When the economic crisis struck, debate over how to re-start the world’s financial engine took precedence over discussion about long-term institutional reform – even in countries where change was crucial. The “change” I am talking about is not a country’s long-term fiscal sustainability or imbalances in trade and finance. It is a much more down-to-earth issue. As a governing politician, I know I must choose my words and their connotations extremely carefully, but I’m not going to beat around the bush: Corruption. It is an enemy that we must never make a truce with, even though it might help us win short-term victories against fiscal hardship. Why? Because corruption will stab you in the back.
When countries are desperate for growth, they need to be extremely cautious about how they try to surmount the obstacles that stand in their way. The relationship between growth and corruption has been debated for decades (this paper by the IMF’s Paolo Mauro was probably the groundbreaker). Some argued that corrupt cash helps to “grease” the wheels of society, while others said it was more like sand that slowed the wheels down. The “grease people” held that bribery makes bureaucracy function. More scientifically put, bribes are “speed money’ that incentivize efficient production of essential public goods. Meanwhile, the “sand people” argued that corruption lowers incentives to invest and innovate because it reduces the security of property rights. Corrupt bureaucracies tend to delay issuing permits and licenses and may even “ration” them. Moreover, corruption might be present in still-unseen channels. To make a long story short: Corruption ultimately kills growth. It imposes barriers and hurts the business environment. That is why destroying corruptions means more economic freedom. The sand-grease debate was never very heated, since most of the data (not to mention common sense) pointed to the sand argument.
I, too, support “sand theory.”
Why does corruption exist? In 2000, U.S. economist Daron Acemoglu and his colleagues suggested the weather was to blame for the proliferation of crooked institutions. According to this theory, European imperial powers set up particularly exploitative governing institutions in colonies where the climate was too harsh for Europeans to migrate in large numbers. When the Europeans pulled out, local elites inherited those institutions and carried on with the same abusive practices. Acemoglu and friends found that institutional abuse today accounts for the wide-scale differences in GDP per capita between countries.
Source: Boris Podobnik, Jia Shao, Djuro Njavro, Plamen Ch. Ivanov and H.E. Stanley: Influence of corruption on economic growth rate and foreign investment.
Southeastern Europe is clearly struggling with some bad institutional heritage. For us, organized crime and corruption are a legacy of communism, compounded by the crippling sanctions imposed on us during the 1990s.
So how can we defeat corruption? Academic literature tells us that the recipe is straightforward, but by no means easy: Rule of law, secure rights to property, institution-building, better remuneration for government officials, stricter oversight, and a government that is smaller in size, but convincingly stronger in terms of law enforcement. We have been using this recipe for years now. It has been a political priority and we have made some spectacular steps – for example, my ministry has a brand-new alert mechanism for identifying money laundering.
The stakes are high: If we lag behind, the result will be both a painful delay in EU integration and diminishing economic growth.