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On the Record

Corruption in Developing Countries

Shang-Jin Wei

A Summary of Remarks

Shang-Jin Wei, Advisor at the IMF and Senior Fellow at the Brookings Institution, began his presentation by noting that eliminating corruption in developing countries is becoming increasingly important due to the rise of globalization. He then focussed on two questions of particular interest to both academics and policy makers. First, how can we quantify how corrupt particular countries are? And second, can corruption be good for economic development? Dr. Wei described several indices of corruption that are useful in cross-country comparisons while arguing that the answer to the second question is “no.” It is possible, he said, to find examples of places that have done well in spite of corruption, but hard to think of anywhere that has done well because of it!

Much more attention is now being paid to the problem of corruption than was the case in the past. In fact, until recently, only the US had a law (the Foreign Corrupt Practices Act of 1977) prohibiting companies from bribing foreign officials. So, for example, a German multinational could legally pay bribes and even get a tax deduction for these amounts (as long as it got a receipt)! This state of affairs only ended in 1999, when the OECD countries (as well as some non-OECD countries that participated voluntarily) signed a treaty banning bribery.

There are two main reasons for the new focus on corruption. With the end of the cold war, it has become less necessary to tolerate “governance challenged” regimes like those of Marcos and Mobutu. At the same time, increased economic interdependence means that a given level of corruption has become much more costly. It has been estimated that moving from a relatively “clean” government like that of Singapore to one as corrupt as Mexico’s would have the same effect on foreign direct investment as an increase in the marginal corporate tax rate of 50%. This means that corrupt countries are also more vulnerable to financial crises because they are forced to rely on short-term offshore loans, which flow out much faster then FDI following a shock. Not surprisingly, portfolio investment is also adversely affected by corruption–a study (by two IMF staff members) of six hundred global and emerging market mutual funds found that fund managers tend to overweight less corrupt countries (relative to the Morgan Stanley Capital International indices).

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