Do Corrupt Countries Tend To Be Poor?

How the history of two countries can help us to answer what truly is the cause and the consequence

Have you ever made yourself that question? Here goes another one, if we think about the general public opinion, what you think would be the answer? I believe that most people would answer “Yes”, that corruption is the cause of poverty, it seems like a logical conclusion and it is comprehensible.

However, if we take a look in history we may find empirical evidence that this conclusion might not be entirely true. Come with me, I’ll show you some pieces of evidence and to do that I’ll tell you the story of two countries, Zaire (actual Democratic Republic of Congo) and Indonesia.

What those two countries have in common? Both have been through 32 years of a dictatorship known for its violence and corruption, however, they had a monumental economic difference. Let’s analyze their scenarios:

Zaire: In 1961, Zaire was a desperately poor country with a per capita annual income of $67. Mobutu Seko came to power in a military coup in 1965 and ruled until 1997. It is estimated that he had stolen about $5 billion during his rule period of 32 years, or about 4.5 times the country’s national income in 1961 ($1.1 billion)

Indonesia: Also in 1961, with a per capita annual income of only $49, Indonesia was even poorer than Zaire. Mohamed Suharto came to power in a military coup in 1966 and ruled until 1998. He is estimated to have stolen at least $15 billion during his 32-year rule. Some suggest that the value might have been as high as $35 billion. Let’s take the mid-point of these two estimates ($25 billion), Suharto has stolen the equivalent of 5.2 times his country’s national income in 1961 ($4.8 billion).

What can we infer from this? The logical conclusion considering the amount that was stolen, would be that Indonesia went from bad to worse if we compare to Zaire, right? Wrong!

“Wrong!”

Zaire’s income per capita in purchasing power terms substantially lowered during Seko’s regimen, in 1997 when he was deposed, was one-third of its level in 1965 when he came to power. By the end of his government, Zaire stood in 141st among the 174 countries for which the UN calculated the Human Development Index (HDI). Remembering that HDI takes account not only income but also “quality of life” measured by life expectancy and literacy.

Meanwhile, the living standards of Indonesia rose by more than three times during Suharto’s rule. Being in 105th on the HDI’s ranking, it is not an economic miracle but is creditable considering where it had started.

What do I want to show with this analyzes? Am I trying to defend corruption or emphasizes Suharto’s dictatorship? Obviously not, I’m not pro corruption and even less of violent dictators.

My point is that the Zaire-Indonesia contrast shows the limitations of the increasingly popular view propagated by the developed countries that corruption is one of the biggest, if not necessarily the biggest, obstacle to economic development of poor countries (I shall discuss this subject later).

How Indonesia did better than Zaire?

As Ha Joon Chang explains in his book “Bad Samaritans”, the critical issue in this regard is whether the dirty money stays in the country or it goes to a bank in the Bahamas (or elsewhere out of the country). In Indonesia, the money from corruption in most part stayed in the country, creating jobs and incomes, while in Zaire, Seko sent his money far away from his country.

“The critical issue in this regard is whether the dirty money stays in the country”

Again, I’m not trying to defend corruption, I know it is a delicate subject, therefore we must be objectives to analyze it. Corruption is, in general, morally objectionable.

Life would be simpler if morally objectionable things like corruption also had unambiguously negative economic consequences, unfortunately, the reality is a lot messier.

When we look at countries like Zaire, under Mobuto or Haiti, we see economies devastated by an uncontrollable corruption, on the other extreme, there are countries like Finland, Sweden, and Singapore that are known for their cleanliness and economically perform very well. However, we have countries like Indonesia that were very corrupted and performed very well economically, like Indonesia, there are other countries as Italy, Japan, Korea, Taiwan and China that did a lot better than Indonesia despite ingrained corruption on a widespread and often massive scale (I know that none of them were as serious as Indonesia).

Let me remind you that corruption is not just a 20th-century phenomenon. Most of today’s rich countries successfully industrialized despite the fact that their public life was spectacularly corrupt. As Kindleberger has shown in his book “A Financial History of Western Europe”, in Britain and France, the open sale of public offices was a common practice at least until the 18th century. Nield in his book “Public Corruption — The Dark Side of Social Evolution” said also that in 19th century’s Britain, it was considered normal for ministers to “borrow” their funds for personal profit.

“Corruption is not just a 20th-century phenomenon”

Corruption and overregulation

We know that corruption may distort government decisions by hampering regulation. If a water company supplying sub-standard water can continue the practice by bribing the relevant officials, there will be negative economic consequences, a higher incidence of water-borne diseases that will increase health care costs and, in turn, reduce labor productivity.

But if the regulation was an “unnecessary” one, corruption may even increase economic efficiency. Before the legal reform in 2000, opening a factory in Vietnam required the submission of dozens of documents, as said in the World Development Report of 2005 (page 101) the process to prepare all the paperwork and get all the necessary approvals took from 6 to 12 months. In a situation that the potential investor bribes the government official and gets the license quickly, the investor wins by earning more money, also may be argued, that the consumer gains by getting his demand satisfied more quickly. For this reason, it has been often argued that bribery may enhance the economic efficiency of an over-regulated economy.

The American political scientist Samuel Huntington has a famous quote about this:

“In terms of economic growth, the only thing worse than a society with a rigid, over-centralized dishonest bureaucracy is one with a rigid, over-centralized honest bureaucracy”.

So, if the impact of corruption on economic development is ambiguous, how about the latter’s impact on the former?

The already mentioned, Ha Joon Chang, argues that economic development makes it easier to reduce corruption, however, this relationship is not automatic, there must be conscious efforts to reduce it.

As was discussed earlier, history shows that, at earlier stages of economic development, corruption is difficult to control. The fact that today no country that is very poor is very clean suggests that a country has to rise above absolute poverty before it can significantly reduce the “dirt” of its system.

With so many references from economic scientists showing that the correlation is that poverty is the cause and corruption is the consequence, why do public opinion thinks is the other way around?

The Unholy Trinity of Neo-liberalism

I said at the beginning that rich countries spread the wrong view that the poorer ones are in that condition because of its corruption, why is that? A neo-liberal agenda has been pushed by an alliance of rich countries led by the US and mediated by, as Chang calls, “The Unholy Trinity” of international economic organizations — the Internation Monetary Fund (IMF), the World Bank and the World Trade Organization (WTO).

The IMF and the World Bank play their role by attaching to their loans the condition that the recipient countries adopt neo-liberal policies. The WTO contributes by making trading rules that favor free trade in areas where the rich countries are strong but not where they are weak.

There have been almost three decades that they are promoting economic policies that don’t work for undeveloped countries and that they didn’t use in their past, they basically climbed a ladder and kicked it for others don’t climb as well.

“They basically climbed a ladder and kicked it for others don’t climb as well.”

And when their neo-liberal policies fail (it always fail) in those poor countries, they blame corruption. It fails because they are wrong, not because they are overwhelmed by local anti-developmental factors, like corruption.

There are about 40 countries that are considered “developed”, ask yourselves that question: How many of those developed ones used neo-liberalism policies and pure free market to change their condition from undeveloped to what they are today?

There is hope?

It is too easy to be pessimist towards something, all you have to do is to stand still and wait for something go wrong for you to point at it, pessimists are lazy. I’ll always think that we as a society will be able to improve by seeking knowledge. For now, I believe that we don’t fully understand what is the phenomenon “corruption”, although, we think we do. That’s the hard part, admit that we are ignorant in the subject to be able to fully learn it.

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