Opinion: there are many reasons why corruption is bad for a country such as how it distorts policy decisions, discourages investment and causes reputational damage

A venerable British professor of economics once asked me in a job interview why I thought corruption was a bad thing. I had written several papers on the abuse of public power for private gain, but I had never really given this question much thought. My off-the-cuff answer was that I thought corruption was a bad thing because quantitative social science has shown that to be the case across a wide range of outcomes and this satisfied the professor 

Thinking back on it a few years and a couple of hundred undergraduate students into my own research and teaching career, I can understand why. Economics has nothing to say about the morality of corruption, or of anything, but that does not mean economists are not interested in it or that we have nothing useful to say. 

Corruption as a tax 

One useful way to think about corruption is to think of it as a tax that can discourage investment and other economic activity and statistical evidence supports this notion. Important research has shown that countries that are more corrupt, or are at least perceived to be so, tend to grow more slowly and that this operates through a reduction in investment. Importantly for Ireland given our economic model, the link between corruption perceptions and investment decisions is very clear in FDI data.

Public investment is another route through which corruption can influence growth. Corrupt officials who are involved in infrastructure decisions often have a lot of leeway over what is built and where, and who builds it. The idea that the incentives facing public officials can lead to distorted policy outcomes also explains the strong, and many would say undesirable, effect of corruption on poverty and inequality.

We also have insights into why some countries are more corrupt than others are and what can be done to combat and curb corruption

These "standard" consequences of corruption are important enough in and of themselves to make the study of corruption worthwhile. The negative effects of corruption go beyond the macroeconomic aggregates that typically dominate popular discourse. Studies using survey data have allowed researchers to uncover further costs. For example, simple economic calculus suggests that nobody would pay a bribe unless one stands to receive something of greater value.

However, one of my own studies found a strong association between being a bribe payer and self-reported anxiety. Other scholars have found that living in a corrupt environment is associated with lower levels of self-reported happiness or worse living conditions, though this is seemingly context dependent. The evidence therefore suggests that corruption imposes a direct cost on people’s well-being. We also have evidence of "non-economic" costs of corruption from a fascinating study from China that links worker deaths to the political connections of a firm’s board members. 

The Habsburg effect

Therefore, economists and other social scientists have a good handle on why corruption is bad. We also have some insights into why some countries are more corrupt than others are and what can be done to combat and curb corruption. The broad message is that history matters, but this does not mean that countries are trapped. Countries with greater female representation in parliament tend to be less corrupt, perhaps reflecting different social preferences.

A wonderful recent study demonstrates that areas within the same modern country can have different levels of corruption depending on what side of the long defunct Habsburg Empire border they are on. Driving this seems to be the relative professionalism and probity of the Habsburg bureaucratic system. 

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From RTÉ Radio One's Drivetime in November 2017, a report from Fergal Keane and Richard Curran about new government measures to tackle white collar crime, replace the Office of Corporate Enforcement and introduce new offences of corruption 

A culture of honesty, once established, can have long lasting effects so how can such a culture be created? Experimental economics offers some promising results in this regard. Perhaps the most obvious anti-corruption policy is a threat of punishment and studies have found that even a small chance of being caught and punished can be effective. Likewise, staff rotation policies can stop relationships forming between potential bribery partners.

Finally, paying officials higher wages has been found to reduce corruption in some laboratory and field experiments. This is an important finding as it suggests that those taking bribes incur a mental cost and that people, in some contexts at least, take or demand bribes because they have to in order to support themselves and their families. 

Ireland's dependence on multi-national investment means that we must be ever vigilant of how corrupt our country is perceived to be

While we are lucky to live in a relatively clean country, the corruption literature offers several lessons that we would do well to take to heart. As we as a country and individuals seek new trading and business opportunities, an awareness of potential economic pitfalls will prove useful. The case of Siemens shows that firms from clean countries can find themselves embroiled in corruption and scandal. Entrepreneurs seeking opportunities abroad should be very familiar with how business is done in their partner’s country before pulling the trigger on a project or deal. Finally, it is worth reiterating that our dependence on multi-national investment means that we must be ever vigilant of how corrupt our country is perceived to be. 


The views expressed here are those of the author and do not represent or reflect the views of RTÉ