Volume 25 Issue 1 Article 1 March 2023 Corruption: A Review of Issues Corruption: A Review of Issues Sandra Damijan University of Ljubljana, School of Economics and Business, Ljubljana, Slovenia, sandra.damijan@ef.uni- lj.si Follow this and additional works at: https://www.ebrjournal.net/home Part of the Business Law, Public Responsibility, and Ethics Commons, Growth and Development Commons, and the Political Economy Commons Recommended Citation Recommended Citation Damijan, S. (2023). Corruption: A Review of Issues. Economic and Business Review, 25(1), 1-10. https://doi.org/10.15458/2335-4216.1314 This Original Article is brought to you for free and open access by Economic and Business Review. It has been accepted for inclusion in Economic and Business Review by an authorized editor of Economic and Business Review. ORIGINAL ARTICLE Corruption: A Review of Issues SandraDamijan University of Ljubljana, School of Economics and Business, Ljubljana, Slovenia Abstract This paper provides a historical overview of the concept of corruption, the existing models for studying it, and the main costs that corruption imposes on the economy and society at large. Corruption was rst understood as a disturbance of the balance of state power, and later as the immorality of political patronage and favouritism of certain groups. It evolved from the public sphere to the intertwining of the public and private spheres, from a political issue to the intertwining of political and economic issues. The ght against corruption evolved from the maintenance of necessary checks and balances, from moral struggles against a system of privilege, to a major motive for state policy. Looking at all these aspects allows us to understand the origins and evolution of corruption and why the ght against corruption is seen as a way to lead »failed countries«, politically backward and immoral societies, to the right path of political virtue. By understanding the historical evolution of corruption and its various forms, institutions and countries in general can develop more targeted and effective anti-corruption policies to limit the occurrence of corruption. Keywords: Corruption concept, Corruption models, Costs of corruption, Transition countries JEL classication: B00, D73, F55, K42, P37, P48 Introduction C orruption is not a new phenomenon. It has been known since ancient times and present in all so- cieties (Klitgaard, 1988). The concept of corruption evolved from the govern- mental failure to maintain the balance of power to the immorality of political patronage and the favouring of certain groups. It grew from the public sphere to the entangled public and private sphere, from a political issue to an entangled political and economic issue. What we now refer to as corruption is the abuse of public ofce for a personal gain (Clarke, 1983; Klit- gaard, 1988; Nye, 1967; Rose-Ackerman, 1978). And in the context of the corruption concept, a number of other issues are mentioned such as breach of laws and regulations nominally in force (Andreski, 1968), bad policies and inefcient institutions (Acemoglu & Johnson, 2005; Djankov et al., 2008), weak democra- cies (della Porta & Vannucci, 1997; Johnston, 1996), unethical public sector (Doig & Theobald, 2013). Whereas in the past, corruption was seen not only as a bad thing but also as a necessary part of any Received 17 November 2021; accepted 12 December 2022. Available online 1 March 2023 E-mail address: sandra.damijan@ef.uni-lj.si (S. Damijan). cycle of government change (Leff, 1964; Leys, 1965), it is now widely recognised to have negative effects on economic growth and society as a whole (Ades & Di Tella, 1997; della Porta & Vannucci, 1997; Gupta et al., 2002; Kaufmann, 1997; Kaufmann & Wei, 1999; Rose-Ackerman, 1999). This paper aims to provide a historical overview of the concept of corruption, the existing models for studying it, and the major costs that corruption brings to economies and societies as a whole, previously examined in the dissertation on ownership struc- ture, corruption, and rm performance in transition economies (Damijan, 2015). We look at the concept of corruption from the early philosophies of Plato, Aristotle, Polybius, Machi- avelli, and Montesquieu, to the contemporary un- derstanding of the phenomenon. The paper also examines the main models used to study corrup- tion in terms of the costs that corruption im- poses on societies. This allows us to understand the origins and evolution of corruption and why the ght against corruption is seen as a way to lead »failed countries«, politically backward and https://doi.org/10.15458/2335-4216.1314 2335-4216/© 2023 School of Economics and Business University of Ljubljana. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/ licenses/by-nc-nd/4.0/). 