• This is a revised version of a paper presented at the Pacific Rim Allied Economic Organizations 2nd Biennial Conference, Hong Kong, January 12, 1996, in the discussion panel “Economics of Corruption” moderated by Gordon Tullock, the University of Arizona. Other panelists were Steven N. S. Cheung, University of Hong Kong, and Francis T. Lui, Hong Kong University of Science and Technology. Western Economic Association International coordinated the conference. The author gratefully acknowledges the financial support of the Toyota Foundation.


This paper takes up the phenomenon of corruption and its relationship to growth explicitly in conjunction with overall institutional environment in which it occurs. The literature has pointed out that some forms of corruption are more detrimental to growth, while others can be considered even beneficial, given the underlying regulation. These notions are made more precise in a framework of Schumpeterian growth in “capitalist” and “totalitarian” environments. The analysis shows that corruption in an overall competitive capitalist environment ordinarily is of a transitive nature and is likely to be conducive to economic growth rather than otherwise. On the other hand, in totalitarian environment, corruption, though also possibly conducive to static welfare, becomes deeply entrenched in the socio-economic system and inevitably leads to a breakdown of the system. That breakdown, in turn, greatly enhances the possibilities for corruption and makes it especially detrimental to the prospects for resumed economic growth.