Trust, Corruption, and Economic Growth: The Role of Trust in the Economic Outcome of Corruption
Corruption is an issue that is at the forefront of every political discussion. Eliminating it (or at least in some cases pretending to) is at the top of virtually every government’s to-do list. In the Philippines this anti-corruption advocacy has been an integral part of every political campaign’s core strategy. From Aquino to Estrada, Macapagal to Duterte, it has become a constant, repeated promise to the Philippine people. I will get rid of corruption. Near the end of his controversial Presidential term, Duterte, in one of his weekly Talk to the People segments, persists in advancing this narrative, proclaiming: “Sabihin ninyo ‘yong mga tao na corrupt at anong opisina (Just tell me who the corrupt person is and from what office he is working), and I will do something about it, immediately.”
This anti-corruption narrative is of course perpetuated by political actors because of its far-reaching socio-political effect on the minds of the Filipino. When asked what the leading cause of poverty is in the Philippines, a leading sentiment in the country is that corruption is a main contributor to economic decline and thus poverty. The anti-corruption narrative becomes much more politically potent because of its link to lowering poverty and economic decline.
However, in some cases, this link may not always hold. There is evidence that trust of all things can change how corruption affects a country’s economy.
CORRUPTION AND ECONOMIC GROWTH
It is commonly held that because corruption encourages the misallocation of resources by diverting capital needed for local economic development to corrupt officials’ purses, economic growth is stunted. However, there are many cases in which this is simply not true. Li and Wu (2010) posit that an examination of corruption levels and corresponding national economic growth rates suggests that some countries may achieve a high economic performance despite corruption being prevalent in the country. China is an example (perhaps a now tired example) of such a case. In the early 2000’s China was cited as having rampant and deeply rooted levels of corruption (Transparency International, 2007). However just three decades past, the Chinese economy had been growing quickly, with an average growth rate of 10% in the past three decades (Li and Wu, 2010). It might be argued that China is a special case. However, the fact remains that China is not alone. There are other countries present and past that have experienced both high levels of corruption and economic growth-take the United States during its own so-called Gilded Age as a historical example (Ang, 2020).
Enter the “grease the wheels” hypothesis for corruption. First put forward by NH Leff in 1964, the hypothesis suggests that in countries where an inefficient bureaucracy and ill functioning institutions are prevalent, corruption provides much needed “grease” to circumvent the red tape, raising efficiency and eventually, growth. Multiple studies over the years have provided evidence for this hypothesis. Kato and Sato (2015) found evidence of a “greasing the wheels” effect of corruption at the firm level in some parts of India. Colombatto (2003) also reports that in developing countries, “corruption eliminates the unfavorable conditions that hinder development”, as it may act as “grease” in cases of prevalent political instability and governmental inefficiency.
However, this hypothesis alone does not account for the varied effect of corruption on economic growth. A puzzling question arises: Why does corruption seem more harmful to the economies of some countries than others?
TRUST AND CORRUPTION
Sociology has always been married with economics. Francis Fukuyama in his landmark work, Trust: The Social Virtues and the Creation of Prosperity, asserts that “the level of trust inherent in a society’s culture can impact the national economy by lowering transaction costs” (Fukuyama, 1995, as cited in Quddus, 2002). This perspective is supported by Li and Wu (2010). Li and Wu suggest that this relationship between trust and economic growth can sometimes be mediated and facilitated by a third variable: corruption. Using China’s own guanxi culture and practice, the authors posit that “high levels of trust tend to make the economic effect of corruption less predatory and more efficiency-enhancing… In countries with a higher level of trust, the negative effect of corruption will be mitigated”.
Trust in this case refers to the trust between the facilitators of corruption. To form a bribery-corruption relationship, it is given that some trust must exist between both actors because of the “time lag and geographic separation” in between the payment to the corrupt official and the delivery of the goods to the briber. Both sides of the transaction want to ensure that their partners in crime will deliver.
A culture in which people tend to trust each other is a culture in which corrupt officials feel comfortable taking bribes from anyone because the possibility of being turned in by the briber is low. In this very trusting society, the bribers pay and the corrupt deliver.
Such a culture, called “guanxi”, is prevalent (or at least used to be during the early 2000s) to a certain extent in China. Essentially, the guanxi culture and practice refers to nepotistic informal networks based on private relations within organizations. It functions as a relationship-based system in which the means to facilitate and protect economic transactions are made possible.
