Allen & Qian
Pacific-Symposium-06
Corruption and Competition
Franklin Allen
Jun “QJ” Qian
Wharton School
Carroll School of Management
University of Pennsylvania
Boston College
Symposium on “Rethinking Corruption”
McGeorge School of Law, University of the Pacific
October 27, 2006
Updated version of the paper can be downloaded at:
http://www2.bc.edu/~qianju/research.html
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Allen & Qian
Pacific-Symposium-06
Motivation
• Damaging effects of corruption:
– Distortion of incentives and misallocation of resources;
– At its worst, corruption is theft and robbery committed by high-rank
government officials;
– Ample evidence on the damaging effects at micro-levels;
– It is also a pervasive and persistent problem
• Corruption and economic growth:
– How to measure corruption: Indexes produced by international agencies
based on surveys (e.g., Transparency International);
– Is the elimination of corruption a necessary condition for economic growth
in developing countries?
• Paul Wolfowitz (President of the World Bank) vs. Hilary Benn
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Allen & Qian
Pacific-Symposium-06
Motivation (cont’d)
(Svensson 2005, JEP)
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Allen & Qian
Pacific-Symposium-06
Motivation (cont’d)
Table 1 The Largest 20 Economies in the World as of 2005
Rank
Country
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
U.S.
Japan
Germany
U.K.
France
China
Italy
Spain
Canada
Korea
Brazil
Russia
Mexico
India
Australia
Netherlands
Belgium
Switzerland
Sweden
Turkey
GDP in 2005
GDP
(US$bil.)
12,452
4,672
2,800
2,197
2,113
1,910
1,719
1,124
1,106
800
789
772
758
746
684
623
365
365
354
353
Annual
growth rate
(%; 90-05)
5.2
2.9
4.0
5.4
3.6
11.2
3.0
5.2
4.4
7.7
3.6
n/a
7.4
6.0
5.5
5.1
4.2
2.9
2.6
5.9
Country
/Region
U.S.
China
Japan
India
Germany
U.K.
France
Italy
Russia
Brazil
Canada
Korea
Mexico
Spain
Indonesia
Australia
Taiwan
Turkey
Iran
Thailand
GDP in 2005 using PPP*
GDP
Annual growth
(Int’l $bil.)
rate (%; 90-05)
12,332
9,412
4,009
3,603
2,498
1,826
1,812
1,695
1,585
1,553
1,112
1,099
1,065
1,026
864
639
630
571
560
559
5.2
12.1
3.7
7.9
3.7
4.6
4.0
3.6
1.4
4.6
5.0
7.6
5.1
4.8
6.2
5.5
7.4
5.7
6.8
6.9
Notes: *The PPP conversion factor is from the World Bank Development Indicator (Table 5.6, World Bank. For details
on how to calculate the indicator, see “Handbook of the International Program.” United Nations, New York, 1992).
Source: IMF World Economic Outlook Database 2006.
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Allen & Qian
Pacific-Symposium-06
Motivation (cont’d)
Table 2-A Corruption, Taxing Ability and Economic Growth
The Corruption Perception Index for a country is the average value (0 to 10; lower score means more corrupt) of
Transparency International from 1995 to 2005. GDP data, starting from 1980 to 2005, are all based on PPP (purchasing
power parity) and from IMF World Economic Outlook Database. Tax/GDP variable, starting from 1990 to 2000, is the
percentage of tax revenue over GDP and from United Nations Online Network in Public Administration and Finance.
Statistics
Least Corrupt
Countries
Moderately Corrupt
Countries
Most Corrupt
Countries
Mean
Stdev.
Mean
Stdev.
Mean
Stdev.
Corruption
Perception
Index
7.31
3.95
2.46
Tax/GDP
21%
8%
17%
9%
14%
11%
GDP Growth
Rate per year
(1981-2005)
6.40%
1.53%
6.22%
1.39%
6.14%
2.13%
Per Capita
GDP (1981)
GDP per
capita (2005)
9,708
4,764
3,560
2,618
1,648
1,411
14,602
6,363
8,706
5,650
3,636
2,974
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Allen & Qian
Pacific-Symposium-06
Motivation (cont’d)
• In large and regionally diversified countries:
– Such as China and India, corruption has not slowed down
economic growth (Allen, Qian and Qian 2005; Allen et al. 2006)
• In many African and South American countries:
– Corrupt officials seem to have severely retarded growth
• What about Russia?
