In the last decade corruption has received a great deal of attention from a broad spectrum of the public. The study of corruption is no longer regarded as a subject of inquiry exclusively by students of politics and sociology. It now occupies the attention of many other fields such as political economy, public administration and law. Many international and regional organizations now regard corruption and poor governance as major obstacles to good policy-making. The current interest in corruption probably reflects an increase in the scope of corruption over the years, and is in part fueled by a better understanding of the economic costs of corruption. Thus it does not just reflect a greater awareness of an age-old problem.
Until recently segments of the economic literature had presented a romantic view of corruption. This view made corruption seem an almost virtuous activity and possibly good for growth in a world stifled by bad governments. For example, in various theoretical studies it was argued that corruption removes or relaxes government-imposed rigidities; greases the wheels of commerce; allocates investment and time to the most efficient users; keeps wages low; and may even act as a political glue that holds a country together. 1 The romantic view of corruption has been replaced, in more recent years, by a more realistic and much less favorable view. According to this new view, the payment of bribes is not a panacea for overcoming red tape and cumbersome government regulations; the highest bribes are paid by rent-seekers and not by the most efficient individuals; a comprehensive civil service reform is better at reducing corruption than simply raising wages; corruption is subject to increasing returns which perpetuate it; and corruption creates an environment that, in time, can lead to the collapse of political regimes.
This chapter elaborates on these contrasting views of corruption and, from this perspective, analyzes the conceptual and empirical links between corruption, economic growth, and public finances. There are many indirect channels through which corruption lowers growth, and