Expert Commentary

The relationship between economic growth and corruption: The case of Vietnam

2013 NBER study on the interaction between growth and corruption in an environment where firms can leave one region for another.

Until Vietnam’s economy cooled in 2011, it was one of the fastest growing in the world. Annual GDP growth had averaged more than 7% since the mid-1980s, when market reforms allowed private enterprise to flourish and opened up the country to outside investment. A 2013 study in the Socio-Economic Review examined the key characteristics of rising Asian economies. It found that Vietnam’s system was characterized by significant government intervention, controlled international integration and a financial system managed by state banks.

If the sole criteria for economic success was GDP growth, Vietnam’s system was clearly effective, and many ordinary citizens benefited. But income inequality in the country also rose, and the boom has been accompanied by a wave of corruption scandals. Many cases involve bribery charges against officials or executives, or against journalists and activists accused of highlighting the problem.

As the relationship is often framed, fighting corruption is critical to reducing inequality and achieving higher growth. A 2013 study published by the National Bureau of Economic Research, “Does Economic Growth Reduce Corruption? Theory and Evidence from Vietnam,” looks at the possibility of a reverse causal link: the role of growth in diminishing corruption. The scholars — Jie Bai and Benjamin Olken of MIT, Edmund Malesky of Duke University, and Seema Jayachandran of Northwestern University — based their work on surveys of thousands of firms in Vietnam from 2006 to 2010. Vietnam offered a unique case because firms mostly deal with local and regional officials.  The study looks at how growth and corruption interact in an environment where firms can leave one region for another to reduce their bribe burdens.

The study’s findings include:

  • As firms become more productive and expand, the potential cost of relocating and establishing new plants become smaller. This gives them incentive to move if they’re being faced with exorbitant bribe demands. In other words, as firms become more productive, they are better able to abandon their sunk costs to seek less corrupt, more business-friendly districts.
  • Secure and transferable property rights, which enhance firm mobility, are necessary to create conditions where corrupt officials face the threat of firms relocating. “Having more [property rights] enhances the negative effect of growth on corruption.”
  • In this environment, government officials must trade off their desire for bribes with the risk that excessive demands will send firms to other districts. In response, officials reduce the proportion of firm revenues extracted as bribes. “Competition among provinces to retain or attract firms is the mechanism that keeps corruption in check.”
  • Increased firm employment (a proxy for growth) reduced the rate of bribe extraction from firms: A 10% increase in a firm’s employment led to a 0.23 percentage point decline in the bribe rate as a proportion of firm revenue.
  • “Firms with a presence in multiple provinces can more easily scale back operations in one province and shift elsewhere where they might be subject to less corruption.”
  • “Reducing any barriers to firm mobility, for example related to business registration, would amplify the negative effect of growth on corruption.”

Overall, the authors conclude: “Our finding that economic growth reduces bribery suggests that countries might ‘grow’ their way out of corruption. In this case, it may not be necessary to root out corruption to spur growth, but rather corruption might subside as a country grows.” The key factor is secure and transferable property rights, which enhance firm mobility and thus allow them to put pressure on public officials.

Keywords: economic growth, corruption,  property rights, Asia

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