Here is a result I do not believe

Consider this hypothesis: In the past, such as the nineteenth century, resources were far less mobile. So corrupt officials had to keep their ill-gotten gains at home. This (supposedly) helped the growth prospects of those economies:

In the relatively closed economies of the 19th century, the gains from corruption remained inside the country and became part of the economy’s productive capital. In contrast, in today’s open economies, corrupt agents smuggle stolen money abroad depleting their country’s stock of capital.

Here is a link to the paper. Here is a recent and slightly misleading summary from The New Scientist.

My take: This can’t be right. Most corrupt agents hold and want money, they do not keep capital goods under their pillow. Let’s say that those agents simply burned the money. This would not destroy any real capital for the economy; co-blogger Alex and I used to call this the “Junker fallacy” (recall the mistaken old view that early Germany did not grow because the Junkers bought land instead of investing in capital). So sending money abroad should not be the fundamental problem. Furthermore the distorting effects of corruption are more important than any so-called loss of capital.

The authors do have an interesting empirical result, namely that corruption damages wealth more when the economy is open. But even if this relationship is causal, we have to look for another mechanism. My best intuitive shot is the following: if the economy is open, international investors will, sooner or later, punish it for the corruption, a’ la Indonesia or Argentina.


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