Corruption and economic development:

A critical review of literature

Mohamad Farida and

Fredoun Ahmadi-Esfahani

Agricultural and Resource Economics

The University of Sydney

AARES 50th Annual Conference, Sydney NSW 2006

1 Introduction
The body of theoretical and empirical research that objectively addresses the
problem of corruption has grown considerably in recent years (Elliot 1997;
Coolidge and Rose-Ackerman 1997; Gill 1998; Girling 1997; HDC 1999;
Kaufmann and Sachs 1998; Mauro 1995; Paul and Guhan 1997; Shleifer and
Vishnay 1998; Stapenhurst and Kpundeh 1998; Vittal 1999; World Bank 1997). A
preliminary analysis of the literature shows that corruption is recognised as a
complex phenomenon, as the consequence of more deep seated problems of
policy distortion, institutional incentives and governance. It thus cannot be
addressed by simple legal acts proscribing corruption. This paper aims at
reviewing the different definitions for corruption in addition to its perceived costs
and benefits. Furthermore, in an attempt to measure corruption, the paper will
address several theories and models that might help in developing a
comprehensive model of corruption.

2 Definitions
The Latin verb "corrumpere" means to break something. The question to be
answered is what is "broken" by the act of corruption. The obvious answer is that
the law is broken; or that a legal rule is broken; a duty is broken; a moral norm is
broken. But it is important to add that communities and human personalities may
also be broken by the practice of corruption. Communities are disintegrated by
corruption because it undermines predictability and accountability; it reduces
social transparency and erodes social trust. The integrity of the human
personality is broken because corruption involves lying, dissimulation, and living
according to two (contradictory) sets of standards. Social disintegration and the
loss of personal integrity may be the greatest long-term damage done by
corruption (Manchin 2000, P.4). Therefore, defining corruption appears essential
when studying its costs and benefits.

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 Corruption or 'level of corruption' is widely used in public discourse and
usually hold a twofold meaning. Its definitions range between two schools of
thought. On one hand, it stands for those illegal practices, in which citizens or
organisations bribe officials in charge for awarding permissions, contracts, or to
escape punishment or fines for offenses they committed. Simpler: to obtain
privileges against law or against the rules of some bureaucracy (Rose-Ackerman
1999). This is the narrow definition of corruption. Many scholars argue, however,
that corruption is a broader phenomenon, or rather, a hardly definable set of
phenomena, including achieving several advances through personal networking;
paying gratitude money or giving gifts for usual services, what are already
reimbursed from customers or state resources (Kaufman 1998). Viewed most
broadly, corruption is the misuse of office for unofficial ends (Klitgaard 1998, P.
4).

Usually the first, narrow definition of corruption is primarily considered as

'dangerous', illegal, immoral, and furthermore: totally illegitimate in today's
developed or transforming societies (and economies). However, research
indicates that the narrowly- defined corruption closely correlates with the level of
the broader phenomena of 'corruptive activities' or deeds which are morally
corrupt (Johnston 1979, P. 387). On the other hand, there is another problem
with the broad definition; it is largely dependent of culture, historic age, actual
social climate, and social groups, which activities can be perceived as corruptive
(Mauro 1998). Whereas the narrow definition can usually be read from the more
or less uniform laws throughout the countries, the definition, and even more the
structure - the patterns - of those that we call corruptive activities, are deviating in
a wide and rather undiscovered range. Heidenheimer (1989) has outlined
"shades" of corruption, ranging from white through gray to black, depending upon
patterns of elite and mass opinion in several kinds of communities. The
perception for corruption in a certain society is a key factor in clarifying the
shades of corruption and correlating both definitions. People are more willing to
fight against corruption in its broader definition, and less likely to encourage
campaigns against corrupted activities that benefit them directly. Previous

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research suggests measuring both types of corruption to get a reliable and useful
resource in estimating actual level of corruption in a specific country, even across
counties. Therefore, corruption can be described as the use of power or money
to obtain desired outcomes against the rules and ethics of the community.
Corruption, in all its forms, not only weakens economies, but also has some
economic benefits.

