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Barriers to Development

Barriers to Development

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An essay for the 2011 Undergraduate Awards Competition by Matthew Mennell. Originally submitted for EC4041: Development Economics: Module 1 at Trinity College, Dublin, with lecturer Dr Pedro Vicente in the category of Business & Economics
An essay for the 2011 Undergraduate Awards Competition by Matthew Mennell. Originally submitted for EC4041: Development Economics: Module 1 at Trinity College, Dublin, with lecturer Dr Pedro Vicente in the category of Business & Economics

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Published by: Undergraduate Awards on Aug 29, 2012
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10/27/2013

 
Barriers to Development
Economic theory-- through the use of exogenous growth models-- often purports thatdeveloping economies should converge with the living standards of more developedcountries through various mechanisms such as the cheap adoption of newtechnologies, and via their relatively high marginal products of labour and capital.However, these growth models often neglect the institutional differences betweendeveloping and developed economies, which may be profoundly detrimental togrowth in developing countries.This paper will comprise of two parts. The first part will analyze the impact of corruption on the growth of developing countries; the second will look at what are
often referred to as ‘curses’ to development – 
the abundance of natural resources andthe presence of ethnic divisions, specifically in relation to the case of Nigeria. Theeffects of both
corruption and ‘curses’ are exacerbated
by the presence of weak institutions in developing countries. This paper will review the literature coveringboth areas and suggest policies that may circumvent these weak institutions thathinder the economic growth and future prosperity of developing nations.
Corruption
This essay will seek to define corruption, analysing why at current levels corruption isa serious impediment to the economic prosperity of developing countries. It will thenanalyse ways in which corruption can be reduced using economic theory, takingexamples from empirical studies.Corruption generally refers to the use of public office for private gains (Bardhan,1997). Under certain circumstances it has been linked to improving efficiency, for
example, through a ‘speed money’ mechanism, which reduces bureaucratic delay; or 
by initiating a Coasean bargaining process by which private agents can negotiate theirway to an efficient outcome. However
, even if in a ‘second
-
 best’
world a nonzerolevel of corruption may be optimal, at current levels in developing countriescorruption poses a severe obstacle to growth and development, reducing incentives toinvest and decreasing the profitability of existing productive investments (ibid).Mauro (1995) finds that corruption lowers private investment, even in countrieswhere bureaucratic regulation is cumbersome.There are several tools that may be employed to tackle corruption, many of whichdepend on the nature of corruption itself and how the opportunity to corrupt hasarisen. This may relate to the structure of bureaucratic institutions, social norms, theincentives and opportunities faced by bureaucrats, and the strength of legalenforcement and accountability mechanisms.The structure and nature of bureaucratic institutions has arguably the most significantimpact on levels of corruption. Bureaucrats are often seen as corrupt, lacking inincentives and obsessed with red tape. In some regimes, bureaucrats may deliberatelycreate red tape in order to attract bribes. The adverse effect of this being that once a
 
