Corruption and Policy: Back to the Roots

Corruption is now recognized to be a pervasive phenomenon that can seriously jeopardize the best-intentioned reform efforts. This paper presents an analytical framework for examining the role basic market institutions play in rent-seeking and illicit behavior. The empirical results suggest that high barriers to new business entry and soft budget constraints on incumbent firms are particularly important institutional factors engendering opportunities for corruption. The findings also support the notion that economic development and maturation of democratic processes both temper corruption, as does, to a lesser extent, openness to international trade.     

Seeds of Corruption – Do Market Institutions Matter?

Ten years into the transition process, corruption is now recognized to be a pervasive phenomenon thatcan seriously jeopardize the best intentionedreform efforts. Because of the complex anddeep political economy dynamics surroundingthe process transition economies areundergoing it is essential for policy-makersto understand the causes of corruption. Thispaper develops an integrated analyticalframework of the role basic marketinstitutions play as determinants ofrent-seeking and illicit behavior intransition economies. Using data onlyrecently available on the incidence ofcorruption and institutional development inthese economies, we provide preliminaryevidence on both the systemic links betweendevelopment of market institutions andincentives for corruption and the relativeimportance of such institutions. The mainlesson from our analysis is that awell-established system of marketinstitutions – one characterized by clear andtransparent rules, fully functioning checksand balances, including strong enforcementmechanisms, and a robust competitiveenvironment – reduces rent-seekingopportunities and, in turn, the incentives forcorruption. The empirical results suggestthat high barriers to new business entrantsand soft budget constraints on incumbent firmsare particularly important institutionalfactors engendering opportunities andincentives for corruption. As in otherstudies, the empirical results also supportthe notion that economic development andmaturation of democratic processes both tempercorruption, as does, to a lesser extent,openness to trade.