Corruption is particularly devastating for small and medium-sized enterprises—often the engines of economic growth and job creation in the developing world—which may not have the clout of big companies to protect themselves from a proliferation of requests for bribes. Corruption also contributes to a misallocation of human resources. To sustain a system of corruption, officials and those who pay them will have to invest time and effort in the development of certain skills, nurture certain relationships, and build up a range of supporting institutions and opaque systems, such as off-the-books transactions, secret bank accounts, and the like. But these “assets” will not be easily transferable to the non-corrupt part of the economy later on, for by its very nature, corruption is not about boosting productivity and the country’s potential wealth; it is fundamentally about the redistribution of rents which, of course, do not add to economic growth. Surveys have shown that the greater the incidence of corruption in the country, the greater the share of time that management has to allocate to dealing with ensuring compliance with regulations, avoiding penalties, and dealing with the bribery system that underpins them, activities that draw attention and resources away from production, strategic planning, and so on. In fact, a paper by Bentzen (2012) finds cross-country evidence that corruption does exert a significant and negative impact on countries' productivity levels. And, of course, the more the time is spent by officials either building up systems to control corruption—or, in the case of corrupt officials, ensuring that the bribery machinery in place remains operational, appropriately flexible and secret—the less time is devoted to governing and adding value, without doubt a net reduction in the government’s administrative capacity.

# **_Distortion of incentives_**

Research done at the IMF has established that corruption “distorts the entire decision-making process connected with public investment projects” (Tanzi and Davoodi, 1997). Large capital projects provide tempting opportunities for corruption. Governments will often undertake projects of a larger scope than necessary or of greater complexity than warranted by the needs of the country. Public investment will thus be higher—the developing world is littered with the skeletons of white elephants, often built with external credits, and representing a heavy burden on meager budgets. Moreover, the productivity of the investment will be lower and, in the context of scarce resources, governments will find it necessary to cut spending elsewhere, sometimes in socially vital areas, or in operations and maintenance. Tanzi (1998) plausibly argues that corruption will also specifically reduce expenditure on health and education because these are areas where it may be more difficult to collect bribes.

implemented with US$80 million. An honest project would need to generate benefits of US$88 million, but the corrupt project would need to produce a return of US$110 million. So, a project that should have cost US$80 million, must generate US$110 million to be viable—this is a rate of return of 37.5 percent on productively used resources, extremely high by any measure. If one assumes a 30 percent loss, then the required rate of return rises to 57.1 percent, and so on. The point is that if you are Bill Gates and you are approached to fund this project, you would be well-advised to say no.

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