How does government wage policy impact on corruption? Can corruption be reduced whilst maintaining reasonable levels of public expenditure on public service wages? While it is generally agreed that government wage policy has an effect on corruption, the magnitude of this effect is more controversial. A number of recent papers suggest that ensuring an honest civil service may be prohibitively expensive.
This IMF working paper argues that the prevailing belief that, in order to reduce corruption, it is necessary to raise wages to prohibitively high levels, is not true. An alternative view, which relies on the concepts of ‘fair wages’ and reciprocity, demonstrates that motivational aspects can be strong even in high bribe environments, and corruption can be eliminated at wage levels that are not prohibitive.
The theoretical background on the relationship between wages and corruption is followed by empirical implementation of the concepts, econometric issues raised by the study, results and policy implications. By assuming that civil servants are not only interested in income maximisation, and that society polices corrupt behaviour, it is possible to construct a wage policy on the concept of ‘fairness’. The paper argues that:
- Civil servants may engage in ‘satisficing’ behaviour (seeking returns which are ‘good enough’) rather than ‘maximising’ behaviour (seeking the largest possible returns). Hence they may only be as corrupt as necessary to achieve a ‘fair wage’. In other words, government officials may willingly forgo opportunities for corruption, provided proper wages are paid, even if such a response is not in their self-interest
- Wages may affect the intensity with which society polices corrupt behaviour. Unrealistically low wages may invite corruption and at times lead society to condone acts of corruption. Similarly, governments can also sanction certain levels of corruption. If a low level of pay for civil servants encourages society to condone corruption, co-operation with law enforcement is likely to falter, leading to a lower probability of detection and punishment, and higher levels of corruption.
The model developed in this paper, based on the above various mechanisms through which concepts of fairness can impact on corruption, suggests that the relationship between civil service wages and corruption may be stronger, and wage levels at which no corruption occurs may be lower, than predicted by models postulating self-interested behaviour. Implications drawn from this paper include:
- The estimated relationship between corruption and pay is significantly negative but is neither very strong (as predicted by the fair wage hypothesis) nor very weak (as predicted by maximizing models).
- Some caution is needed in drawing policy implications or carrying out cost-benefit analysis based on this estimated relationship
- Cross-country correlations made in this paper need not reflect a causal link from government wages to corruption. The fact that corrupt countries tend to have poor budgetary performance and face strong budgetary pressures, or may subscribe to the view that civil servants already earn sufficient income from corruption, may lead them to pay less well
- The results of the paper suggest that strengthening the rule of law will also have beneficial effects on corruption with wage policy.