3 Perceived Costs and Benefits of Corruption

Corruption works like a social trap or the mechanism of the "tragedy of the
commons". People enter the game of breaking the rules of their community in
order to privately profit from it. But as more and more people "desert" the
community, less and less will be the profit of each of them. After a certain point,
everybody will get in a worse position than he or she was originally, but the costs
of jumping out of the game and returning to the rules of the community are so
high that the process can hardly be stopped. In the same way, corruption is
tempting, because it promises each candidate a special advantage over the other
members of the community. But the more people enter the game, everybody's
profit will diminish and finally everybody will pay more for the same goods or
services than they originally paid. Let alone the fact that the corruption of the
social institutions will cause further, perhaps even more serious, damage (Girling
1997, P. 94).

3.1 Forms and Causes of Corruption

Economic corruption is an important form of corruption; however, it is not the
only form of corruption. There are non-economic forms of corruption, including
many types of police corruption, judicial corruption, political corruption, and
academic corruption. Indeed, there are at least as many forms of corruption as
there are human institutions that might become corrupted. Further, economic
gain is not the only motivation for corruption. There are a variety of attractions
that motivate corruption. These include status, power, addiction to drugs or

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gambling, and sexual gratification, as well as economic gain (Miller 2005).
Corruption is usually caused by several procedures and practices.

The biggest cause of corruption is undoubtedly the political leadership at the

helm of affairs in the country (Shleifer 1998, P. 34). From this fountainhead of
corruption flow various streams of corrupt practices which plague the political,
economic and social activities in a country. Amoral politics, self-aggrandizement,
disregard of the constitutional norms in the pursuit of power, and political survival
at any cost are their rules of the game. They interfere with the administration of
justice and have bent bureaucracy to do their bidding. This leads to a highly
corrupted environment and makes it hard to be contained.

In addition, cumbersome and dilatory administrative procedures and

practices are another major cause of corruption in most developing countries
(HDC 1999). The legal and administrative system was designed in the middle of
the 19th century to serve the interests of colonial administration. Another
contributory factor to the growth of corruption is that the cases relating to
corruption are often handled in a casual and clumsy manner. Those in hierarchy
vested with disciplinary powers shirk duty and show unwillingness to use their
powers against corrupt practices (Stapenurst 1998, P. 26). This may be due to
different reasons such as political or trade union pressure, vested interests, or
sheer ineptitude in handling criminal investigation. The result is that the corrupt
individuals are rarely caught, and even if caught they are let off with minor or no
penalties.

Furthermore, the government officials, entrusted with the responsibility of

dealing with corruption, do it in a most inefficient and lethargic manner that suits
the political leadership which patronizes corruption. The judicial system is usually
expensive, dilatory, and inefficient that it takes years and years for corruption
cases to be decided (Vittal 1999). The result of such inordinate delay is that the
accused often escape punishment because a long time span has an adverse
effect on the evidence in a case. Justice delayed is justice denied in most cases
of corruption.

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3.2 Consequences of Corruption
There is a growing empirical literature based on comparative country studies,
emphasizing that corruption lowers investment, capital productivity, capital
inflows and many other macroeconomic data (Lambsdorff 1999). Corruption not
only slows economic growth, but it also increases the volatility of business cycle
and affects the human development through enhancing poverty and reducing
social services.

3.2.1 Corruption and Economic Growth

There is an increasing volume of literature on the relationship between
corruption and economic growth, and the general conclusion is that corruption
slows down the long-term growth of an economy through a wide range of
channels. Mauro (1995) presents some strong empirical evidence to help
establish the negative relationship between corruption and long-term growth. Wei
(1997) argues that corruption is much more costly than ordinary taxes, because it
generates uncertainty in addition to the tax burden. In the presence of corruption,
businessmen are often made aware that a bribe is required before an enterprise
can be started and, in addition, corrupt officials may also lay claims to one part of
the proceeds from the investment. Therefore, businessmen interpret corruption
as a species of tax. In addition, they also face secrecy and the uncertainty that
the bribe-taker may not fulfill his part of the bargain. Both the tax and the
uncertainty will diminish incentives to invest.