2 ECONOMIC AND BUSINESS REVIEW 2023;25:1–10 immoral societies, onto the right path of political virtue. The paper is structured as follows. The following section discusses the corruption concept from early beginnings to the concept as we know today. Sec- tion 2 describes principal models of corruption and classies its costs. Section 3 discusses corruption in transition countries and why it is seen as a perennial problem. Finally, Section 4 summarizes and concludes the paper. 1 Corruption concept development through history 1.1 The early beginnings of the corruption concept The concept of corruption can be traced back to the ancient philosophers Plato, Aristotle, and Polybius, when it referred to a process by which a government without virtue and laws corrupts and degenerates into another form of government. This change in governments was believed to be harmful and often accompanied by violence and unrest. Plato and Aris- totle emphasised the paramount importance of laws and the necessary balance of power within govern- ments. Corruption was thus synonymous with the failure to maintain this balance of government. »Where the law is subject to some other authority and has none of its own, the collapse of the state, in my view, is not far off; but if law is the master of the government and the government is its slave, then the situation is full of promise and men enjoy all the blessings that the gods shower on a state«. (Plato in The Laws, 346 B.C./1888) Plato believed that laws and trained leaders were paramount to the governance of the state. Aristotle also believed that these laws should also uphold just principles in the common interest of all citizens and not just in the interest of a few. »Governments which have a regard to the common in- terest are constituted in accordance with strict principles of justice, and are therefore true forms; but those which regard only the interest of the rulers are all defective and perverted forms, for they are despotic. « (Aristotle in The Politics, Book III, 1279a/95) Polybius (200–120 B.C.) is also known for argu- ing for the separation of powers in government. He argued that if one is to gain too much power (po- litical, monetary, or military), he should be removed from the polis. Polybius also believed that corruption was an inevitable process of “constitutional revolu- tions” where a certain type of government evolves into another type. “It was a force beyond the indi- vidual, and so beyond individual moral or ethical behaviour.” Philosophers of later centuries also saw corruption as synonymous with the failure of the system of the balance of power. Machiavelli (16th century) held that anything that upset the balance of power was cor- ruption, whether or not it was the result of immoral behaviour by the individual. Montesquieu (18th cen- tury) held that government must have an efcient system of checks and balances to prevent one branch from gaining the upper hand over another. Their so- lution was to create laws to make individuals behave morally (Skinner, 1999). Wallis (2006) points out in his study that this way of thinking had an impact on the development of balanced constitutions as fun- damental law. Any deviation from this balance was considered corruption. During this time, the term corruption was also dened to include the »manipulation of economic privilege to secure political power« by a few (Wallis, 2006). Throughout Europe, only political and eco- nomic elites were allowed to establish organizations that then created economic rents (the rise of the Robber Barons). Commonwealth theorists in Britain, for example, believed that the nancial revolution only served the king, who could then undermine the independence of others, which in turn would mean the »rule of one man«. These economic rents of the privileged few were used to inuence po- litical decisions, undermining the independence of the other powers (especially Parliament as a sym- bol of freedom) and corrupting the entire political system. However, in the 18th century, the only avail- able model to promote economic development was precisely the creation of public service enterprises (Wallis, 2006). The creation of these enterprises was most evident in Great Britain and the United States. The prevailing public opinion was that these enter- prises promoted both economic development and corruption. One such example was the Albany Re- gency, which granted bank incorporations only to its political supporters, who in turn supported them nancially in order to maintain control of state gov- ernment. There was a general belief that governments would become corrupt if the balance of power was not protected. In the mid-1800s, the investment boom in corporations, especially banks, led to nancial crises and depressions, due to privileges that beneted only the few and were detrimental to the many (Wallis, 2006). In the 19th century, corruption was understood as a systematic process of selling corporate privileges. The widely held view was that business corrupts politics, not politics corrupts business. To address ECONOMIC AND BUSINESS REVIEW 2023;25:1–10 3 the corruption problem, antitrust laws were enacted that prohibited corporate privileges and government investment in private companies (Wallis, 2006). Re- forms affected all areas of politics and the economy to create a government controlled by the many (voters) and fair competition for the benet of consumers. It was the time of populist morality and the revival of trust in institutions. 