CAN CORRUPTION EVER IMPROVE

Many in the world of developmental economics believe that cor-ruption, the circumvention of the rule of law for private gain, leads to nothing but woe for any nation’s economy, under any circumstances. Transparency International makes the elimination of corruption their mission, and many large multinational firms today echo that goal by building ethical codes that prohibit employees from engaging in prac-tices deemed corrupt, regardless of local attitudes and customs to-ward the practices. The World Bank makes curbing corruption a linchpin in their campaign to improve governance. Reasons given for blanket condemnation of corrupt behavior are often utilitarian: Cor-ruption is expected to increase the economic costs of doing business by undermining the laws of the land; this, in turn, reduces productive activities and investments, with negative consequences unfolding for human development and economic growth. When legal protection of personal and property rights is strong, this argument is reasonable, but does it hold for nations that have failed to establish and consistently enforce a sound rule of law? Leff (1964) and Huntington (1968) speculated that corruption may be considered a useful substitute for a weak rule of law. In other words, the value of behaving corruptly—the value of additional productive transactions that occur—can exceed the costs of engaging in corruption. This is most likely when the legal options for doing business are quite lim-ited. Osterfeld (1992) makes a useful distinction in sorting out corrupt behaviors that is followed in this article. He divides corrupt actions into two categories: economically restrictive and economically expan-sionary. Corruption may often be restrictive, rent-seeking actions, such as firms ’ seeking government protection from competitors. But corruption also can expand economic activity, for example, by privat