conscious efforts made to reduce corruption.

As I discussed earlier, history shows that, at earlier stages of economic development, corruption is difficult to control. The fact that today no country that is very poor is very clean suggests that a country has to rise above absolute poverty before it can significantly reduce venality in the system. When people are poor, it is easy to buy their dignity – starving people find it difficult not to sell their votes for a bag of flour, while under-paid civil servants will often fail to resist the temptation to take a bribe. But it is not just a matter of personal dignity. There are also more structural causes.

Economic activities in developing countries are mostly dispersed across a large number of small units (e.g., small peasant farms, corner shops, hawkers’ stalls and backyard workshops). This provides a fertile ground for petty corruption, which may be too numerous to detect for under-resourced developing country governments. These small economic units also have very poor, if at all, accounts, making them ‘invisible’ for tax purposes. This invisibility combines with the lack of administrative resources within revenue services to produce low tax collection capacity. This inability to collect taxes limits the government budget, which, in turn, encourages corruption in a number of