The Ends and the Means of Development

Augusto Lopez-Claros & Valeria Perotti The transformation of Japan into a modern economy at the end of the 19 th century is a tale of culture and cultural change. The centuries-long transmission of values like honor, loyalty, duty, obedience and discipline in the bushido (the code of conduct of the samurai) contributed in fundamental ways to shape Japan’s human capital. However, a change in mindset – triggered by the personal influence of key political figures – needed to happen in order for the country to devote its efforts to economic development. Japan’s 250-year old feudal shogunate collapsed in 1867-68 and power returned to the emperor in Kyoto. The Home Minister appointed in 1873, Okubo Toshimichi, was relentless in the recruitment of talent for his Ministry, believing that promotions should be based on merit rather than family or military connections, and that those trained abroad were particularly well-suited to assist him in his efforts to launch Japa...

In our earlier blogs on corruption we have looked at the causes and consequences of corruption within the process of economic development. In our last blog, Six Strategies to Fight Corruption , we addressed the question of what can be done about it, and discussed the role of economic policies in developing the right sorts of incentives and institutions to reduce its incidence. This blog will provide some thoughts on the moral dimensions of corruption. In his erudite and all-encompassing study of bribery through the ages, Noonan ( 1984, p. 700 ) observes that “the common good of any society consists not only in its material possessions but in its shared ideals. When these ideals are betrayed, as they are betrayed when bribery is practiced, the common good, intangible though it be, suffers injury.” Bribery and corruption—however much the experts may wish to disguise them in the language of costs and benefits and economic choices—have a moral dimension. We ignore ...

The 2008-2009 global financial crisis led to a number of large–scale government interventions across the world. These included massive provisions of liquidity, the takeover of weak financial institutions, the extension of deposit insurance schemes, purchases by the government of troubled assets, bank recapitalization and, of course, packages of fiscal stimulus, sometimes of a scale not seen since World War II. Even the IMF, the world’s traditional guardian of sound public finance, came out strongly in favor of fiscal loosening, arguing through its managing director that “if there has ever been a time in modern economic history when fiscal policy and a fiscal stimulus should be used, it's now” and that it should take place “everywhere where it's possible. Everywhere where you have some room concerning debt sustainability. Everywhere where inflation is low enough not to risk having some kind of return of inflation, this effort has to be made. ” One can ar...

Having looked at some of the ways in which corruption damages the social and institutional fabric of a country , we now turn to reform options open to governments to reduce corruption and mitigate its effects. Rose-Ackerman ( 1998 ) recommends a two-pronged strategy aimed at increasing the benefits of being honest and the costs of being corrupt, a sensible combination of reward and punishment as the driving force of reforms. This is a vast subject. We discuss below six complementary approaches. 1. Paying civil servants well Whether civil servants are appropriately compensated or grossly underpaid will clearly affect motivation and incentives. If public sector wages are too low, employees may find themselves under pressure to supplement their incomes in “unofficial” ways. Van Rijckeghem and Weder ( 2001 ) did some empirical work showing that in a sample of less developed countries, there is an inverse relationship between the level of public sector wages and the inc...

In an earlier blog post, we commented on the sources of corruption, the factors that have turned it into a powerful obstacle to sustainable economic development . We noted that the presence of dysfunctional and onerous regulations and poorly formulated policies, often created incentives for individuals and businesses to short-circuit them through the paying of bribes. We now turn to the consequences of corruption, to better understand why it is a destroyer of human prosperity. First, corruption undermines government revenue and, therefore, limits the ability of the government to invest in productivity-enhancing areas. Where corruption is endemic, individuals will view paying taxes as a questionable business proposition. There is a delicate tension between the government in its role as tax collector and the business community and individuals as tax payers. The system works reasonably well when those who pay taxes feel that there is a good chance that they will see...

In a previous blog we discussed the factors that have pushed issues of corruption to the centre of policy debates about sound economic management. A related question deals with the sources of corruption: where does it come from, what are the factors that have nourished it and turned it into such a powerful impediment to sustainable economic development ? Economists seem to agree that an important source of corruption stems from the distributional attributes of the state. For better or for worse, the role of the state in the economy has expanded in a major way over the past century. In 1913 the 13 largest economies in the world, accounting for the bulk of global economic output, had an average expenditure ratio in relation to GDP of around 12%. This ratio had risen to 43% by 1990, with many countries’ ratios well in excess of 50%.  This rise was associated with the proliferation of benefits under state control and also in the various ways in which the state im...

For those of us who have had an interest in corruption for much of our careers, there is little doubt that sometime in the late 1980s and early 1990s there was a shift in thinking within the development community about the role of corruption in the development process. The shift was tentative at first; continued reluctance to touch upon a subject that was seen to have a large political dimension coexisted for a while with increasing references to the importance of “good governance” in encouraging successful development. What were the factors that contributed to this shift? One that quickly comes to mind is linked to the falling of the Berlin Wall and the associated collapse of central planning as a supposedly viable alternative to the free market. It was obvious that it was not inappropriate monetary policies that led to the collapse of central planning but rather widespread institutional failings, including a lethal mix of authoritarianism (i.e., lack of accounta...