Corruption may or may not be illegal, but it’s always a bad thing. Isn’t it?
Some think of corruption — the misuse of public trust in the powers of political office for private gain — as comparing (a) the honest services and choices of a public official with (b) actions “corrupted” by considerations that are not legitimate. Harvard law professor Lawrence Lessig has claimed that a decision is corrupt if the official is improperly, even if only subtly, influenced by the anticipation of some sort of economic gain or loss. Fordham University law professor Zephyr Teachout has claimed that if a public official acts in consideration of a private benefit outside of the standard compensation for his or her office, the action is automatically corrupt.
Suppose, though, you are an entrepreneur in a developing nation and you have a good idea for a new company. It normally takes six months to have a telephone or internet line set up, because the state monopoly utility company is notoriously inefficient. But if you pay lagay (“speed money” in Tagalog), or if you khilana para (“feed him” in Hindi), a happily willing, competent work crew will be there tomorrow. Who will actually cough up the cash? Whoever values the service most. Which means that the most economically productive firms and the best new ideas will get to jump the queue.
In a system with bad rules or limited state capacity, tacit endorsement of corruption improves the working of the system. The more inefficient the system, the greater the efficiency increase in the near term, as scarce resources are directed first to higher-value uses.
But as Tullock asks, “And then what?” In this case, two things happen. First, because the scarcity of the resources is artificial and discretionary, the state actors who formally and informally control those resources will adjust access strategically so as to increase the quantity of “rents” (i.e., undeserved benefits) they receive. In my example, the phone company might announce a mandatory two-year waiting period, increasing the value of access to the “informal” workaround of bribes. Second, those with control over the resources and thus access to the rents will start competing — very likely by offering bribes of their own — to maintain their lucrative positions.
Tullock noticed this phenomenon for himself at several points during his career. When he was briefly in private practice as an attorney in Chicago, his job as a junior associate involved paying bribes to minor officials in the Kelly-Nash political machine to ensure that his firm had fast access to records that might otherwise take weeks to secure through normal channels. Later, while working for the U.S. Foreign Service in Tientsin, China, he had the experience of being there on the ground during the Communist takeover of 1948–49.
Tullock was struck by a presentation from an academic who decried the corrupt practices of the Chiang Kai-shek regime in Taiwan but lauded the new Communist regime on the mainland. In particular, the academic pooh-poohed the supposedly “restrictive” travel policies of the Communists, noting that it was easy to bribe officials to obtain passes.
To Tullock, both regimes seemed corrupt. But he also realized that corruption, far from being an immediate problem, was the only thing that made the cumbersome Rube Goldberg governing mechanisms work at all. “While corruption usually meets with disapproval,” he wrote in Contemporary Economic Policy in 1996, “it may have some redeeming features. It may make possible smaller or no salary payments to officials who, if carefully supervised, will still carry out their functions on a fee-for-service basis. The purchase of government jobs usually is thought to be corrupt, but in some cases, it has worked out quite well.”
He filed this lesson away in the late 1940s and often came back to puzzle over it for the next 65 years. If corruption is actually a benefit — at least in countries with bad institutions or sharply limited state capacity — then what is the problem? All we need to do is suggest that developing nations cultivate corrupt systems and voilà! Problem solved.
Of course, that’s not right, and this realization is what led Tullock to his signature contribution to the study of public policy: the problem of “rent-seeking.” In China, he said, officials write laws with the explicit expectation of selling “permits” that would exempt the “customers” from having to obey the regulation. In addition, officials may purposely limit the total number of exemptions so they can auction them off to the highest bidder. In the short term, corruption is a workaround for bad government, but in the long run corruption locks in bad government and encourages abuses of state power.
Tullock used the example of an official in Fukien (now Fujian), a province from which many citizens illegally traveled to Indonesia to work, returning with substantial sums of cash and goods. Local officials set up elaborate programs under which going abroad to work was technically not allowed but in fact actively encouraged for those who could expect to earn good wages. Officials charged licensing fees that were high enough to substantially enrich the “sellers,” but they made sure the cost was not so high that it would deter workers from traveling abroad in the first place.
The problem is that the system became firmly entrenched, and the bribes came to be capitalized in the “prices” for getting a job as a local official in Fukien. In fact, the “salaries” of government officials could be rendered as negative numbers. The opportunity to collect bribes was so lucrative that the positions were essentially sold as franchises, with officials paying their superiors, who paid their superiors, and so on.
This system, once in place, is nearly impossible to root out. In open, noncorrupt systems, parents might save or borrow to pay for law school or some other training for their children. But in a corrupt system, people save or borrow to pay the bribes necessary to get the kinds of jobs where bribes from citizens provide a good living. If a new, reform-oriented government comes into office, the reaction from government officials is likely to be fierce, possibly violent. After all, they paid for their corrupt jobs fair and square, and they expect to be able to collect.
“Evidence suggests that officials tended to draw a large part of their personal income from bribes,” Tullock wrote in his 1996 paper. “Indeed, it is almost certain that once a government structure has been set up so various people make profits, changing the structure in such a way to shrink the profits will be extremely hard, regardless of whether the profits are legal or not. Firing civil servants may be even harder than firing college professors.”
A passage from a recent New York Times article on illegal “sand-mining” in India puts the situation in stark relief: “Construction is the business where criminals have the best opportunities to launder the most money, [one real estate agent] explained, and a cascade of bribes go ‘to the topmost levels in the government.’…You pay 6 percent in bribes up front. Then, after the first payment, you pay another 7 percent, half of which goes to the state’s top politicians. The development authority’s junior engineer gets 3 percent. The associate engineer gets 1.5 percent. The senior manager gets 3 percent, and so on — until the total reached an astonishing 30 percent.”
For Tullock, the really interesting question is not why so many governments are corrupt. Instead, the puzzle is how any government manages to solve this problem and avoid corruption. The benefits, to those in power, of creating arbitrary restrictions and then selling indulgences to exempt the wealthy and powerful seem irresistible. The U.S. Internal Revenue Code is replete with relatively high income tax rates, at least on paper. But as each industry or investment group pays its “bribe” to Congress by organizing voting support, making campaign contributions, and the like, the actual rates to which it is subject are reduced, often sharply, via esoteric subsidies, tax credits, or deductions.
In the early 16th century, Martin Luther recognized this kind of corruption in the Catholic Church. In his “Thesis 27,” Luther complained of priests “who say that as soon as the coin jingles into the money box, the soul flies out of purgatory.” He was referring to an actual jingle, dating to long before Mad Men — perhaps the first ever used in advertising. A little rhyme, attributed to a German monk named Johann Tetzel (1465–1519), translates to: “As soon as the money in the chest rings, a soul from purgatory to heaven springs.” The very idea of judgment had been hijacked by some members of the Church as a way to increase their revenue, selling “Get out of purgatory” cards.
A lot of work has been done since Tullock first wrote about this problem. Our understanding of the temptations of corruption, especially in developing nations — he called it “the transitional gains trap” in a famous article in 1975 — is now standard economics. But Tullock saw the problem clearly in the 1950s.