1.2 The concept of corruption in the 20th century In the early part of the 20th century, the concept of corruption also incorporated the behaviour of indi- viduals (Nye, 1989) and not only a condition of polity based on the “distributions of wealth and power, re- lationships between leaders and followers, the source of power and the moral right of rulers to rule” (John- ston, 1996). For example, this period witnessed the start of illicit payments by private agents given in exchange for government-controlled resources (John- ston, 1996). Industrial prosperity, growth of cities, factories, de- velopment of new products, transportation, paving, water, electricity, and public health (Teaford, 2019) were accompanied by reorganization of the internal structures of government and increase of government responsibilities, development of civic associations, and independent, nonpartisan press (McCormick, 1981). These factors provided an opportunity for in- creased corruption. The research shows that although the United States was the leading industrial power, it also had the most corrupt government when com- pared to similar economies (Steffens, 1957; Teaford, 2019). Across Europe, services and infrastructure development were in hands of governments and state-owned enterprises, while in the United States the governments outsourced many of these functions to private corporations. The puzzling question is of course how economic development in the United States was not under- mined by corruption. One possible explanation is that across Europe governments limited entry of corpora- tions in order to protect the monopoly of state-owned enterprises. This led to a perception that corruption was less widespread than in the United States, where corporations actively were “competing” in the level of illicit payments in order to obtain the license to provide these services. However, by the 1920s, the political elite was largely replaced with mob bosses who took over the control of industry (Menes, 2003). Industrial disorder and inadequate policy priorities caused by corruption led to the worldwide economic crisis of the 1930s and the Great Depression (Dobbin, 1993). In the post-war era of the 1950s, concerns about corruption declined as other priorities surfaced such as rebuilding countries, institutions and lives. And it was not until the 1980s and 1990s that the de- bates about corruption were restored due to the rise in international institutions which conditioned development assistance on anti-corruption efforts. For example, the Millennium Development Goals to ensure good governance and effective institu- tions, including a target to reduce bribery and corruption. 1.3 The concept of corruption as we know today The concept of corruption as we know today bor- rows profoundly from the concepts in the past and denes it as abuse of public ofce for private gain (Klitgaard, 1988; Nye, 1967; Rose-Ackerman, 1978). Olivier de Sardan denes it as “nepotism, embez- zlement, inuence peddling, prevarication, insider trading and abuse of the public purse” (Olivier de Sardan, 1999). In connection with the corruption concept, a number of other issues are associated such as breach of laws and regulations nominally in force (Andreski, 1968), bad policies and inefcient institutions (Acemoglu & Johnson, 2005; Djankov et al., 2008; Hicken & Stoll, 2011; Hilgers, 2011), weak democracies (della Porta & Vannucci, 1997; Heidenheimer & Johnston, 2011), and unethical pub- lic sector (Doig & Theobald, 2013). Many of these scholars adopted the denition of “public ofce abuse”, while at the same time they acknowledged that it may not be enough to explain corruption. However, as Jain puts it, “there is surprising con- vergence on a minimally agreed upon denition” when studying the causes and consequences (Jain, 2001). In the post-war period, interest in corruption waned, but in the late 1980s and 1990s it again became a major issue. It was seen as an economic and secu- rity threat resulting from weak states being overrun by wealthy criminals (Smale, 2001). In particular, the United States and its businesses saw corruption as a threat to their security and trade. They believed that their business was being harmed by billions of dollars through illegal payments from competitors in these weak countries (Smale, 2001). They also saw it as a disguised form of protectionism, because local com- panies had informal networks that