Corruption and the Capitalist Transformation: Analysis, Policy and Problems of the Real World

Developing countries are in general more corrupt than advanced countries. From this widely observed correlation has sprung a powerful body of analysis and policy identifying the importance of governance reforms. However, the economic theory driving this agenda is still weak in identifying the causal chains between social change, corruption and economic performance. Economic theory has identified some of the reasons why underdevelopment should be associated with greater corruption but it has largely ignored some of the most important reasons. In particular, it has focused on low bureaucratic salaries and weak institutions of disciplining public officials. This is not irrelevant but it misses out much more important structural processes that make corruption endemic in developing countries. This paper will focus on two of these structural processes. The first is the problem of political stabilization in a context of structurally weak fiscal capacity. If fiscal capacity is sufficient, political stabilization can be achieved through transparent social democratic transfers. In contrast, weak fiscal capacity, which is structurally related to low per capita incomes, leads to many different variants of patron-client politics to achieve political stabilization. The price is that now off-budget funds have to be maintained, and corruption is politically sanctioned to raise funds. Fighting this structural motivation is almost impossible until economic and institutional development allows sufficient redistributive resources to be raised through the tax system to stabilize the polity through legal means. The second structural driver of corruption is the process of primitive accumulation. The collapse of pre-capitalist production systems leads to many variants of nonmarket transfers of assets to new classes and groups. In some cases these transfers lead to the emergence of a viable capitalist class, in many other cases, it leads to plunder and further impoverishment. However there is no historical precedent of capitalism emerging without fundamental transformations of pre-existing property rights through both market and non-market mechanisms. The issues of political stabilization and primitive accumulation are deeply intertwined, and the specifics of thing first affects the dynamics of the second. We conclude that corruption is a useful lens through which to understand the specific characteristics of patron-client networks and the specific types of primitive accumulation that they support. This knowledge can be used to intervene more effectively in the underlying political and institutional processes in ways that can accelerate a viable capitalist transformation. But fighting corruption in general is not likely to be of much use. 1 The recent policy interest in corruption has been motivated by the observation that developing countries that can least afford to waste resources typically suffer from high levels of corruption. Corruption has obvious economic costs in the form of lower investment, unstable property rights and misallocations of resources, and developing countries can least afford these costs. There is no dispute that these costs are real and that development would be assisted if they could be reduced. However, there are analytical and historical questions about the sequence of reforms that are likely to prove efficacious in sustainably reducing corruption over time (Khan 2002a). In particular, there is a question about whether the success of general anti-corruption policies are a precondition for development. This does not mean that corruption is unimportant from a policy perspective. If corruption cannot be reduced across the board in a developing country, the policy implication may be that we should focus on particular types of corruption that are particularly damaging in terms of development. Most economists recognize that a poor country that cannot pay its bureaucrats proper salaries will be exposed to some amount of corruption. However, we argue that theory and evidence suggests that the salaries of bureaucrats are at best a minor contributor to overall corruption. Neither does poverty in general drive individuals to corruption since the poorest sections of a society are rarely the most corrupt. In this paper we focus on two other structural constraints that make it very difficult to significantly reduce corruption across the board in the typical developing country. The first is the problem of maintaining political stability in a context of severely limited fiscal capacities. If taxation raises a relatively small share of GNP and the GNP is itself small, there are likely to be very limited resources for maintaining political stability through official and audited processes of redistribution. Political stabilization will then happen through other mechanisms, in particular through the use of different variants of patron-client politics, where off-budget redistribution is focused on organizationally powerful clients as a way of maintaining stability. Patron-client networks play an important role in the analysis of corruption in the neo-patrimonial school, but our analysis is