What is corruption?

A. Agents, clients and streams

The term corruption is often vaguely used for any improper money charge and any improper money offer, or even any improper way to acquire money or goods and services. But the concept should be confined to tapping the money flows associated with government administration involving government agents. The necessary condition for talking of corruption is the owner of an asset changing hands (the government or a victimized citicizen) does not approve of it, but is unaware or powerless. This is, however not sufficient to talk of corruption:

bullet bullet bullet bullet bullet bullet
Non-corrupt types of acquiring property in a way not approved by the disappropriated owner are bullet Warfare
Illegal taxation
Illegal duties and public fees
Paying low wages that would not be accepted under free market choice,
Evasion of legal types of government taxation, duty and public fees without co-operation of government agents
Members of the public deceiving, robbing or stealing amongst themselves.
Tapping money streams within companies and NGO's (though similar, is better to separate this type of misbehaviour  from the corruption subject)

Most of these non corrupt acts of extortion stem from asymmetric power relations. Pervasivenees of those acts is an important cause of corruption.

corruption.jpg (39559 bytes)Another halmark if corruption is that it is not a power situation with a winner and a looser, but one where either a public official embezzles money he is trusted with, or one that results from a deal of some sort, reflecting the advantages of the parties and hence the power they perceive to have over each other: you have the document, the medicine, the educaton, I have the money. You produce the diamonds, I have the guns to keep the owning or taxing entity at a distance.
Some basic concepts are useful for comprehension and neat discussion. The government spending flow meant to execute government tasks (like education, roads, security) is called the downstream. Under propriety, the flow reaches the (final) executors of the work done.
The payments by customers of the public administration (like tax payers, licence holders, customers of paid public services) form the upstream.

Together, customers and executors form the clients of the public administration.

Corruption arises when a public administration individual or agent ceases to behave according to the rules he is hired to follow. He can engage in embezzlement:  this is tapping money directly from the downstream or the upstream in his own office to his private property.
Corruption can also be done by contract. Then, an executor agrees to "buy" his rights to execute for money by paying money directly to an agent. Or, a customer agrees to "buy" his rights to buy a public service by paying money directly to an agent.

Corruption by contract can be by the agent's or by the client's initiative.

Corruption by contract



Agent initiative Proposing Accepting, satisfied Accepting, dissatisfied
Client initiative Accepting Proposing

Only under Agent initiative, client dissatisfaction is possible (though rare). In most cases (those with white background colour in table), both corrupt contract parties (the client and the official) will withhold proof if questioned about a corrupt deal.

B. Types of Taps

Downstream tapping

tapping downstream .jpg (17009 bytes)The downstream flow of government expenditure is meant to buy a public service product made by executors (like teachers, road workers, bookkeepers). The government expenditure is meant to pay executor incomes, and the value of the public service may, in this happy case, be estimated as the sum of these executor incomes, that is, the cost of these services.
An agent puts a service tap by allowing an executor to fall short of his requirements, and adding the "saved" expenditure to his private property. One can reduce the true quantity of service below what is reported, or increase its price above the level yielding a market conforming profit. Examples are ghost workers, false reports on activities not executed in reality, public service "trucks" in books that really are Pajero's driving the agent's family around, etc.
Another example: an executor pays a public agent to be granted a government contract above market price. Both public agent and executor win. The government budget is tapped. The value of government service now falls below the payments to executors (that in turn are partly channelled to the corrupt agent). So a government budget tap is a service tap.
An agent puts an executor income tap by paying the executor less than his/her administratively determined agreed income: salaries too low or too late, road contractors working below market price, leaving part of their margin with the agent to get hired for the job, etc. The result in the agent's private appropriation at the expense of the administratively envisaged channelling is seen in the reduction of grey (proper channelling) in the figure "Downstream Tapping".
In sum, the direct or instantaneous burden of downstream tapping might fall on public service (service taps), of on the executor of public service (executor income tap). These direct burdens propagate through the economy in due time in a way analysed in Section C.

Upstream tapping

tapping upstream.jpg (19594 bytes)The upstream flow of government income is meant to finance government expenditure. Thus it is a burden on the private sector. In the figure "Upstream Tapping" in the top bar, representing proper channelling, public (government) income exactly equals the private burden. A part of unburdened private property is also displayed in this top bar order to compare the top bar with what happens if an agent puts a customer budget tap: this broken line delineated grey bloc, that ought to remain private property, is taken by the (public) agent. This may be done by excess charges on the customer, or withholding parts of the service the customer should get thus obliging him to use additional money to purchase it elsewhere. An example is taxing more than administratively envisaged, and appropriating the excess revenue. It may also be done by reducing manpower used to execute the service to the customer, resulting in increased efforts and longer waiting times necessary to get through a procedure, which leads to additional cost at the customers' side. Then, in addition, "special treatment" can be given to customers who are agreeing to pay some more and appropriating these payments. Another example is to omit parts of the service which the customer paid for, obliging him to go somewhere and pay for it again (like omitting glue on stamps). The result of a customer budget tap is that the customers' budget is reduced with the amount by which the corrupt agent's private budget is increased.
The agent can also put a public income tap: he reports lower than the real tax and revenue income, and appropriates the difference.
The result in the agent's private appropriation at the expense of the administratively envisaged channelling is seen in the reduction of grey (proper channelling) in the figure "Upstream Tapping".
In sum, the direct or instantaneous burden of upstream tapping can fall on the customer budget (customer budget tap) or on the public income (public income tap). These direct burdens propagate through the economy in due time in a way analysed in Section C.