enabled them to “give the right bribe to the right ofcial at the right time" (Krastev, 2000). They complained that the United States had en- acted the Foreign Corruption Practices Act in 1977, which prohibited bribery of foreign ofcials, while countries in Europe and the rest of the world allowed 4 ECONOMIC AND BUSINESS REVIEW 2023;25:1–10 Table 1. The development of the corruption concept in the literature. Period/year Key highlight Key authors Ancient Greece Laws should also uphold just principles in the common interest of all citizens (not only of a few) Aristotle (in The Politics, Book III, 1279a/95) Plato (in The Laws, 346 B.C./1888) Arguing for the separation of powers in government, since corruption is an inevitable process of “constitutional revolutions” Polybius (200–120 B.C.) 16th–18th century Failure or deviation from the system of the balance of power Machiavelli (16th century) Montesquieu (18th century) 19th century Systematic process of selling corporate privileges Wallis (2006) 20th century Abuse of public ofce for private gain Klitgaard (1988) Nye (1967) Rose-Ackerman (1978) Incorporation of behaviour of an individual to the concept of corruption Nye (1989) Corruption seen as “nepotism, embezzlement, inuence peddling, prevarication, insider trading and abuse of the public purse” Olivier de Sardan (1999) 2001 Condition of polity based on the “distributions of wealth and power, relationships between leaders and followers, the source of power and the moral right of rulers to rule” Heidenheimer and Johnston (2011) bribes even as tax-deductible expenses. This led to disappointing results of market reforms after the Great Depression and World War II. Under pressure from the United States, it soon became a condition of receiving stimulus aid that the rules for granting in- formal payments be tightened, while at the same time unnecessary rules on foreign direct investment had to be eliminated. The result was the adoption of the OECD Convention on Combating Bribery of Foreign Public Ofcials in International Business Transactions (1998) and the United Nations Convention against Corruption (2003), which outlawed corruption world- wide. The global anti-corruption agenda became primar- ily an economic problem that required liberalization, institutional reform, and the strengthening of good governance. Corruption was seen as the main obstacle to economic development. Governments, civil society, organizations, and consultants fought the causes and consequences of corruption. Numerous tools were developed for this ght, such as Transparency In- ternational’s corruption perception index (CPI) and other corruption indices, anti-corruption guidelines, and best practice seminars to raise awareness of the problem. This period also saw an increase in stud- ies on corruption and its consequences. World Bank President Wolfensohn’s speech on the “cancer of cor- ruption" in 1996 is considered a dening moment in corruption research. Corruption became public enemy number one and the main reason for poor economic performance (Ades & Di Tella, 1997; Ibodul- laevich & Bahromovna, 2020; Mauro, 1995; Varraich, 2014). Table 1 gives a short summary of the key highlights and authors of the corruption concept, which is de- rived from the relevant academic literature. 2 The evolution of modelling the effects of corruption in the literature Since the mid-1990s, there have been numerous theoretical and empirical studies on the determi- nants and costs of corruption. In general, standard economic and socioeconomic approaches are used in studying the causes of corruption. The standard economic approach assumes the existence of discre- tionary powers associated with economic rents. The literature shows that inefcient regulation is the main cause of discretionary and economic rents (Ades & Di Tella, 1997; Becker & Stigler, 1974; Fisman, 2001; Rose-Ackerman, 1978). Countries where rms have higher economic rents tend to have higher levels of corruption and uncompetitive markets (Ades & Di Tella, 1997). Johnson et al. (1998) also argue that the more discretion ofcials have, the more rms have in- centives to operate in the informal economy because of corruption. The socioeconomic approach assumes that corruption is a result of social norms, culture, and history. According to Treisman (2000), the extent of corruption is related to the degree of involvement in civil society, legal culture, and religion, while Aidt (2003) adds that individual values inhibit corruption. In societies where corrupt behaviour is accepted as the norm, corruption levels are more likely to be higher (Aidt et al., 2008). Just as there are two underlying determinants of corruption, there are two main costs of corruption. Corruption is believed to have signicant effects on economic growth (Mauro, 1995; Shleifer & Vishny, 1993; Tanzi & Davoodi, 1997) and equity (Gupta et al., 2002; Welsch, 2004). There is