Corruption in Developed and Developing Countries

Corruption is a "rules-related" problem. Rules determine the incentives faced by participants in markets. Unless the analyst understands the laws and institutions of the economy being examined, any attempt to study corruption and other forms of opportunism will not yield policy-relevant results.

In a 1985 study, Brennan and Buchanan argue that rules (1) determine the nature of the interaction between individuals within society; (2) provide the means for the peaceful resolution of conflict; (3) provide information to market participants, enhancing the ability of each individual to anticipate the behavior of others; and (4) constrain the behavior of individuals, as well as that of collectivities within the society. To deal effectively with corruption, for example, it is necessary that the police, who investigate and collect evidence to be used in the prosecution of those accused of corruption, be adequately constrained by the law. Since the rules determine the incentive structures faced by market participants, any effort to deal with corruption and other forms of opportunism (e.g., rent seeking) must begin with a negotiated modification of existing rules so that the economy can be provided with a new set of rules that effectively constrains state custodians and makes it quite difficult for them to behave opportunistically.

Rules can be implicit (e.g., tribal custom and tradition) or explicit (e.g., a written constitution). After a country has developed and adopted a constitution, corruption can be seen as post-constitutional opportunism—that is, behavior on the part of individuals or groups designed to generate extra-legal income for themselves, usually through the subversion of rules. One can see corruption then as part of the larger problem of constitutional maintenance or how to enforce compliance to the rules. Here, opportunism is defined as behaviors designed to improve the welfare of an individual or group at the expense of other citizens and includes such behaviors as shirking, corruption, adverse selection, moral hazard, and free riding.

The key to producing a sustainable and effective anticorruption campaign is a thorough and complete examination of the country's existing rules and by implication, its market incentives. This approach to corruption control has many benefits. First, institutional reform, especially if undertaken democratically, can produce rules that (1) reflect the values of the relevant stakeholder groups and hence are most likely to be considered legitimate tools for the regulation of sociopolitical interaction, improving the chance that people would respect and obey them; and (2) effectively constrain the state and make it quite difficult for civil servants and politicians to extort bribes from the private sector.

Second, institutional reform can be used to entrench economic freedom and improve entrepreneurship and wealth creation. Finally, institutional reform can provide each economy with more viable and effective structures for the management of ethnic diversity, resulting in a reduction in communal violence. A more peaceful society should significantly improve the environment for investment and wealth creation.