Corruption, economics, and environmental policy

When discussing environmental policy in introductory courses of environmental and natural resource economics, the fiction of the benevolent policy maker is often used. The benevolent policy maker wants to maximize society’s welfare and has to find the most adequate policy to reach such goal.

Unfortunately, policy makers are generally not benevolent in the above sense: they may be corrupted, that is, they may misuse the power of their public office for personal gain.

What insights does economics provide in the analysis of corruption? What are the implication for environmental and natural resource economics?

In an excellent article Economic Analysis of Corruption: A Survey, Toke Aidt identifies four approaches to corruption in the economic literature:

1. Efficient corruption: corruption facilitates beneficial trade and promotes allocative efficiency by correcting pre-existing government failures. The notion of efficient corruption however is based the theoretically weak “ the implicit assumption that the government failure that corruption is supposed to correct is exogenous and in itself unrelated to corruption, when, in fact, it may well be put in place and maintained by corrupt politicians precisely because of its corruption potential.

2.Corruption with a benevolent principal: the benevolent principal (for instance a government official) delegates some powers to a non-benevolent agent (e.g. a bureaucrat); the institutional arrangements of how this power is delegated affects the level of corruption. The major result of this approach is that: If the government wants both to implement socially beneficial policies and optimize the working of its institutions, it will have to design institutions that allow some positive (optimal) level of corruption. Aidt argues that if the aim of the economic analysis of corruption is to try to identify its determinants and study its relationship with existing institutions then theories based on the benevolent principal are not very fruitful. (Aidt 2003, 649. )

3. Corruption with a non-benevolent principal: government officials abuse their power to extract rents from the private sector. This approach starts from the more realistic assumption that all agents can be corrupted and sets the general principle that “Economic policies are adopted, not to eliminate market failures but because they create corruption opportunities: inefficient policy and corruption are equilibrium phenomena and are jointly determined by underlying economic and political institutions.” (Aidt 2003, 644. )

4. Self-enforcing corruption: unlike the above mentioned theories, which assume that only the incentives provided by different institutional arrangements determine the level of corruption, self-enforcing corruption theories assume that history plays a crucial role. The returns to being corrupted, it is argued, depend on how diffuse corruption is in the society, that is, on how much corruption is inherited from the past. The larger the share of corrupted agents, the higher the returns to corruption. If corruption is endemic then a “big push” is needed to reduce corruption.

Aidt concludes that most useful in the understanding of corruption are detailed case studies as they can “help establish more firmly that corruption, economic policies, and economic outcomes are jointly determined by the underlying political and economic institutions and possibly also by history. This point seems to have been forgotten, at least partly, in much of the recent empirical work that uses data from a cross-section of countries to study precisely this nexus relationship.¤” (Aidt 2003, 650 )

What are the implication of the corruption literature for environmental and natural resource economics?

First of all, corruption is an important factor that shapes the design and implementation of environmental policies. Second, natural resource abundance is likely to act as a facilitating factor for corruption. Three conditions are crucial to the emergence and persistence of corruption: 1) discretionary power, 2) economic rents, and 3) weak institutions (Aidt 2003, 633 ). Abundance of natural resources facilitates the emergence of corruption because their exploitation allows the extraction of high rents (Leite and Weidmann 2002, Sala-i-Martin and Subramanian 2003)

References

Aidt, T. S. (2003). Economic analysis of corruption: A survey. Economic Journal, 113(491), 52.

Leite, C., & Weidmann, J. (2002). Does mother nature corrupt? Natural resources, corruption, and economic growth. Governance, Corruption, and Economic Performance, 159-96.

Sala-i-Martin, X., & Subramanian, A. (2003). Addressing the natural resource curse: An illustration from Nigeria National Bureau of Economic Research, Inc, NBER Working Papers: 9804.

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