also a difference between the immediate costs of corruption (income redistri- bution) and the consequential costs (misallocation of ECONOMIC AND BUSINESS REVIEW 2023;25:1–10 5 Table 2. Corruption modelling – key strands in the literature and overview of empirical ndings. Model Key theoretical points Key empirical ndings Author and year Principal-agent (P-A) model Costs and benets associated with corruption between two principals (one of whom corrupts) and the agent (who is corrupted) Conrmed the theoretical implication of P-A model with empirical study and showed that electronic government could potentially limit bureaucratic corruption Sadik-Zada et al. (2022) Extent of corruption can be reduced by an appropriate motivational structure of the institutional setting in which it occurs Empirical support for the theoretical model exploring policies that can be used to combat corruption Zheng and Xiao (2020) Important factors in the model: incentive, sanction, and cost Resource allocation model Costs of inputs, the rent-seeking behaviour of agents, and the outputs of the economy Hidden rent seeking may be crucial for distortions allocations of transfers Mixon et al. (1994) Considers the cost function, the demand function, and the supply function Corruption (via indirect connection) alters volume of funds (available for allocation government) by affecting tax collection Tanzi and Davoodi (1997) Important factors in the model: the cost of rent seeking, the availability of rent, and the number of agents involved in rent seeking resources) (Jain, 1998). Gupta et al. (2002) state that both costs affect each other. While the classication of economic and social costs is discussed further in the text, the key stands in the literature and empirical ndings of the below-mentioned corruption models can be found in Table 2. 2.1 Principal models of corruption There are two main methods for modelling cor- ruption: the principal-agent model and the resource allocation model. They are commonly used to un- derstand the theoretical and empirical relationship between corruption and institutional efciency. The principal-agent model considers the costs and benets associated with corruption between two prin- cipals (one of whom corrupts) and the agent (who is corrupted) (Groenendijk, 1997; Klitgaard, 1988; Rose- Ackerman, 1978). The roles of the agent and the principal are sometimes different. Occasionally, rulers act as principals and bureaucracies act as contractors (Becker & Stigler, 1974). According to this model, the extent of corruption can be reduced by an appropriate motivational structure of the institutional setting in which it occurs (Jain, 2001). One of the most important theoretical principal-agent models is the one devel- oped by Becker and Stigler (1974), which explores ways to increase the efciency of law enforcement while reducing corruption within its structures. Law enforcement ofcers, as agents, benet from corrupt activities but also risk being removed from ofce. In this model, there are three important factors: the incentive (what the benet is), the sanction (the like- lihood that the corrupt act will be discovered and punished), and the cost (what the actor will lose). The principal-agent model has been used in theoretical and empirical studies to examine corruption be- tween different actors and systems, such as between elected ofcials and bureaucrats (Rose-Ackerman, 1978), the behaviour of leaders in democratic sys- tems (Rose-Ackerman, 1999), the defence industry and government (Gupta et al., 2002), and the be- haviour of autocratic rulers (Jain, 1987; Klitgaard, 1991; Rose-Ackerman, 1999; Shleifer & Vishny, 1993). The central question within the principal-agent model is how to control both principals and agents, which in turn depends on the efciency of institutions (Pers- son et al., 2000). Research shows that corruption is not simply determined by calculating expected bene- ts versus costs and the probability of getting caught (Pierson, 2004). The resource allocation model considers the costs of inputs, the rent-seeking behaviour of agents, and the outputs of the economy (Jain, 1998). One of the best- known rent-seeking models is the one developed by Shleifer and Vishny (1993), which examines corrup- tion in the small bureaucracy by considering the cost function (provision of services), the demand function (number of actors competing in the rent-seeking ac- tivity), and the supply function (monopoly on the service). One of the main challenges is the uncertainty associated with this model, as there are no guarantees 6 ECONOMIC AND BUSINESS REVIEW 2023;25:1–10 that the transactions will occur unless the gains from corruption are shared with those who can impose costs on the corrupt ofcial (Jain, 2001). As with the principal-agent model, there are three important factors in this model: the cost of rent seek- ing, the availability of rent, and the