Corruption (Economics)

The abuse of power to satisfy individual or parochial group interest. The corrupt individual is, therefore, an official or fiduciary who uses his status unlawfully to procure benefits for himself or others to the detriment of society.

Corruption may be systemic and analogous to organized crime. Systemic corruption occurs when the segments of a government that are supposed to prevent corruption by way of inspection, evaluation, enforcement, [Page 115]budgeting, and auditing are in fact highly corrupted. In such situations, there is usually a conspiracy of principals and agents to be corrupt.

Corruption is a major concern for international businesses because of the harmful effects it has on investment and economic growth, and many countries have at least made the symbolic gesture of signing treaties to prevent corruption. In 1996, the Organization of American States adopted the Inter-American Convention Against Corruption. The Organization for Economic Cooperation and Development (OECD) adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997. The African Union adopted the convention on Preventing and Combating Corruption in 2003. And the United Nations ratified its Convention Against Corruption in 2005. Consequently, although some might argue in favor of a “grease hypothesis” (i.e., that corruption speeds up the wheels of commerce), corruption is unequivocally a crime in international law.

In 1977, the U.S. Congress passed the Foreign Corrupt Practices Act, which makes it illegal for U.S. companies to bribe foreign government officials. The act was amended in 1988, inter alia, to differentiate between lack of knowledge and willful bribery. It has become recurrently difficult to distinguish grease payments from bribery.

Some economists believe that corruption is a drag on growth and that it impedes foreign direct investment (FDI). Therefore, corruption hurts developing countries, in particular, where FDI and capital inflows have the potential to augment meager national savings.

Curing corruption will require better systems rather than laws or new codes of conduct. It is believed that reducing monopoly power (by promoting competition), limiting the exercise of discretion (by making rules transparent and less ambiguous), and demonstrating exemplary behavior, will minimize the propensity to have systemic corruption. The World Bank and Transparency International compile data on the intensity of corruption in various countries. For more information, see Folsom, Gordon, and Spanogle (2004), Perkins, Radlet, and Lindauer (2006), and Slomanson (2003).