Cash for Corruption

One of the many challenges for developing countries is good governance. You can have all the natural resources you want, but they are good for nothing without proper distribution mechanisms and sound public policy.

Fortunately, there is a recent trend in the academic literature to explore the role of governance in development. Several development economists, many of whom are affiliated with the NBER Africa Project, have begun to examine the effect of incentives on governance outcomes in low-income countries. There are two common policy instruments used to reduce the incidence of corruption, in particular.

Governments have tried to establish financial incentives for performance and accountability. Most of the empirical literature supports the hypothesis that these conditional payments will reduce corruption, but there is one obvious wrinkle. Are monetary rewards really the solution for an already rich, greedy bureaucrat? Surely the amount of money that corrupt officials receive through bribes is far greater than the monetary value of the financial incentive for good governance. So, are these conditional cash payments really incentives, or are they disincentives? It is possible that the purely rational, profit-maximizing strategy would actually be to continue with the status quo of corruption. In other words, financial incentives might work for poor schoolteachers, but not for corrupt officials.

That's why incentive payments are often coupled with monitoring and accountability programs. The theory here is that sunlight is the best disinfectant for the stain left by corruption. A couple things have to work right for these programs to have their desired effect. Public infrastructure must be developed enough to conduct sufficient auditing. But, perhaps more importantly, monitoring programs are ultimately only as successful as the perceived strength of enforcement. What good is a finger wagging without actual punitive damages? If corrupt officials know that auditing systems are weak and punishment is severely delayed, then there is no reason to expect a change in their behavior.

We all know that corruption is a tough nut to crack. Social and economic development will require economists to get the incentives right. But it's not going to be as easy as giving out money or taking it away in places where cash is not just a currency, but also a language.