This chapter analyses the relationship between the economy and corruption. In many ways, this relationship is a straightforward one; the effects of corruption on economic development are overwhelmingly believed to be negative. While it is impossible to quantify the costs of corruption, and, indeed, many of the figures that are quoted in this regard are nothing short of simple guesses, it nonetheless remains clear that corruption can be a debilitating drain on economic development. It is beyond question that corruption costs rich and poor countries alike significant amounts of both money and resources. This chapter begins by illustrating why that is. It explains that even the most cursory of glances at the data reveals that corruption skews the allocation of resources, often has a detrimental effect on economic growth, undermines both the rule of law and property rights and impacts negatively on standards of living.

Nevertheless, the following carefully points out that much (although not all) of the econometric analysis that is done in this area is conducted on shaky ground. None of the traditional measures of corruption are rigorous enough to facilitate the data crunching demanded of them; however, much economic analysis ignores this and carries on regardless. Simply noting that they are the best measurements of corruption we have is not a good enough reason to go on and use them as if they were actually reflecting real-world activity. This poses a real challenge for economists and those seeking to create economic models that can be tested with real-world data.

This chapter illustrates two further things. First, the economic impact of corruption is differential. Indeed, context is important in explaining why corruption can be so utterly corrosive in some places and have a much more sanguine effect in others. This does not mean that corruption is a positive influence, but it does mean that there are some awkward real-world situations involving what is clearly corruption that need explaining. How, for example, did the Asian Tiger economies of the 1980s and 1990s manage to mix dynamic growth with sustained and deeply ingrained corruption?