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The word corruption is associated with a range of acts such as bribery, extortion, buyinginfluence, nepotism, favoritism, fraud and embezzlement.

Corruption comes from the Latin verb rumpere, which means to break, presumably a

prevailing ethical, moral, social or administrative code of conduct.

Corruption takes place not only in govt. offices by public officials but also by those in a positionof trust in private enterprises or non-profit organizations. Indeed, most government corruption

involves a private sector entity.

Arnold J.H classifies corruption into three basic models:1. Public-office-centered,2. Public-interest-centered3. Market-centered models.

The key focus of public-office-centered concepts of corruption is on the behavior of public

officials which deviates from accepted norms in order to serve private ends.

The essence of public-interest-centered definitions is on the damage done to the public interestby corruption.

The market-centered definitions use social choice or public choice methods to analyze

corruption. The result is that corruption involves a shift from the bureaucratically determined,centrally allocated, mandatory pricing model to a model that is akin to a free market in which

clients risk to pay bureaucrats higher than mandatory prices to assure desired benefits.

Alatas (1990) distinguishes between

y Transactive corruption that is mutually arranged, agreed and advantageousy E

xtortive corruption that involves some kind of compulsion.y Investive corruption is not linked directly to an immediate transaction but is instead an

investment for obtaining favors in the future.

y Nepotistic corruption involves unjustified favored treatment for friends and relatives,y Autogenic corruption refers to benefits obtained from pre-knowledge of policy outcomesy Supportive corruption protects and strengthens existing corruption.

Another distinction has also been made between administrative or bureaucratic corruption and political corruption, the latter occurring when politicians betray the electorate by selling their

votes to pressure groups while undertaking regulatory or budgetary legislation.

Political corruption involves substituting rule in the interests of an individual or group for thosepublicly endorsed practices which affect an ordered resolution to conflicting individual or group

interests.Substituting these rules for individual or group gains erodes the legitimacy and the capacity of

the public domain to resolve conflict. One may add, in such a case, the state itself becomes asource of conflict rather than a mechanism for conflict resolution.

IS CORRUPTION A SERIOUS MATTER?

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Two Views about corruption:

For the purpose of analysis we call the first conception the benign view of corruption(corruption as oil) i.e. corruption is socially beneficial and the second corruption as malignant

(corruption as sand in the machine) i.e. corruption distorts the economy. Over time, an emerging

body of theoretical and empirical research on the phenomenon has shifted the balance in favor ofthe latter view.

A: Political impact

Benign view: Corruption is conducive to Political development

Malignant view: Political corruption shakes the very foundations on which a state is established:state is an apparatus to resolve conflict. Bribery results in arbitrary action that inspires conflict

rather than resolves it

Benign view: Organized corruption is superior to disorganized corruption.

Malignant view: Compared to organized, disciplined, centralized, and predictable corruptionwherein agents abide by established rules of the game (strong state: for example, monarchical

and pre-Communist USSR arrangements), disorganized, decentralized, and anarchic corruption(weak state: for example, post-Communist Russia and many developing countries) is more

devastating for growth and investment. The difference between different arrangements is that ofthe intensity rather than the direction of impact.

B: Macroeconomic performance:Benign view: Corruption oils the economic mechanism. Bribes lower the business costs oftaxes, customs duties, and regulations

Malignant view: Both theoretical and empirical studies point to a strong negative correlation

between the perception of corruption in a country and economic indicators such as the ratio ofinvestment to GDP, the rate of economic growth, and total revenue to GDP ratio.

Benign view:

In a distortion free economic environment, a Coasean bargain may result in the awarding of acontract to the firm that offers the highest bribe. Given only the low cost firm will afford to offer

the highest, bribes will not induce allocative inefficiency.In the second-best world of pre-existing policy-induced distortions, additional distortions in the

form of black marketeering, smuggling and so on may actually improve welfare even when someresources have to be spent in such activities (Bardhan, 1997,p. 16).

Malignant view: First, given illegal contracts cannot be enforced, bribery increases uncertainty

and transaction risk.

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Second, corruption increases the influence of criminal organizations as they guaranteeenforcement of illegal transactions and assist in laundering money.

Third, it can be argued that in developing countries, lower revenue collection owing tocorruption impairs a states capacity to adequately fund maintenance of law and order and

enforcement of contracts, thereby jeopardizing preconditions for economic growth.

Fourth, corruption diverts resources from productivity enhancing investments in human capital towasteful grand infrastructure or military projects easily amenable to corruption.Fifth, empirical evidence suggests corruption costs (time, money) to small and medium-sized

enterprises (SMEs) are highervis--vis large firms stifling the inception, growth, and competitivecapacity ofSMEs.

Sixth, secrecy requirement for bribes breeds capital flight retarding capital formation. It alsoencourages undocumented economy.

Seventh, bribery impedes foreign direct investment by operating as tax (Tanzi, 1998).

Corruptions capacity to mimic a Coasean bargains is impaired in more than one way. In particular, favoritism or nepotism for a particular client or secrecy requirements introduce

conditions other than size of the bribe in the decision making process. Bribers may alsosubstitute lower quality goods.

Even in the second-best world, corruptions ability to increase efficiency is doubtful since factorscausing distortions are quite often the same as those responsible for corruption. Secrecy

requirements may favor trusted rather than the highest bidder being allotted a contract.

Benign view: Bribes facilitate maintaining a lower tax burden by alleviating the need to raisewages of government employees. Lower tax burden is pro growth.

Malignant view: Bribes are worse than taxes in terms of consequences for growth. Bribes are an

ex antetax on capital reducing all future returns while taxes are levied exposton profit.

C. Incentive structures

Benign view: Corruption provides incentives for business friendly action speed money that is

offered to jump slow-moving queues is efficient because it saves time for those who value it.

Malignant view: Rules and rigidities are not exogenous but instead the product of governmentmachinery. When rules can be used to extract bribes, more rules will be created. Evidence

suggests that speed money induces systemic slowdown to attract more bribes

The starting point for the benign view is Leff (1964). He argued that the notion that corruption is

harmful is based on an idealized conception of government the government is good position.

In reality, many governments can be indifferent, outright hostile, or lukewarm to the process ofeconomic development owing to other priorities (military, ideological, political), and to fears of a

challenge emerging to established centers of political and economic power in case of progress,in-expertise, and inefficiency. In these circumstances, corruption can act as an extra-legal

institution to facilitate business, encourage government officials to business friendly action, andmitigate governmental policy errors.

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On the alternative view, corruption sustains a vicious cycle of rule substitution by politicians,over-regulation and systemic procrastination by bureaucrats, and wasteful use of talents in rent-

seeking. Thus Mancur Olson (1982) in his monumental study The Rise and DeclineofNationsadvanced the thesis that differences in macroeconomic performance within and across nations

could be explained by the degree of prevalence and influence exerted by collusive, cartelistic and

restrictive business, trade, and professional associations in creating or preserving favorableredistributive monopoly positions for their members. The higher the influence of interest groups,the more focused the political process is on redistributing existing income at the cost of

efficiency losses and the less successful it is in promoting efficiency enhancing, pro-growthpolicies that benefit a wider spectrum of the citizenry