In this system, “snitching” is discouraged at the societal level. And it is these types of systems that allow for relatively risk-free corruption.
Because of these inherent trust systems within certain societies and the “greasing the wheels” effect of corruption that enhances the efficiency of otherwise slow and cumbersome bureaucracy, according to Li and Wu, “the society will have a government with a strong and monopolistic political power, a weakened government treasury, and an efficient and wealthy business class”, leading to economic growth the likes of which are seen in China.
CONCLUSION
In countries where systems of trust are culturally prevalent, and political instability and governmental inefficiency are commonplace, corruption becomes a “greasing on the wheels” that speeds up institutional efficiency and thus increase economic growth. Corruption is less detrimental to a less effective country (Meon and Weill, 2010).
However, as Li and Wu put it: “even in efficiency-enhancing corruption, the cost of corruption is still greater than zero; it is still less efficient as compared to no corruption”.
Politicians will continue making that promise and corruption will continue to be an issue. Corruption is still prevalent in both China and in the Philippines. However, there is one key difference: in the Philippines, it acts more as “sand on the wheels” rather than “grease”.
Perhaps the Filipino should be thankful the Philippines did not achieve economic prosperity despite its corruption. At least this way deeply seated within their minds is the link between poverty and corruption.
And as long as that link exists, people (and greasy politicians) will seek to fix corruption.
REFERENCES
2007 — CPI. Transparency.org. (n.d.). Retrieved April 27, 2022, from https://www.transparency.org/en/cpi/2007
Alfada, A. (2019, November 1). The destructive effect of corruption on economic growth in Indonesia: A threshold model. Heliyon. Retrieved April 27, 2022, from https://www.sciencedirect.com/science/article/pii/S2405844019363091#bib16
Ang, Y. Y. (2020). China’s Gilded Age: The Paradox of Economic Boom and Vast Corruption. Cambridge University Press
Colombatto, E. (2003, December). Why is corruption tolerated? — the review of Austrian economics. SpringerLink. Retrieved April 27, 2022, from https://link.springer.com/article/10.1023/A:1027349206371
Fukuyama, F. (1995). Trust: The social virtues and the creation of prosperity. New York: The Free Press.
Gita-Carlos, R. A. (2021, July 22). Duterte legacy: Fighting corruption in Gov’t until his terms ends. Philippine News Agency. Retrieved April 27, 2022, from https://www.pna.gov.ph/articles/1147925
Kato, A., & Sato, T. (1970, January 1). Greasing the wheels? The effect of corruption in regulated manufacturing sectors of India: Semantic scholar. undefined. Retrieved April 27, 2022, from https://www.semanticscholar.org/paper/Greasing-the-wheels-The-effect-of-corruption-in-of-Kato-Sato/1cb6975ab904d4207e3de934a8b032fea8df2570
LEFF, N. H. (1964). Economic development through bureaucratic corruption. ECONOMIC DEVELOPMENT THROUGH BUREAUCRATIC CORRUPTION | Office of Justice Programs. Retrieved April 27, 2022, from https://www.ojp.gov/ncjrs/virtual-library/abstracts/economic-development-through-bureaucratic-corruption
Li, S., & Wu, J. (Judy). (2010). Why some countries thrive despite corruption: The role of trust in the corruption — efficiency relationship. Review of International Political Economy_, _17_(1), 129–154. http://www.jstor.org/stable/25699628
Luo, Y., Huang, Y., & Lu Wang, S. (2012, March). Guanxi and organizational performance: A meta‐analysis. Retrieved April 27, 2022, from https://www.researchgate.net/publication/239768439_Guanxi_and_Organizational_Performance_A_Meta-Analysis
Quddus, M. (2002). Trust and Economic Progress: Franci Fukuyama’s Work Re-examined. Retrieved April 27, 2022, from https://www.usi.edu/media/3655208/Trust-and-Economic-Progress.pdf
Svensson, J. (2003, February). Who must pay bribes and how much? Evidence from a Cross Section of Firms. Retrieved April 27, 2022, from https://www.jstor.org/stable/25053902
Weill, L., & Méon, P.-G. & W. (1970, January 1). Is corruption an efficient grease? World Development. Retrieved April 27, 2022, from https://ideas.repec.org/a/eee/wdevel/v38y2010i3p244-259.html