number of agents involved in rent seeking (Paul & Wilhite, 1994). The resource allocation model has been used in theoretical and empirical studies to examine corruption, such as the rent-seeking behaviour of rms and the resources devoted to it (Krueger, 1974), the rent-seeking be- haviour of governments competing for their higher budgets (Katz & Rosenberg, 1994), the performance of customers in return for favours from government ofcials (Mixon et al., 1994). Finally, there is the ques- tion of at what equilibrium corruption will persist in a society. Bardhan (2017) argues in his study that this depends on the number of corrupt ofcials. The more corrupt ofcials there are, the lower the marginal util- ity of honest ofcials and the greater the persistence of corruption in society. Empirical ndings are somehow consistent with the theoretical framework. Tanzi and Davoodi (1997) explored the connection between corruption, public investment, and growth. They found that corrup- tion alters the entire decision-making process, which is connected to public investment projects. Corrup- tion also affects tax collections indirectly and has direct effect on funds allocation – where more funds are assigned to more corrupted projects. Zheng and Xiao (2020) nd similar empirical evidence of the principal-agent theoretical model while trying to explore policies that can be used to combat cor- ruption. They show that infrastructure investment is negatively correlated with anti-corruption effort. Additionally, building on the principal-agent model of corruption, Sadik-Zada et al. (2022) managed to conrm theoretical implications of the model. They conrmed the hypothesis that electronic government could potentially limit bureaucratic corruption. 2.2 The consequences of corruption If corruption was not considered a bad thing in the past, it is now widely recognised that it has a neg- ative impact on economic growth and society as a whole. Studies conclude that in some cases corruption can grease the »wheels« of the economy by help- ing to overcome bureaucratic burdens and inefcient regulation (Leff, 1964; Leys, 1965). Bardhan (2017) re- called episodes from European and U.S. history that illustrate situations in which corruption may have favoured development by allowing entrepreneurs to grow from bribes. Rose-Ackerman (1999), however, believes this view is mistaken because corrupt acts are treated as iso- lated events rather than systematic patterns that affect other parts of the system. Moreover, Kaufmann and Wei (1999) agree with Rose-Ackerman in stating that if corruption “greases the wheels," more informal payments to ofcials would lead ofcials to be more efcient. A number of theoretical and empirical stud- ies also support the view that corruption is primarily “sand in the wheels" (see review of the studies of Ades & Di Tella, 1997; della Porta & Vannucci, 1997; Gupta et al., 2002; Kaufmann, 1997). The main costs of corruption can be divided into economic, political and social costs. Table 3 sum- marises main consequences of corruption. According to the below mentioned research, corruption hin- ders investment, reduces growth, distorts govern- ment spending, strengthens the informal economy, increases poverty and income inequality, and re- duces trust in institutions. The remainder of this text provides an overview of some important economic, political, and social costs of corruption. Corruption reduces domestic and foreign invest- ment, because it involves higher costs and uncer- tainty. One of the rst to study the impact of cor- ruption on investment was Mauro (1998), who found that corruption has a negative impact on the ratio of investment to GDP . Since corruption has the same ef- fect as taxes, it also reduces foreign direct investment. A number of studies have come to similar conclu- sions that countries with less corruption have higher domestic investment and FDI (Abed & Gupta, 2002; Campos et al., 2010; Knack & Keefer, 1995). Moreover, corruption reduces economic growth. There are a number of studies that show a signicant negative impact of corruption on growth (Brunetti et al., 1998; Knack & Keefer, 1995; Mauro, 1995; Méon & Sekkat, 2005; Pellegrini & Gerlagh, 2004; Tanzi & Davoodi, 2001). Most studies conclude that corrup- tion has a negative impact on growth, especially in the context of low quality governance. Moreover, corruption distorts government spend- ing and reduces revenues. For example, it can re- duce the quality of infrastructure, because spending on road maintenance declines (Tanzi & Davoodi, 1997) and spending on education and health de- clines (Mauro, 1995). Gupta et al. (2002) nd that in countries with high corruption, government ser- vices are inefcient and therefore of lower quality (e.g. health care). As evidence, they note that in- fant mortality rates are one-third higher in corrupt countries. In addition, the government spends