– Composition of industries
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Allen & Qian
Pacific-Symposium-06
Research Goals
• Re-examine the reasons for the occurrence of corruption:
– Linking corruption with government’s ability to raise tax revenues;
• Develop a new rationale:
– To explain the different impact of corruption on growth across countries;
• Provide new empirical predictions:
– Impact of corruption on different countries/regions;
– Impact of corruption on different industries and firms;
– Impact of corruption and the degrees of competition among officials;
• Policy implications:
– How to set up the provision of government goods and services;
– How to link the efforts to control corruption with other types of regulations;
– How to measure the performance of local government officials.
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Allen & Qian
Pacific-Symposium-06
Related Work
• Literature on “efficient” corruption:
– Leff (1964) and Huntington (1968);
– Competition among economic agents (e.g., Lui 1985; Bliss and Di Tella 1997; Ades
and Di Tella 1999)
• Shleifer and Vishny (1993)
• Literature on central vs. local government officials:
– Principal-agent relationship first developed by Becker and Stigler (1974);
– How to motivate agents to implement socially optimal goals
• Literature on institutions and economic growth:
– Rajan and Zingales (2003a,b);
– Acemoglu and Johnson (2005)
• Empirical literature on corruption:
– Corruption and economic growth (e.g., Mauro 1995; Svensson 2005);
– Corruption and provision of government goods and services (micro).
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Allen & Qian
Pacific-Symposium-06
Main Results
• In our model corruption occurs when:
– Government cannot raise sufficient tax revenues to finance the (costly)
provision of goods and services;
• Long-run solution is to increase government’s taxing ability;
• In the short-run, bribes can be regarded as user fees
• Impact of corruption on economic growth depends on:
– Degree of competition among officials providing the same good/service
• Perfect (Bertrand) competition: User fees are competitively determined and
damaging effects of corruption are minimized;
• Monopoly: Much higher user fees => provision of goods and services below
socially optimal level;
• Imperfect (Bertrand) competition: Relocation costs of agents affect the
quantity of goods and services provided.
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Allen & Qian
Pacific-Symposium-06
Empirical Predictions
• Corruption and government’s taxing ability
• Corruption and the degree of competition in the provision of
government goods and services:
– Negative impact of corruption depends on regional competition:
• Large and diverse countries (e.g., China and India);
• Small and homogeneous countries (African and South American countries)
– Negative impact of corruption also depends on firm and industry
characteristics:
• Relocation costs are lower for small firms and industries require less
(immovable) fixed assets;
• Empirical literature on the size of “Underground economy”
• China/India vs. Russia
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Allen & Qian
Pacific-Symposium-06
Policy Implications
• Eliminating corruption during early stage of development:
– Unlikely to be effective;
– Long-term solution is to increase government’s taxing ability
• How to limit the negative impact of corruption:
– Set up provision of goods and services in a competitive environment:
• This can be implemented even in small and homogeneous countries;
– Encourage regional competition:
• Inter-regional trade (Imports/exports over GDP; Svensson 2005);
• Lower regulation of entry and costs of relocation (Djankov et al. 2002)
– Evaluating performance of government officials:
• Performance measures based on economic growth and amount of activities
from non-local sources (see Li (1998) for example on China).
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Allen & Qian
Pacific-Symposium-06
Ongoing and Future Work
• Model extensions:
– Costs of providing the good/service:
•
•
•
•
Different across officials;
Fixed and variable costs;
Asymmetric information in cost structure
Literature on defense procurement;
– Different types of government goods and services: Externality
• More empirical evidence on corruption, finance and growth
– Law, institutions, finance and growth in Africa
• Direct empirical tests of the model
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Allen & Qian
Pacific-Symposium-06
Summary
• Despite evidence of the damaging effects of corruption at
the micro-level, there is no significant relation between
corruption and growth at the aggregate level;
• We argue that the degree of competition in the provision of
government goods/services can explain cross-country
differences of corruption’s impact on growth;
• More effective way to control corruption and promote
growth would be to increase competition among officials
rather than punishing corrupt officials.
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