Since rent seeking is often more lucrative than productive work, talents will
be misallocated. Financial incentives may lure the more talented and better
educated to engage in rent seeking rather than productive work, which in turn
results in adverse consequences for the country's economic growth. Ehrilich
(1999) presents a balance growth model to show that in some equilibrium
officials spend a substantial amount of time and effort in seeking and
accumulating political capital, which is not socially productive. Corruption may
entice government officials to allocate public resources less on the basis of social
welfare than according to opportunities for extorting bribes. Large projects,

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whose performance is difficult to monitor, may provide lucrative opportunities for
rent seeking and bribes. We can expect that it is easier to collect large bribes on
large infrastructure projects or high-tech defense systems than on textbooks or
teachers' salaries. Mauro (1998) concludes that corruption affects the
composition of government expenditure. When corruption is serious, there is
much less government expenditure on education than on large infrastructure and
defense projects. In addition, Mauro finds that corruption also lowers the quality
of infrastructure projects and pubic services. This will result in not only lowering
economic growth, but also affects the human development in these communities.

3.2.2 Corruption and Volatility

Ramey (1995) has presented some empirical evidence to show that there is
a negative relationship between macroeconomic volatility and long-term
economic growth. He found that countries with higher volatilities have lower long-
term growth rates. Corruption is one of the important reasons why there is a
negative correlation between volatility and long-term growth. As can be
concluded from Ramey’s article, corruption slows down long-term economic
growth through many channels. As such, one can observe a negative
relationship between volatility and long-term growth.

Standard macroeconomic theories use various economic shocks, such as

aggregate supply or demand shocks, to explain the volatility of business cycles.
Some economists also use other factors, particularly the structure of a country's
financial system, to explain macroeconomic volatility. Krugman (1998) used a
simple static model to show that financial intermediaries whose liabilities are
guaranteed by the government pose a serious problem of moral hazard. Corsetti
(1999) explained a dynamic model to show the same result. Stiglitz (2000)
argued that financial structure played an important role in producing
macroeconomic volatility. Denizer (2000) argued that besides financial structure,
corruption might also play a role in creating volatility. Therefore, according to
many scholars, corruption is one of the reasons that increases the volatility of
business cycles.

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3.2.3 Corruption and Social Welfare
The damaging effects of corruption on investment and economic growth are
widely recognised. But corruption also has adverse effects on human
development. First, corruption reduces the availability and increases the cost of
basic social services. Access to core social services can be easily restricted with
the intention to make corrupt gains (Kaufman 1998, P. 36). Since obtaining
access to basic public services normally requires an illegal cash payment,
corruption also raises the price of these services.

Second, in addition to a decrease in total government expenditure (due to tax

evasion), corruption also shifts government expenditure from priority social sector
spending to areas, where the opportunities for rent-seeking are greater and the
possibilities for detection are lower. Allocating government funds to a few large
defense contracts or mega-projects may seem more attractive to corrupt
bureaucrats and politicians than spending the same money to build numerous
rural health clinics (Bardhan 1997). Similarly, there may be a temptation to
choose more complex technology (where detecting improper valuation or over
invoicing is more difficult) than simpler, and more appropriate technology.
Politically, corruption increases injustice and disregard for rule of law. Basic
human rights and freedoms come under threat, as key judicial decisions are
based on the extent of corrupt bribes given to court officials rather than on the
innocence or guilt of the parties concerned. Police investigations and arrests may
be based on political victimization or personal vendettas rather than on solid legal
grounds.

3.2.4 Corruption and Poverty

The equation C (corruption) = M (monopoly) + D (discretion) -A
(accountability) often used to explain corruption, omits V (values), and seems to
suggest that ethics are an irrelevance (Mauro 1997, P. 92). In studying the
apparent intractability of corruption in many countries V (values) has risen to the
fore along with other vital linkages that help present a more comprehensive
picture of the nature of corruption in any given country. The link between poverty

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and corruption is one of these vital relationships. Corruption is an important
cause of poverty because it promotes unfair distribution of income and inefficient
use of resources.

