Corruption and economic growth

Can corruption risk a country’s economic growth?

That question is at the core of discussions among some economists and political scientists amid the current national trauma over a trillion pesos disappearing at the hands of senators, congressmen, DPWH district engineers and private contractors.

Corruption, some economists say, is not a deterrent to economic growth. They cited South Korea, China and Vietnam as proof.

Yuen Yuen Ang, a professor of political economy at the Johns Hopkins University, in a recently published book by the Cambridge University Press, wrote that “while corruption is never good, not all forms of corruption are equally bad for the economy, nor do they cause the same kind of harm.”

“The rise of capitalism,” she pointed out, “is accompanied not by the eradication of corruption, but rather by the evolution of the quality of corruption from thuggery and theft to influence peddling.”

I take it that she is saying a corrupt developing country can still grow significantly and even reach developed-economy status, but corruption makes that path harder and riskier, and the costs are substantial.

Prof. Ang distinguishes four types of corruption: petty theft, grand theft, speed money and access money.

Petty theft is when bureaucrats steal, extort, or misuse small amounts of public funds. The bureaucrat is simply pocketing money or valuables for personal enrichment, without providing any service in return. Like grand theft, it is directly growth-damaging by draining public and private wealth.

Grand theft is the embezzlement or misappropriation of large sums of public money by political elites who have control over state finances. It is perpetrated by high-ranking officials and political leaders, as opposed to street-level bureaucrats.

Grand theft also involves the manipulation of government policies or contracts. This form of corruption is directly growth-damaging because it drains the public treasury for no productive return.

Grand theft is a clearly illegal and outright abusive form of corruption. This describes what Marcos Sr. and his cronies did and now the trillion-peso flood projects scandal.

“Speed money” is the small, petty bribes paid to low-level bureaucrats to get around red tape and expedite a process. The intent is not to obtain exclusive privileges, but to speed up an otherwise slow or inefficient process.

“Access money,” involves high-stakes bribes to powerful officials for exclusive privileges and can have growth-enhancing, though risky, effects.

This “access money” corruption, Ang argues, has acted like “steroids for growth.” It funnels huge investments into major state-led or public-private projects (infrastructure, real estate, etc.), helping drive rapid expansion.

Yet this does not mean that “access money” is “good” for the economy – on the contrary, it distorts the allocation of resources, breeds systemic risks and exacerbates inequality, the professor warns.

Corruption is conventionally defined as the abuse of public office for private gain. But Prof. Ang pointed out that in China, local bureaucrats know that it doesn’t pay to kill the goose that lays the golden eggs.

Ang explains that in China, local governments compete for investments and it makes no sense to try to extort from a potential investor.

I saw this first hand as top provincial officials from different regions rolled out the red carpet for Carlos Chan who was looking for sites for Oishi factories all over China. They were on their best behavior.

It is so unlike here where LGUs and even barangay captains will extort as much as they can from an entrepreneur (kasi mayaman naman sila) to the point of extinguishing any enthusiasm of a potential investor.

Some of my economist friends say that perhaps, it is not so much that corruption deters serious economic growth but that we lack the right industrial policies and economic goals and the structures to carry these out. And we lack focus.

One economist in my Viber Group explains:

“Park in Korea understood immediately that the shortest way out of poverty and low income in the 1960s (they were below the Philippines) was industrialization and exports. Very clear, targeted and focused.

“Korea in the 1960s-70s did not have a much better government than the Philippines, and it was very corrupt. But the focus on manufacturing and exports put the economy on steroids (corruption included).

“Korea reached high income in less than 30 years. In our case, please read the current Philippine Development Plan. A Christmas tree with over 350 targets. Absurd.

“Today, we cannot do what Korea did but we can do much better with a bit of focus on industrializing the countryside, focusing on a few manufacturing activities… And we need to understand that many things the government is doing are useless or not a priority.”

Prof. Ang rejects simplistic conclusions about corruption being either “good” or “bad” for growth. All corruption is harmful, she says, but the harms of different forms of corruption manifest themselves in different ways.

Some may say some corruption in an authoritarian regime may result in high economic growth, but we have tried that route with the martial law regime of Marcos the First and miserably failed.

Corruption and crony incompetence were major causes of that failure. Same problem with Duterte’s Chinoy crony from Davao whose companies are now bleeding after Duterte left office.

Crony firms are mostly managed badly. They are just out to milk government support. When things go bad, the government has to bail out many of them.

To answer our original question: Corruption and development can probably co-exist but not in our country with the kind of politicians and greedy rent-seeking economic elite that we have.

We must work smarter, harder and with a sense of national purpose. Grand corruption in our context is equivalent to treason because it threatens the country’s survival, as it does now. It should be punishable by death.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco