Does corruption matter?

In a recent survey, the IMF paints a rosy picture of the economic prospects of Mauritius: the country is on its way to a second growth miracle. Despite the declining terms of trade (due to the erosion of trade preferences in textile and sugar), GDP growth was above 5% in the last 3 years and this trend is expected to continue into the foreseeable future. The country seems indeed to be doing the right thing: it has simplified business regulation, chosen a flat (and low) tax regime, and considerably strengthened its monetary policy framework. It is also addressing its level of public debt and, perhaps more importantly, it is aggressively seeking to diversify its economy, with emphasis on the financial sector and on tourism. There is, however, room for improvement, according to the IMF. The government ought to disengage itself from loss-making parastatals, labour market reforms and training ought to be accelerated, and social spending ought to be more targeted towards the needy. As ever, the IMF is silent on one important count: corruption.

A quick browse through the local papers (and a look at the league table from Transparency International which puts Mauritius in the 53rd position) gives an idea of the extent of the problem. Only last week, the well-respected Director of Customs, Mr Bert Cunningham, a Canadian national, was forced into resignation over petty issues while denouncing widespread corruption that reaches the highest spheres of government. I myself have worked for 2 years or so at the local university there and I was shocked by the things I saw.

But does corruption really matter? China does badly in the league tables and yet grows impressively. The following figure shows that corruption is actually perceived to be worse in high-growth Asian economies than in Mauritius. In fact, corruption perception is no better in the former than in poor small island developing nations. But the Asian tigers are way more competitive.

Source: 2008 Selected Issues on Mauritius by the IMF

I think perhaps that the answer to the question is: it depends. Corruption, on its own, harms a country, but it may also be a consequence of fast growth: there is more to steal when the cake gets bigger. Take the case of Mauritius. High growth in the tourism sector has dramatically improved the value of state-owned lands, thus increasing rent-seeking by officials allocating the lands (and it also reduces the relative cost of bribing – what does it cost to give a few millions of dollars in bribes if the returns are 50 times larger?). Similarly, the increasing value of trade with the rest of the world makes it more profitable to bribe custom officers, a trend which Mr Cunningham has tried to fight against in the last six years. Whether the growth momentum can be sustained in the medium term depends on whether the positive benefits of growth (better education and health care, a more educated population voting for better governments, better laws against corruption, etc) outweigh the negative impact of corruption.