Causes of Corruption: An Economic Approach

Corruption and the fight against its various forms have constantly been a concern of theorists and policymakers because corruption is one of the important obstacles to socio-economic development. Economists have issued warnings about the devastating consequences of financial corruption and have argued that financial corruption increases transaction costs, reduces investment incentives, and ultimately reduces economic growth. Political scientists have pointed out the political costs of corruption for societies and claimed that an increase in corruption leads to a decrease in public trust in the political system and the destruction of the government's legitimacy, and could have a negative impact on democracy and political development. The manner in which this phenomenon influences growth and development is that it typically leads to more inequality and loss of public trust in government. By reducing political accountability, it undermines democracy and good governance. The economic approach is useful to study the causes of financial corruption because the researchers will be able to pay close attention to the underlying motivations and rationality to explain this problem of corruption. The researchers will be able to explain and understand why some individuals make choices based on their preferences that results in financial corruption. Some individuals are more corruption-prone and willing to engage in corruption when the opportunity arises to maximize financial gains for their own personal use or act as agents of corruption in their institutional roles for collective gains. Equally important is the task of discussing the anti-corruption efforts to deter future corruption behaviors of individuals and to combat state-sponsored institutional corrupt practices. In order to formulate effective strategies and policies to win the fight against corruption, it is necessary to first identify and understand the causes of corruption.With a qualitative approach and within the framework of public choice theory, the authors analyze a collection of the most important empirical and theoretical work on the causes of corruption with the goal of finding suitable answers to the following research questions: 1. What are the prominent differences between economic and non-economic approaches to explain the causes of financial corruption? 2. Does the economic approach used to explain the causes of financial corruption have more explanatory power than the non-economic approaches? The research hypothesis assumes that the use of economic approaches (general choice theory) to study financial corruption is more effective in analyzing the financial corruption-development association. The essence of the general choice theory to explain the behaviors of individuals and political elites is that these individuals seek to maximize their own personal gains and/or the collective benefits of a particular group, party, class and family with no or little regard for the maximization of the accrued benefits for the society at large. A key question is, to what extent the corrupt individuals are rational actors, given that they make choices which are generally perceived as irrational by other individuals—who do not get involved in corrupt practices. A multitude of reasons might influence an individual to make a ‘rational’ decision to engage in financial corruption practices. Theoretically, he makes a rational choice, because his calculations indicate that the expected benefit of financial corruption exceeds the expected cost including the cost of being detected, arrested and punished for his illicit acts.The critics of the economic approach to explain financial corruption emphasize a score of economic and non-economic factors such as weak economic development, low levels of education, poor quality of the bureaucracy, reduced transparency in laws and tax regulations, misconduct of community leaders, and religious composition of the total population. The existence of ethnic-linguistic subgroups in a country, the low degree of democracy (indicated particularly by the lack of freedom of speech and the freedom of the press), and political instability have been emphasized in the non-economic approach to the study of financial corruption. However, the effects of the non-economic causes of financial corruption are indirectly through economic factors. The individuals generally base their decision-making on their cost-benefit analyses and if the gains exceed the cost, they get engage in corruption. In other words, the improved quality of bureaucracy and transparency do not necessarily prevent a person from committing acts of financial corruption, but the high quality of bureaucracy and the high degree of democracy (particularly freedom of the press and transparency) reduce financial corruption by increasing the cost of corruption behaviors. The results suggest that non-economic approaches have been useful in explaining causes and consequences of corruption to a certain degree, but economic approach is more effective for understanding the motivations of corruption and its consequences for economic and political development. These research findings are important for planning and implementing anti-corruption programs such as enforceable ethical code of conduct, and regulations to increase transparency and accountability for public officials.