How Corruption Affects Productivity

Corruption is likely to lower the productivity of capital due to a variety of channels. Corruption renders governments incapable or unwilling to achieve public welfare as a result of x-inefficiency, wasteful rent-seeking or distorted public decisions (Bardhan 1997, Rose-Ackerman 1999, Lambsdorff 2002a). The allocation of capital goods will not be optimal when affected by corruption because those projects that promise large side-payments and exhibit low risks of detection are preferred to those that benefit the public at large. The best-connected contractors and those most willing to offer bribes are preferred to those offering the best product. The quality of investments will suffer from corruption because control mechanisms, required to guarantee the contracted quality level, can be circumvented. Public servants are appointed based on nepotism or bribe payments while aspects of efficiency and capacity are disregarded. The effort level of public servants suffers from adverse incentives because creating artificial bottlenecks can increase the need for paying speed-money. The most visible sign of the adverse impact of corruption are ‘white-elephant projects’, that is, projects that totally disregard public demand or that are wrecked shortly after completion (Mauro 1997). There exists strong empirical support for the adverse impact of corruption on the ratio of investment to GDP (Mauro 1995 and 1997, Knack and Keefer 1995, Campos, Lien and Pradhan 1999, Brunetti, Kisunko and Weder 1997: pp. 23, 25 and Brunetti and Weder 1998: pp. 526, 528). Equally there is substantial evidence for an adverse impact of corruption on foreign direct investments and capital inflows (Wei 2000, Lambsdorff 2003). But there exists no