Graft And Growth Don't Mix

From France to Mexico, countries across the globe are attacking official corruption with renewed vigor. Corruption--in the form of bribery, influence-peddling, money-laundering, and the like--has generally been an offense against law and always unfair to honest businesses. But it is increasingly clear that official corruption, if left unchecked, can be a powerful drag on economic growth. It must be curtailed if countries are to thrive in the new global economy.

For one, running the gauntlet of government officials who need to be paid off can make it considerably more expensive to do business. Conversely, rooting out corruption can lower costs and improve competitiveness. In Italy, for example, the cost of construction projects has fallen by almost half since an enormous scandal came to light in 1991.

Much of the higher costs from corruption gets passed on to taxpayers. Payoffs to government officials so they'll close their eyes to illegal activities cost countries precious tax revenues, while expensive sweetheart contracts force governments to raise their tax rates. In Germany, which is far from the worst offender, public-works corruption alone costs $7 billion a year.

Corruption becomes a significant obstacle to foreign investment when the whole network of illegal connections and backdoor payoffs gives an unfair advantage to the local elite. It's considerably more difficult to attract foreign companies to a corrupt country, where who you know is more important than what you can do. Similarly, corruption makes it harder for small, innovative businesses to arise as easily as they do in the U.S. Instead, the cozy relationship between government and large, established companies means that government contracts and preferences go to the chaebol in Korea, the keiretsu in Japan, and similar large business groups in other countries.

Some may long for the old days when corruption was an accepted practice. Payoffs and bribes had value as the way to get quick action from ponderous government bureaucracies. Moreover, the transition to a market-based economy is producing rapid changes in wealth and status, which may spur some groups to try to get special treatment.

All this only emphasizes the need for political reforms to go hand in hand with economic reforms. Economic liberalization by itself creates new growth, but also new opportunities for corruption, as shown by the massive scandal involving the family of former Mexican President Carlos Salinas de Gortari. Developing countries cannot thrive while the old oligopolies keep their hands on the levers of power.

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