catalogue.jpg (38196 bytes)Four types of taps can be distinguished, each of them can be put by embezzlement and by contract. For these eight possible corruption strategies, there are again two modes: work by executors and services to government customers can be overpriced, or the work by executors and services to government customers can be below the quantity and/or standard envisaged.  Exercise: File examples of corruption you know into this catalogue of sixteen possibilities (right):

(for examples of corruption cases in Uganda see Ruzindana, A., (1997), "Combating Corruption in Uganda", in: Ruzindana, A. Langseth, P. and Gakwandi, A. (eds), (1997) Fighting Corruption in Uganda, p. 59-68)

C. Macro-economic Effects of Improper Channelling

The direct effects of improper channelling are:

How do these changes propagate through the economy?
Government services (like roads, education, hospitals) boost economic growth by increasing the efficiency of private economic initiative (like reducing transport cost, reducing production cost by increasing know how, by lowering the rate of disease absenteeism). Hence, service taps are drags on economic growth.
As far as corruption affects customer budgets, every citizen, whether working in the private or the public sector or both, has its "corruption balance", being the difference between what you win by extortion and what you loose by being extorted.
In the unlikely event that every citizen's corruption balance usually would be zero, the cost of corruption would be the effort needed to gain here what you loose there, such as to make your net corruption loss equal zero. If everybody would stop corrupting the procedures, everybody's budget would be the same, but it would be made available in exchange for execution of economy boosting government services instead of corruption activities like colluding, forging signatures and documents, arranging fake court procedures etc. Under zero net corruption loss for everyone the question would merely be: what are the people doing with their time? The question people would simply have to pose is whether forging, intriguing and conspiring makes your life more interesting than building up your country.
The standard case however, is worse than net corruption loss: few have a positive corruption balance, and the masses of the people have a negative corruption balance. The masses are net losers of corruption. The few are the net winners. This implies a redistribution of budget from the masses to the few. From the tapped part of their budgets, the masses would have bought home produced necessities of life. This would have boosted local industry: local suppliers would save part of their sales revenues to invest and expand production. Under non zero net loss corruption the money is transferred to the few, who spend a large part of their net gain of corruption on imports, and, what is worse, not on investment imports, like production machinery, but consumer imports ("Pajero's"). If they do not know how to spend everything, they put the rest on accounts of foreign banks, who invest their savings abroad. The home economy is receiving little of the tapped money and collapses.
Generally, corruption lowers home product quality relative to its price. Non only in the luxury sector, therefore, but in every sector, foreign imported products from less-corrupt foreign countries will gain attraction in the home market. Corruption hence generally lowers demand for home products. Money and jobs to produce what the money pays for flow abroad, as well as the profit on that production that is meant to invest and thus fuel the economy.

Clearly, not only service taps, but all flow taps are drags on economic growth and can easily become causes of economic decline.

The drag is, to be precise, not corruption, but the inclination to be corrupt. This becomes clear if one realises that a set of procedures that would effectively succeed to fully prevent corruption would not remove the drag: there would be no corruption, but the enormous amounts of money for the corruption-barring procedures (lengthy procedures of consent by many officials, customers obliged to hire employees for the purpose of managing the interaction with all government bureaucrats involved in preventing corruption, special departments of inspection, and inspections of inspections etc.) would be taken from economic growth boosting activities like road building, health care and education. So, to remove the drag on growth it is not sufficient to bar corruption. Only if the inclination to be corrupt goes down, the social cost not only of corruption but also of corruption-prevention can be reduced, thus allowing wealth to replace poverty. 

Some hold that corruption is bad because it is a selfish act. This is entirely false.
The underlying vice of corruption is not selfishness. Selfishness is OK. Selfishness is the driving force of any good economy: people work to selfishly improve themselves by selling on a market, not (at least not in the first place) to "be good" to the buyer.  Economically, being good to your customer is a rational means for the selfish end of improving your life: you make a good product because you want your customer to come back, and keep paying a good price.
In corrupt countries everybody, the corrupt even more than those who consider themselves honest, claims not to be selfish. That is wrong and a sign of the sickness, the hypocrisy of a corrupt society. Everybody knows everybody is lying.
A healthy economy only works properly with rational, selfish people. There is no reason to be ashamed of that.

So, since the vice underlying corruption is not selfishness, then what is it?

It is stupidity. The specific type of stupidity involved is short-sightedness: without corruption all citizens (corrupt agents included) would, after some years of honesty, by boosting the economy be far richer than they are under corruption. Under corruption, every owner of an expensive car knows he is likely to be seen, and correctly to be seen, as perspicuously showing himself guilty of the poverty of his nation. Under honesty in a healthy, working economy, people could rightly be proud of owning one.

D. Types of Monitoring

Enhancing systems of monitoring

Monitoring involves cost. The cost of any single measure should be compared to the economic benefits to be expected from the measure. That in its turn should be monitored. Reducing the need for monitoring by reducing the inclination to be corrupt ("culture change") is likely to have the highest result relative to cost. Since the cause of the inclination to be corrupt is the stupidity of short-sightedness, the issue of culture change is stretching the time horizon in the consciousness of public agents. Or, simply put, enhancing their brain function.

Monitoring can be done for all types of taps mentioned above, but, first of all, there is a set of measures from which all types of monitoring benefit:

Monitoring the downstream:

1. Service Monitoring: is every government service properly executed?
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2. Executor Income Monitoring: did the final government service executors get their full pay?
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Monitoring the upstream:

1. Customer Budget Monitoring: did government customers not pay too much?
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2. Public Income Monitoring: did all government customers' money reach the treasury?
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Version: 2014-08-20
Author: BH