3.3 Economic Benefits

Some economists consider corruption as means of aiding the economy,
particularly in the case of cumbersome regulation, excessive bureaucracy or
market restrictions. For example, Bayley (1966); Nye (1967); Huntington (1968);
Leff (1964); Morgan (1964) argued that corruption could, in extreme cases, be
not only desirable but essential to keep the economy going. Moreover, it
emerges as a helpful inducement for reestablishing market efficiency and has
gained recognition in economic textbooks (Mankiw 2000, P. 123) where scholars
highly recognize and use in their studies especially in developing economies.

A similar conclusion can be drawn for a minor case of corrupt misdeed: the
payment of speed money as mentioned by (Douie 1917, P. 545) with respect to
reduced levels of corruption in courts. This implies a tradeoff between
administrative delays and corruption. Given excess demand for public goods and
services, applicants have to line up according to the time of their arrival; files will
be piled and not processed according to the needs of the applicants. The
resulting waiting costs would be reduced if the payment of speed money could
induce bureaucrats to increase their efforts and to process cases according to
urgency, a need which might be measured by the applicants’ willingness to pay.
This argument was opposed (Myrdal (1968), who argued that corrupt officials
might, instead of speeding up, actually cause administrative delays in order to
attract more bribes. A similar proposition is put forward by (Rose-Ackerman
1978, P. 90) arguing that bureaucrats behave like monopolists who profit from
increasing prices by creating scarcity.

Although some benefits from corruption are recognised, there is still a

growing empirical literature based on comparative country studies, emphasizing
that corruption lowers investment, capital productivity, capital inflows and many
other macroeconomic data. The World Bank believes that corruption is a major

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factor impeding economic development. Corruption hampers economic growth,
disproportionately burdens the poor and undermines the effectiveness of
investment and aid. In addition, the World Bank (1997) is helping countries
develop anti-corruption strategies (World-Bank 1997).

4 Theoretical Considerations
The first theory of corruption that will be discussed is the typology
Heidenheimer (1989), who divided the corruption theories into those which
concentrate on the public official and concern the breaking of the rules of the law
and those according to which corruption is a particular kind of market
phenomenon. Some non-economical formulations of the problem of corruption
will be presented, and thus be placed within the two first categories of
Heidenheimer's typology. In accordance with the perspective adopted in the
research it is an attempt to present non-economic, institutional conditions of
corruption. In successive parts of the chapter corruption will be defined as a
contract referring to the works of Rose-Ackerman (1999) and Banfield (1958),
where they mostly agree that the essential influence on the scale and structure of
corruption is exerted on the one hand by agency structures of the administration
and, on the other hand, cultural conditions.

4.1 The Typology of Heidenheimer

Heidenheimer (1989) isolated three ideal-types of corruption in his cited
work. First, public office-centered corruption which is the behavior that deviates
from the formal duties of a public role due to private-regarding pecuniary or
status gains; or violates rules against the exercise of certain types of private-
regarding influence (Nye 1967, P. 421). Secondly, market-centered corruption
where a corrupt civil servant regards his public office as a separate business and
seeks maximise his income. The size of his income depends upon the market
situation and his talents for finding the point maximal gain on the publics demand
curve (Klaveren 1957, P. 38). Thirdly, public interest-centered corruption, where
its patterns can be said to exist whenever a power holder who is charged with

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doing certain things is by monetary or other rewards not legally provided for,
induced to take actions which favor whoever provides the rewards and thereby
does damage to the public and its interests (Friedrich 1966, P. 37). Added to
these merely theoretic and loose definitions, researchers need little input
information to make their studies more effective. In each country there are areas,
where traditional corruption is more widespread, where it is virtually unpresent.
Though, the measurement of the narrowly defined corruption has relatively long
tradition and international researches provide sufficient basis to prepare
comparative measurement of the level of these activities. The issue gets even
more complicated, as we try to capture various corruptive activities.

4.2 Institutional Conditions of Corruption

Corruption may be the single most significant obstacle to both
democratization and economic development (Banfield 1958, P. 34). Economists
marshal convincing evidence of the toll that corruption – the misuse of public
office for private gain – exacts on economic growth. Corruption also corrodes
democracy (Rose-Ackerman 1999), undermining the most fundamental principles
of democratic governance. Corrupt practices remove government decisions from
the public realm to the private, diminishing openness and accountability.
Corruption provides privileged access to government for actors able to offer
bribes and other payoffs, violating norms of equality (Sandholtz 2000, P. 36).
When citizens perceive politicians and officials as devoted not to the public
interest but to their own enrichment, trust in government declines. In states still
trying to consolidate democratic norms and institutions, distrust of office-holders
all too easily transforms into disillusionment with democracy itself.