less money on education because of corruption (Gupta et al., 2002; Mauro, 1998). A positive correlation is also found between corruption and the size of the shadow ECONOMIC AND BUSINESS REVIEW 2023;25:1–10 7 Table 3. Consequences of corruption – key ndings in the literature and overview of empirical ndings. Consequences Key ndings Key Authors (year) Economic Reduces growth (and weakens economic performance) Abed and Gupta (2002); Brunetti et al. (1998); Campos et al. (2010); Guetat (2006); Knack and Keefer (1995); Mauro (1995); Méon and Sekkat (2005); Pellegrini and Gerlagh (2004); Tanzi and Davoodi (1997); Lowers investment (domestic and foreign) Abed and Gupta (2002); Mauro (1998) Distorts of government spending Gupta et al. (2002); Mauro (1998); Tanzi and Davoodi (1997) Increases income inequality – directly (e.g. distorted tax system) and indirectly (e.g. human capital formation, and educational inequalities) Gupta et al. (2002); Li et al. (2000) Lowers the quality of government services (e.g. health care) Gupta et al. (2002) Increases the size of the shadow economy (e.g. reducing tax revenues and total revenue relative to GDP) Friedman et al. (2000); Johnson et al. (1998); Tanzi and Davoodi (1997, 2001) Negatively impacts trade (e.g. due to unwillingness of exporters to do business with corrupt countries and investor sensitiveness to the topic) Habib and Zurawicki (2002); Lambsdorff (1998, 2003) Political Reduces the trust in public institutions and civil participation (e.g. in democracy) Bjørnskov (2003, 2011); Frey and Stutzer (2000, 2010) Increased political instability Mauro (1998) Reduced stringency of policy formation (e.g. environmental regulations – only in times of low political instability) Fredriksson and Svensson (2003) Social Increases poverty Gupta et al. (2002); Justesen and Bjørnskov (2014) Stagnation of satisfaction and happiness amongst the population (e.g. due to poor governance and institutions) Frey and Stutzer (2000, 2010); Helliwell (2003, 2008); Welsch (2008) Negatively impacts public health (e.g. mental health) Gupta et al. (2002); Sharma et al. (2021); Vian (2008) economy, which reduces tax revenues and total rev- enue relative to GDP (Friedman et al., 2000; Johnson et al., 1998; Tanzi & Davoodi, 1997, 2001). Corruption has a negative impact on trade. Ex- porters are less and less willing to make informal payments to countries, and investors are increasingly sensitive to corruption (Habib & Zurawicki, 2002; Lambsdorff, 1998, 2003). Poverty and income inequality are higher in more corrupt countries. For example, Gupta et al. (2002) nd that a 2.5-point decrease in the corruption index increases the Gini coefcient by 2.5 points. Moreover, corruption increases inequality in education, which in turn contributes to higher income inequality (Gupta et al., 2002; Li et al., 2000). However, most stud- ies show indirect effects of corruption on poverty through economic and governance factors. Corrup- tion affects income inequality through a distorted tax system, poor choice of social programs, human capital formation, and educational inequalities (Gupta et al., 2002). Those who suffer most from corruption are the poorest in a society. Last but not least, corruption weakens public con- dence in the state, its institutions, and the law. A number of studies show that good governance and good institutions increase citizen satisfaction and happiness (see review of the studies by Frey & Stutzer, 2000, 2010; Welsch, 2008). When citizens be- lieve that basic public services are provided because of corruption, the government loses accountability, citizens do not participate in society (Bjørnskov, 2003, 2011), in direct democracy (Frey & Stutzer, 2000, 2010), or they even try to migrate to other countries where they have more opportunities for fair access to public services. 3 Corruption as a perennial problem in transition countries The post-1990s period has seen an increased inter- est in the study of corruption, which is particularly evident for Central and Eastern European countries and the countries of the former Soviet Union. The period since the 1990s marks the fall of the communist states and the end of the Cold War, which led to the establishment of a number of independent countries and market economies. The newly formed countries saw a general decline in living standards and life ex- pectancy, the rise of oligarchs, and disproportionate social and economic development. It is the period of colossal democratization and reform movement, privatization of state industries, all of which provide fertile ground for corruption (Shivakumar, 2005). 