Three Longs & Three Shorts

When is corruption good for growth?

Corruption is often attributed as one of the key impediments to development and growth. However, Shrabani Saha and Kunal Sen of the United Nations University in a working paper (see here) show that there is indeed a positive correlation between corruption and growth drawing from the experiences of East Asian economies who demonstrated long periods of high growth despite evidence of high corruption. However, Saha and Sen show that this relationship holds only for autocratic states whilst the relationship inverts to normalcy in democracies as generally expected.
“Our results provide support for the so-called East Asian paradox of high corruption and high growth and suggest that the benign effect of corruption on growth is because of the authoritarian nature of the political regimes in these countries for a large duration of their development experience that gives firms confidence that the ruling powers will deliver on the deals that they have entered into and these credible commitments are vital for investment and growth. These credible commitments can be achieved through promoting economic freedom and maintain macrocosmic stability in a country. On the contrary, for the average democratic countries, the effect of corruption on growth is likely to be strongly negative. Democratization is likely to weaken the positive relationship between corruption and growth in previously autocratic countries, and the increasing wave of democratization observed in the developing world suggests that corruption may be more of a threat to economic growth in the years ahead.”