Assuming that society considers corruption to be illegitimate and undesirable,

one may tend to argue that the negative externalities of corruption outweigh the
gains (Lambsdorff 1999). But where poor institutional preconditions and
extensive distorting regulation exist, some economists would rather downplay the
size of these externalities and favor corruption as a means to open up new
contractual possibilities (Ades 1999). Poor institutional conditions can provide

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fertile ground for corruption to flourish; however they are often not the basis but
themselves a consequence of corruption.

4.3 Effects of Culture

Corruption is such a pervasive and enduring fact of life in some societies that
it became an aspect of culture, that is, of social norms and practices (Sandholtz
2000, P. 34). It has long been recognised that the incidence of corrupt practices
depends on both structural and cultural factors (Rose-Ackerman 1999).
However, structural factors have received the bulk of the attention in empirical
work. Scholars in the political economy tradition have emphasised the structure
of opportunities and constraints as basic determinants of corruption (Rose-
Ackerman 1978; Klitgaard 1987). Culture consists of “orientations to action,” or
“general dispositions to act in certain ways in sets of situations.” People acquire
orientations to action through processes of socialisation; they learn about social
norms and expectations regarding acceptable behavior (Eckstein 1988, P. 790).
The tendency of cultural patterns to reproduce themselves through socialization
leads to a general expectation of continuity. Cultures do change, of course, but
they tend to change slowly, even when parts of their environment alter
substantially. Thus, we would expect that if various forms of corruption became
widespread cultural practices, these orientations would persist even after the
dramatic changes in political and economic institutions.

In most developing countries today, corruption is widespread and part of

everyday life (Guhan 1997, P. 52). Society has learned to live with it, even
considering it, fatalistically, as an integral part of their culture. Not only are public
or official decisions – for instance, on the award of government contracts or the
amount of tax due – bought and sold, but very often access to a public service or
the exercise of a right, such as obtaining civil documents, also has to be paid for.
Several mechanisms help to spread corruption and make it normal practice in
these countries. Civil servants who refuse to toe the line are removed from office;
similarly, businessmen who oppose it are penalised vis-à-vis their competitors.
Furthermore, an image of the state has grown up over the years according to

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which the civil service, far from being a body that exists to implement the rights of
citizens – rights that mirror their duties – is first and foremost perceived as the
least risky way of getting rich quickly. All of which helps to make corruption seem
normal (Stasavage 1998). It is the environment in which public servants and
private actors operate that causes corruption. Public administration in developing
countries is often bureaucratic and inefficient. A large number of complex,
restrictive regulations coupled with inadequate controls are characteristic of
developing countries that corruption helps to get around. But to understand
corruption, institutional analysis is not enough. A political and economic analysis
is important too. Whether it is in Benin, Bolivia, Morocco, Pakistan or the
Philippines – five countries examined in a study by the OECD Development
Centre and the UN Development Programme – corruption is closely linked to the
type of government involved (Hors 2000, P. 5).

The link between political and economic power can be direct. There is
patrimonialism, as in Lebanon, where access to political power ensures access
to economic privileges. The link can be indirect too, as in Turkey, where political
power, such as a privileged position in a patronage-based system, can be bought
and sold. In short, the process of allocating political and administrative posts –
particularly those with powers of decision over the export of natural resources or
import licenses – is influenced by the gains that can be made from them. The
political foundations are cemented as these exchanges of privileges are
reciprocated by political support or loyalty (Kaufman 1998, P. 19). Another
feature common to the countries studied is their underdevelopment, which is
conducive to corruption. In fact, underdevelopment encourages corruption. First
of all, low wages in the civil service encourage petty corruption, and the
imbalance between the supply of, and demand for, public services likewise
creates opportunities for corruption. Also, individuals tend to invest in a career in
the public service, given the shortage of opportunities in the private sector, thus
increasing the likelihood of their involvement in corrupt practices (Gill 1998, P.
85). Another reason is that the low level of education found in underdeveloped

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countries maintains citizens in a state of ignorance of their rights, barring them
from participating in political life.