8 ECONOMIC AND BUSINESS REVIEW 2023;25:1–10 The political and economic reforms of these tran- sitional countries vary, leading to growing unease in international society about the impact of corruption on their development efforts. One way to think about the reasons why transition countries have not reached the level of development of Western European coun- tries is that their governments are generally corrupt and have systematically pursued economic policies for years that promoted political interests and main- tained political control of the people and parties in power (Bracking, 2007). Another line of argument is the imbalances in the various systems that these coun- tries experience (Bayley, 1966; Nye, 1967). They argue that corruption in these countries is due to political institutions that differ from traditional cultures, as well as slower legal development compared to eco- nomic development. Scholars have considered each of these three areas as separate factors, but the in- teractions between culture, legal systems, and rapid economic development is an area that needs further research. Around the same time, the international commu- nity changed its policy and realized that corruption was holding back economic growth. In fact, the problem of corruption is not limited to the tran- sition countries, as there have been a number of corruption scandals in the developed countries as well. However, in transition countries, corruption is seen as an ongoing problem (Bracking, 2007). Ear- lier, we mentioned that the international community has made zero tolerance for corruption a condition for receiving development assistance. In addition, the European Commission required all countries ap- plying for EU membership to ratify anti-corruption conventions (such as the aforementioned OECD Con- vention on Combating Bribery of Foreign Public Ofcials in International Business Transactions, 1998, and the United Nations Convention against Corrup- tion, 2003), because of their high moral stakes in development. There is no doubt that a lower level of corrup- tion is benecial. There is also no question about the good intentions of ghting corruption. How- ever, obsession with corruption and policies aimed only at ghting it in transition countries can some- times be counterproductive. First, political discussion degenerates from fundamental policy issues to accu- sations of corruption among policy options within countries (Ivanov, 2007). Second, rash anti-corruption rhetoric can lead people in transition countries to harbour undue resentment and view all successful businesses and private wealth as illegally acquired, because of a lack of trust and social participation. Finally, Ivanov (2007) argues that focusing exclu- sively on ghting corruption leads to the illusion that removing corrupt elites from ofce will imme- diately lead to development progress. Much more needs to be done, and the challenge for policymakers is to build respectable governments and effective in- stitutions. Building them is a multifaceted, long-term project. 4 Conclusion Corruption is an old concept. Plato, Aristotle, and Polybius believed that corruption was a necessary part of any cycle of governmental change. A balance of power was required to control this process. Failure of this balance was tantamount to corruption. Later philosophers such as Machiavelli and Montesquieu also saw corruption as synonymous with the failure of the balance of power. The solution was to create laws prescribing moral behaviour for individuals. The concept of corruption rst evolved from the disturbance of the state balance of power to the im- morality of political patronage and the favouring of certain groups. It evolved from the public sphere to the intertwining of public and private spheres, from a political issue to the intertwining of politi- cal and economic issues. The ght against corruption evolved from the maintenance of necessary checks and balances, from moral struggles against a system of privilege to a primary motive for state policy. What we call corruption today is the abuse of a public ofce for personal gain. And to this day, the ght against corruption is seen as a guide for »failed countries«, politically backward and immoral societies, to the proper political virtues. While corruption was not necessarily seen as a bad thing in the past, it is now widely recognised that it has a negative impact on economic growth and society. It inhibits investment, reduces growth, dis- torts government spending, strengthens the shadow economy, increases poverty and income inequality, and reduces trust in institutions. This is seen as a persistent problem, especially in the countries of Central and Eastern Europe and the former Soviet Union, although the problem of corruption is not limited to these countries. Without strengthening the efciency of institutions and implementing effective anti-corruption measures, it is unlikely that reforms toward a more efcient market can be implemented in these countries. History shows the presence of corruption since the beginning of human life, and most likely we will never be able to eradicate it. 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