high degree of corruption is observed in a particular bureaucracy, investors mayassume that all offices of that government are corrupt (Banerjee, 1997).A commonly suggested policy to tackle rigid and corrupt bureaucracies is to reducethe monopoly or bargaining power of officials. Officials may be given competing jurisdictions so that if one agent poorly serves a client, they can visit an alternativecompetitive agency (Bardhan, 1997). For example, in the US, if a citizen is asked fora bribe to obtain a passport, they can easily go to another window, or another passportoffice (Shleifer and Vishny, 1993). Improving political competition can open up thegovernment, reducing secrecy in addition to reducing corruption; weak governmentswith little control are strongly linked to high levels of corruption (ibid). However,there is a risk that decentralizing bureaucratic systems may actually result in higherbribes than in a centralized system, if the number of bribe takers at the ground levelremains the same (Olken and Barron, 2009).In addition to enhancing competition between bureaucratic offices, improvingaccountability of offices can also create significant improvements in lowering levelsof corruption and may help to alleviate the shortcomings stated above. Olken (2007)found that increasing government audits from 4% of projects to 100% of projectsreduced missing expenditures by an average of 8 percentage points in Indonesia.However, achieving certainty of detection may be extraordinarily expensive (Stiglerand Becker, 1974) and there is no guarantee that auditors won
’t become corrupt over 
time. It may be more optimal to have a lower probability of auditing, with a higherpunishment for corrupt officials, matched by stronger accounting systems andincentives for private individuals to expose corrupt officials through an anonymouswhistle-blowing mechanism (ibid, Shleifer and Vishny, 1993, Bardhan, 1997).A final alternative to improving cumbersome bureaucracies is to simply legalize orderegulate the formally prohibited or controlled activity. For example, policecorruption fell significantly in Hong Kong after off-track betting was legalized;similarly, increasing duty free imports into Singapore alleviated corruption in customs(Bardhan, 1997). This is clearly limited by jurisprudential concerns over the activitiesto which this may be applied, but it is a highly cost effective alternative to theprevious two policies.Corruption can also stem from poor incentives faced by bureaucrats in office. Bribesmay be the only incentive for officials to work hard
er, acting as a ‘piece
-
rate’ above
their regular income (Mauro, 1995). One way to reduce this form of corruption is toraise the salaries of enforcers above what they could get elsewhere, increasing thecost of dismissal in the event that they are caught (Stigler and Becker, 1974). Thismay eradicate corruption even if the probability of detection is quite low (ibid).However, improvements in compensation may not act as an incentive to actually work harder, it may be more optimal to use competitive private enforcement agencies, or anincentive based pay structure (ibid, Banerjee, 1997). Moreover, increasing the cost of corruption may simply raise the level of the bribe (Bardhan, 1997).Finally, corruption can also stem from social norms and weak legal enforcement. Asmore officials become corrupt, the benefit of an honest official declines. Moreover, itis much cheaper for corrupt officials to be discovered by a corrupt superior, ratherthan an honest superior (Bardhan, 1997). Therefore, corruption can become prolific
 
in countries where it is seen as the norm and where corrupt officials face a very lowprobability of incurring costs for their actions.Altering social norms can be a difficult task as these may be structurally ingrained inthe economic fabric of developing countries. On a simple level, policies may havevery little effect. For example, running an anti-corruption campaign that is neithercredible nor sustained may simply increase cynicism over anti-corruption policies(Bardhan, 1997). Making supervisors more accountable for subordinates may help,but supervisors themselves may be limited in their monitoring capacity or be prone tocorruption, particularly in decentralized systems (ibid). Tackling social norms mayalso be executed through policies focused on individual issues.A study by Bertrand et al. (2006) showed that giving individuals access to free drivinglessons in India improved driving skills an the reduced the need to make extra legalpayments, but corruption still persisted even with this provision in place. Moreover,there is likely to be adverse selection present on the basis that those with a greaterneed to circumvent laws and regulations are more likely to make bribes, whichundermines the purpose of these instruments. Stronger enforcement of rules, ratherthan incentives not to corrupt, may be a better way of altering persistent norms.Fisman and Miguel (2007) attempt to separate the effects of norms and legalenforcement in their study of diplomatic parking violations in New York City. Priorto 2002, there was a strong correlation between unpaid parking tickets on diplomaticvehicles and existing measures of home country corruption. When a law wasintroduced to allow the revocation of diplomatic license plates after 3 unpaid parkingoffences, diplomatic parking violations fell 98%. This study shows through revealedpreferences that tighter laws and more rigorous enforcement can alter the behavior of actors; even when social norms toward corruption are persistent.In conclusion, there are several ways in which corruption may be tackled which canlead to improved growth prospects for developing countries by making them moreattractive places to invest. Key to this is identifying areas or bureaucracies wherecorruption is persistent, understanding the underlying causes of the corrupt activities,and formulating and implementing strong policies that undermine these root causes.This may involve using a range of policies outlined in this essay, which can bolsterone another to enhance their overall effectiveness. Fundamentally, failure to addresscorruption will undoubtedly hinder any conditional convergence towards incomelevels of developed countries as stipulated by exogenous growth models.
Curses in Development
 – 
the case of Nigeria
Nigeria as a country rich in a natural resource (Oil) and with several ethnic divisionscan be classified as suffering from two development curses. Firstly, a naturalresource, which relates to the hypothesis that natural resource abundant countriesgrow at a slower pace than others (Collier and Goderis, 2004); and Secondly, a ethnicdivisions curse, the hypothesis that ethnic divisions can lead to inferior economicpolicies and lower economic welfare indicators (Easterley and Levine, 1997). Bothcurses may arise through various transmission mechanisms, leading to differentialimpacts across country and institutional settings.

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