The Economics of Anti-Corruption: Lessons from a Widespread Customs Reform

Abstract

Introduction Corruption is pervasive in developing countries, and is widely considered to be a major barrier to economic development. Yet systematic empirical evidence on the effectiveness of anti-corruption efforts is scarce. The seminal theoretical work of Gary Becker and George Stigler (1974) identified a pair of generic remedies for bureaucratic corruption in government: increased monitoring and higher wages. But for many reasons, anti-corruption reforms may fail in practice. For example, consider a reform that increases monitoring of potentially corrupt officials. Such a reform might fail if the monitors themselves were corrupt and so provide inaccurate information to higher authorities. In addition, higher-level officials may themselves be corrupt and not put the information gathered to good use. The monitoring program may simply be implemented to demonstrate the government's anti-corruption credentials. What is more, even if enforcers are honest, corrupt officials may be able to find alternative methods of continuing their corrupt dealings. Empirical work is therefore necessary to determine the effectiveness of any given anti-corruption effort. When there is a high probability that lower-level agents monitoring corrupt activity may themselves be corrupt, it may be reasonable for higher authorities to use monitors from outside the government—in particular, private firms. Hiring private firms to monitor potentially corrupt activity may make sense if competition among the private monitors generates incentives for integrity. A widely-recognized example of government-mandated monitoring by private firms is auditing by private accounting firms of the financial statements of publicly-traded companies, an essential foundation of securities regulation. Can hiring integrity from the private sector to collect information for government anti-corruption efforts be effective? This chapter analyzes a reform adopted by the customs services in many developing countries that does just that. Within a developing country government, the customs agency—the organization responsible for taxation of imported goods—is often singled out as having particularly severe problems with bureaucratic