4.3.1 Lipset’s Module

Few studies explicitly address cultural factors that might affect levels of
corruption. Treisman (2000) found out that former British colonies tended to be
less corrupt. One of the more ambitious attempts to assess quantitatively the
links between culture and corruption is a study by Lipset (1999). He began with
Banfield’s insight that, in southern Italy and Sicily, the high value placed on family
loyalty led people to provide favors and preferential treatment to relatives
(Banfield 1958). Lipset created a scale to measure “familism” and then tested
the relationship between familism and corruption. He also build on Merton’s
proposition that people who faced restricted access to the goods highly valued by
a society – for example, economic achievement – will seek to obtain those
rewards through means that violate social norms. He derived from this argument
the hypothesis that “those cultures that stress economic success as an important
goal, but nevertheless strongly restrict access to opportunities, will have higher
levels of corruption” (Lipset 1999, P. 6). Attitudes measured in the World Values
Survey are the basis for a measure of “achievement orientation.” The data
analysis shows that, controlling for income; high scores on both familism and
achievement orientation are positively related to corruption levels and statistically
significant (Lipset 1999, P. 10).

Therefore, underdevelopment encourages corruption, and makes it part of

the culture, then it persists and it becomes hard to be perceived as dangerous.
Institutional conditions provide fertile ground for corruption and decreases trust in
government. In studying corruption, it is essential to understand political,
economic, institutional structure and the culture of a society in order to formulate
a suitable module to asses its level and propose a plan to decrease or eliminate
it.

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5 Measuring Corruption
There is a consensus that real volume of corruption cannot be measured or
calculated. However, there are different approaches that indicate the spread of
corruption in societies.

5.1 Methods Used To Estimate Corruption

There are three widely used 'scientific' methods in the field of corruption
evaluation. All three methods hold value in achieving the goal; that is, to estimate
the spread and map the structure of corruption.

First, general perception can be, and is regularly used as a sensitive core
indicator of the feeling the 'lack of justice' in public transactions. This type of
measure is less stabile over time; it is sensitively reflecting the level how
corruption is displayed in media. Corruption perception in this sense is an indirect
measure related to actual level of corruption, highly depending on how much
space corruption actually has in media agenda. In normal cases, the relative
weight of corruption issues appearing on media must be closely related to what
happens in real life; if there are more corruption cases in the country, there are
more scandals appearing on TV screens as well (Markovits 1988, P. 28).

On the other hand, the incidence-based approach is more independent from

media agenda, general sense of the society, or even questionnaire editing. By
asking the ones who potentially bribe and those whom bribes are offered,
researcher might get a good feedback on how frequent is corruption in different
types of transactions. Using direct and indirect incidence, or proxy measures
(one regarding the respondent, and one regarding 'others'), the measures will
provide a sufficient basis to decide in which areas corruption is more frequent
than in others (Manchin 2000). The usage of indirect measures shows
extraordinary importance in case of the business pilot study, where the - usually
senior official - respondents were very reluctant to answer the direct questions
asking about bribery and other forms of corruption the organization was involved.
By incidence measurement one can also get a more reliable and stabile cross-

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country comparison in certain widely measured areas, and finally we provide the
basis for the longitudinal analysis, which we see more important than cross-
country comparisons. The cross-country analyses in terms of general corruption
practices have serious validity problems. Using perception methods, actual
events surrounding the data collection can significantly influence the results we
get. In proxy measures we cannot control the 'shame-bias' and the 'routine-bias',
that is, we will never know the exact ratio between actual corruption attempts and
the reported number.

Finally, in the most cited and probably respected cross-country comparison

of the “Transparency International” was primarily based on expert evaluation.
Now scholars are trying to transform the computation of CPIs, as a common
index derived from different general polls and expert interviews. As Sik (1999)
pointed out, expert evaluations are 'severely biased' for many reasons,
accounted primarily to the nature of the group of international business experts
involved in TI evaluations. According to Sik, this group of businessmen is fairly
closed (the cross-validity of separate experts' evaluations are not the
consequence of their similar reflection of the same truth, much more the common
stereotypes, developed on social events they jointly attend, or other sources of
personal networking), and is not accustomed to the local customs and language
(they tend to oversee the ways, how issues are settled locally and tend to use
bribery to solve problems fast). In this respect, businessmen are more prone to
corruption than 'normal' citizens, just by the very difference of their professional
ethics and the 'ethics in their veins'.

