1 International Economy Week 8 Prepared by Shi Young Lee* (Chung-Ang University)

2 Contents Corruption & Global Business 1. On Definition of Corruption 2. Corruption & Business 3. Global Business Management in a Corrupted World

On Definition of Corruption  What is Corruption? - It is difficult to precisely define corruption - For example, is tipping a bouncer corruption? Or how about tipping a waitress to get a better table at a restaurant? - How about gift exchanges based on long run personal relationships? - In doing so, you may develop personal relationships and attachment and even engage in voluntary exchanges 3

On Definition of Corruption  Morality and corruption - Bribes may be used to stop immoral acts and harms - When you pay a policeman not to torture a suspect  Maybe it is immoral not to pay to the police officer - Schindler’s List: Schindler paid bribes to Nazi officials to save Jews - But in general, bribery and corruption may be morally objectionable (?)

5 On Definition of Corruption  Not-So-Well-Defined Corruption - Corruption as spot market phenomenon - Spot market vs. future market corruption—Which is more distortionary? - For example, guanxi type corruption is different from spot market corruption  guanxi refers to ambiguous, implicit, and long-term based personal transactions & guanxi based relationships are voluntary and self-enforcing - Favoritism should be viewed as corruption  It is difficult to pinpoint and to crack down

On Definition of Corruption Definition of Corruption 1. Definition of public corruption: Sale of government property by government officials for personal gains 2. Two types of bribery: (1) Bribery without theft (issuing passport) (2) Bribery with theft (not to issue speeding tickets)

7 Corruption and Efficiency  Effect of Corruption on Efficiency - Pre-existing distortions: Given pre-existing distortionary policies, corruption may correct some of its distortion - Even without pre-existing distortions, Coasian bargaining may induce an efficient outcome - Allocation efficiency can be maintained via efficient bidding among the participants  University admission process ? - But what if there is no complete information regarding the cost function, for example? - Incomplete information may lead to the winner’s curse and inefficient outcome

8 Corruption and Efficiency  Bribery and Efficiency - Speed money: A queuing model is developed to explain how bribe may lead to an efficient outcome - Bribe can lead to reduce the opportunity cost of time  Reduce inefficiency by minimizing waiting cost (via self-selection) - But, due this same effect, public officials may delay administrative process to acquire more bribes (instead of speeding up)

Corruption and Inefficiency  Asymmetric Information & Corruption - Asymmetric information may lead to the inefficient outcome  Corruption is no exception - Uncertainty regarding transactions (control rights problem)  corruption contracts are not enforceable in the courts and thus corrupted transactions are often arbitrary and uncertain - Cost of hiding corrupted activities  This may lead to inefficient resources allocation (more distortionary than taxation)

Power Structure & Corruption  Shliefer & Vishny (1994) - Absolute power (centralized power structure)  a single monopolist collects bribes - Power sharing (joint monopolist)  independent agency collects bribe independently  maximum amount of bribe - Decentralized power structure: Perfect competition among administrative agency lead to no bribe

11 Corruption and Development  Corruption as a Function of Development - Zaire vs. Indonesia (Chang) - Corruption provides conflicting results on economic development  Some countries prosper with corruption but others don’t - Even France and Great Britain were very corrupted countries in the past - Economic development does not reduce corruption per se (?)

Corruption and Development  Corruption & Market Forces - Best way to tackle corruption is to introduce market forces into both private and public sectors - Deregulation may lead to less corruption - Deregulation does not lead to less corruption automatically because it does not automatically let market forces to take over - In this case, less corruption does not lead to efficiency gains and economic prosperity

Guanxi-Related Corruption  Corruption & Social Norms - Some social norms often inspire corruption related activities  For example, in China (and other Asian countries), people condemn the widespread use of guanxi in securing public resources but at the same time admire the help provided by acquaintances - Long term (special forms of) gift exchanges and personal interactions lead to implicit favoritism  corruption

How to Conduct Business in China?  How to Start & Manage a Business in China? - Import-Export Business in Shanghai - Restaurant in Ching Tao