Corruption

Corruption is negatively correlated with investment and political stability

Kiltgaard Equation

C = R+D-A

In the above equation, C stands for corruption, R for economic rent, D for discretionary powers, and A for accountability. The equation states that the more opportunities for economic rent (R) exist in a country, the larger will be the corruption. Similarly, the greater the discretionary powers (D) granted to administrators, the greater will be the corruption. However, the more administrators are held accountable (A) for their actions, the less will be the corruption, and hence a minus sign in front of A.

Stated differently, the equation tells us that a fertile ground for growth of a thoroughly corrupt system will emerge in a country if it satisfies the following three conditions:

1. It has a large number of laws, rules, regulations, and administrative orders to restrict business and economic activities and thereby creates huge opportunities for generating economic rent, and especially if these restrictive measures are complex and opaque and applied in a selective, secretive, inconsistent and non-transparent way;
2. Administrators are granted large discretionary powers with respect to interpreting rules, are given a lot of freedom to decide on how rules are to be applied, to whom and in what manner they are to be applied, are vested with powers to amend, alter, and rescind the rules, and even to supplement the rules by invoking new restrictive administrative measures and procedures; and
3. There are no effective mechanisms and institutional arrangements in the country to hold administrators accountable for their actions.