5.2 The World Bank’s Framework

In recent years significant improvements have been made in the
measurement of corruption, in the construction of composite corruption indices,
and in the design and implementation of surveys. Beyond applying improved
empirics through a multi-pronged approach to surveys, it is now possible to
construct a framework linking the analytical and empirical research with

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operationally relevant utilization. One can effectively utilize empirical analysis in
the design and implementation of action programs.

The Economic Development Institute at the (World-Bank 1997), in

collaboration with the Transparency International and local NGOs, has developed
a methodological approach integrating within one empirical framework the
various components identified so far for understanding and combating corruption.
This overall empirical approach links worldwide database and analysis with
determinants of corruption, in-depth country analysis, and country action program
(Kaufman 1998).

5.3 The X-inefficiency model

The X-inefficiency approach was modeled for different purposes. This
approach has also been considered useful for describing the adverse impact of
corruption and government operations on public welfare (Kaufman 1999). In

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contrast to allocative inefficiency, this type of inefficiency is defined as one that
originates from a lack of effort and motivation among the workforce, resulting in
productive units not operating on the production possibility frontier (Button 1994,
P. 91). The original approach to X-inefficiency as developed by (Leibenstein
1973) aimed at explaining the efficiency losses resulting from a lack of
competition in private goods markets. In addition to the allocative losses depicted
by the classical Harberger triangle, Leibenstein argues that monopolistic firms do
not minimise costs for a given production level (Leibenstein 1966, P. 401). In a
competitive environment, inefficient producers are put under pressure from
competing firms, but monopolies can maintain their market position without effort.
The market selects those firms that are able to efficiently use their factor inputs.
But such a selection process does not exist in the case of a monopoly. This
absence of pressure results in a lack of motivation and effort among the
workforce and an inefficient organization of production.

This parallels the situation faced by public institutions, where it may be

questioned whether evolution selects benevolent principals who motivate agents
to serve the public. The resulting type of inefficiency appears to apply particularly
to an uncontested principal, a leadership position which is not repeatedly
occupied by new and innovative persons. Societies miss the opportunity to test
new applicants and types of leadership. Organisational innovation no longer
takes place and the constituency does not become aware that alternatives may
prove superior. Collective nonperformance among them does not cause their
organizational unit to go bankrupt. Fears of losing one’s job are mitigated.
Engendering a sense of responsibility for welfare- enhancing policies, being
motivated toward a common goal along with supervising the effort exerted by
colleagues is, therefore, harder to implement and may find few protagonists
within an uncontested government. In such a situation governments may be little
motivated to secure that agents serve the public. Shirking and laziness may be
condoned. An equal conclusion can be drawn with regard to corruption, because
the uncontested principal will avoid the effort required to control agents
(Lambsdorff 1999).

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 Finally, all the three approaches explored scientific methods in the field of
corruption evaluation, and hold value in achieving the goal: that is to estimate the
spread and map the structure of corruption. But, the methods used to measure
corruption based on the World Bank’s frame work may be considered as the
primary tool to use in formulating a comprehensive model to assess and combat
corruption in a specific country. The X-inefficiency model that was used by some
scholars to measure corruption did not proof to be of good use, while doing this
as it was originally formulated for other purposes.

6 Implications for modelling

Measuring corruption needs special attention regarding the kind and level of
corruption that determine the appropriate method to be used. A good model
requires a comprehensive understanding for the causes of corruption, business
environment, public administration, institutional structures and the effect of
culture. Moreover, accurate data are a key factor in formulating a sophisticated
model in assessing the level of corruption. Based on literature that has been
reviewed, the model is more likely to use the political patronage, administrative
labyrinth and lack of punishment as the determinants of corruption. As for the
country analysis, the political will, focus group and task forces are the useful
tools.

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