How Corrupt and Incompetent Governments Can Produce Economic Development

Many people hate their government because it is corrupt and incompetent. The United States is relatively clean and technocratic. The Transparency International rankings of government corruption in 2017 lists us as the 16th cleanest nation out of 180 countries in the world. Number 16 is not number 1, (New Zealand holds that title.) but it is not bad.  We are about at the same level as Austria. We are above Israel (# 32) and Mexico (#135). If you really want to see government corruption, check out Venezuela (#169) or for the pits, Somalia (Rock Bottom at #180.) The World Bank also publishes indicators of governmental effectiveness. Here again, we are not bad. In 2017, the United States was # 16, this time out of 208 nations. (Yes, we were # 16 for both measures.) The champion for government effectiveness was Singapore. Austria was a little underneath us at #18. Israel was #23, Mexico #99. Somalia was the only second worst in the world; at the bottom of the table was South Sudan. There are numerous nations that really are corrupt and incompetent. Notoriously corrupt Greece is only #59 on the international corruption rankings; that means Countries #60-#180 are worse than Greece. Greece is #70 for competence. Countries #71-#208 were worse than Greece. The United States is in good shape, but much of the rest of the world is not.

Government corruption and incompetence are consequential. In particular, venal ineffective governments can really lower a country’s rate of economic growth. Business arrangements get distorted by the need to make side payments to influential politicians. Property relations are not secure. Critical government functions such as maintaining schools, building infrastructure and preventing crime do not get done. Nothing seems to work; investors shift their capital to other more secure locations. It is understandable that citizens of corrupt incompetent states blame the government for their stagnant economies. It is understandable that development agencies and people concerned about alleviating poverty want to see government corruption and incompetence eliminated as a key first step in setting countries on the right path.

    

I am all for getting rid of corruption and incompetence. Corruption and incompetence are both extremely hard to eradicate. So, people who place all of their developmental hopes on getting rid of corruption and incompetence are basically betting on winning the lottery. The odds of getting the clean-ups they want to see are very low. Corrupt officials are extremely good at clinging on to power. Administrators who are very bad at doing their jobs can be very good at holding on to their jobs. If corruption reform and producing good governance is the only plan for creating economic growth, then people who want to see an end to poverty are basically, giving up and conceding defeat.

 

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Fortunately, it is possible to create economic growth even with corrupt incompetent governments. Progress is not as great as the progress you would expect to see if one’s government was a super-performer like Singapore. But governments do not either have to be saints or superheroes in order to produce growth.

    

How do corrupt incompetent governments produce economic growth?

   

With cheap simple projects that do not require a ton of money to pull off and do not require Albert Einstein running the program to succeed. If the cost is low, even if huge amounts of the budget are plundered by the wrong people, there will be enough left in the treasury to make the project work. If the project is sufficiently easy, then lots of people can do the jobs required for the project, even if the government agency overseeing the job does not have as high a quality of staffing as one would like.

    

The simple projects that produce growth are not glamorous, nor are they grand in scale. They do not produce instantaneous wealth, and by design, they need to be cheap. Their effects are modest, but their effects are real. I call these projects “palliative development”. Palliative development projects are modest projects oriented around eliminating poverty and producing small amounts of employment for poor people. 

    

What kind of projects are we talking about here?

Vocational Education.

Putting water and sewers in neighborhoods.

Plain ordinary construction projects, be they schools, public housings, or museums praising the accomplishments of the president.

Improving bus transportation.

Putting in tourism development along a beach.

 

What do all these projects have in common?

    

One, none of them are particularly complicated. You do not need government bureaucrats with Ph.D.s from Johns Hopkins to bring in cutting edge technology to make these projects work. Yes, it would be glamorous if the new bus station had an ecological design. But pretty much any building made of concrete blocks that has enough spaces for the busses to park and enough benches for the people to sit down is going to function as a bus terminal.

    

Secondly, they create either physical infrastructure or skills infrastructure that supports the rest of the economy.

    

Vocational education produces skilled workers.

    

Water and sewers open up entire areas for commercial development. No one wants to open up a café next to an open sewer or in an area where they can’t get clean water.

    

Construction projects create blue collar employment.

    

Bus transportation gives workers in areas surrounding cities access to urban labor markets. It also opens up the city as a recreation location for lower class customers.

    

Tourism projects do not have to attract international tourists to work. Creating a nightlife area can create a thriving economy of locals providing entertainment to locals.

    

A third feature of the list is that they produce fairly immediate employment for poor people. Employment for poor people stimulates economic growth because the poor become consumers, and their purchases support other businesses. Consumer multiplier effects can often be substantial. It is nice to generate an internationally competitive export sector that brings foreign exchange into an economy. But that assumes that a nation can build a “world-beater” product or service that can survive foreign competition. Some economies can do this; some economies can not. In contrast, any project that props up local demand will produce spin-off economic development substantially in excess of the results of the original product because the wages of the workers involved are pumped back into the local economy. This is an effect that should not be under-estimated.

 

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The main point here is that garden variety routine government projects can have more effect than is appreciated for eliminating poverty and stimulating economic growth. True, creating a vocational education program will not move an economy from the level of Zaire to the level of Denmark overnight. But not every economic intervention has to be a grand slam home run.

    

Only non-corrupt highly competent governments can create the grand slam home run of rapid dramatic development. The developmentalist East Asian states of the late twentieth century (South Korea, Taiwan, Singapore, China) experienced the fasted economic growth recorded by any economies in human history. Their governments really were super-performers.

    

But not every government has to be Singapore to be effective.

    

Yeah, you don’t want a government that starts civil wars. As Gregory Hooks says, warfare is development in reverse.

    

Yeah, you don’t want a government that starves regions of the country out of policies of pure ethnic favoritism.

    

If your problem is that a government is corrupt and incompetent, this is bad, but it is not a death blow. Plain ordinary garden variety government activities still produce small but meaningful amounts of economic growth. The routine business of running education programs, and building infrastructure can make a tremendous difference, even if the rats have their hands all over the building funds.

    

Cheap programs work better than expensive programs because they avoid debt.

    

Simple programs work better than complex programs because you don’t want them screwed up.

    

But plenty of cheap simple programs exist that are within the technical capacity of even the worst governments.

    

Which is just as well, since bad governments are what a large percentage of the world’s population has got.

For More Information

To look at the data on worldwide levels of corruption, go to Transparency International’s website. This particular table can be found at: www.transparency.org

 

The World Bank data on quality of governance can be found at: info.worldbank.org

 

For typical high quality studies statistically linking government transparency and competence to economic growth, see: 

 

Evans, Peter and James Rauch. 1999. “Bureaucracy and Growth: Cross-National Analysis of the Effects of Weberian State Structures on Economic Growth.” American Sociological Review 64: 748-765.

Alam, MD Rafayet, Erick Kitenge and Bizuayehu Bedane. 2017. “Government Effectiveness and Economic Growth.” Economics Bulletin 37: 222-227.