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Can Bribes Buy Protection Against International Competition?
Unformatted Document Text:  the government while imposing deadweight losses on society as a whole. From an intuitively theoretical perspective, we should therefore observe that corrupt behaviour is associated with barriers to trade, a causal association that could go both ways. However, the existing literature has focussed on the link from trade to corruption. Krueger (1974) and Ades and di Tella (1999) for example both make the theoretical point that more protection against international competition leads to more rent-seeking activity and thereby also to more corruption. The latter study supports this proposition with empirical evidence from 31 countries, a finding that since has become almost a stylized fact in the corruption literature and has been replicated in the related literature on capital account restrictions (e.g. Dreher and Siemers, 2005; Le and Rishi, 2006; Sandholz and Gray, 2003). However, Ades and di Tella (1999) also mention the possibility that corrupt practices might affect trade policy or – as the title of this paper suggests – that bribes can buy protection. Their point is that if some sort of coordination mechanism exists between customs officers – those implementing trade policy, and politicians – those making the policy, the level of protection might be set to maximize the income from corrupt practises given the constraints imposed by politics and international rules. There are nevertheless two much simpler potential mechanisms that do not involve coordination. First, Rose-Ackerman (1997, 56) notes that “once a pattern of successful payoffs is institutionalized, corrupt officials have an incentive to raise the size of bribes demanded and to search for alternative ways to extract payments”. Hence, whenever firms have begun using bribes to lower their costs, politicians and public servants are given an incentive to set the height of barriers in order to maximize their corrupt incomes. The causal chain between corruption and trade policy could therefore go the 3

Authors: Bjørnskov, Christian.
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the government while imposing deadweight losses on society as a whole. From an
intuitively theoretical perspective, we should therefore observe that corrupt behaviour is
associated with barriers to trade, a causal association that could go both ways. However,
the existing literature has focussed on the link from trade to corruption. Krueger (1974)
and Ades and di Tella (1999) for example both make the theoretical point that more
protection against international competition leads to more rent-seeking activity and
thereby also to more corruption. The latter study supports this proposition with
empirical evidence from 31 countries, a finding that since has become almost a stylized
fact in the corruption literature and has been replicated in the related literature on capital
account restrictions (e.g. Dreher and Siemers, 2005; Le and Rishi, 2006; Sandholz and
Gray, 2003).
However, Ades and di Tella (1999) also mention the possibility that corrupt
practices might affect trade policy or – as the title of this paper suggests – that bribes
can buy protection. Their point is that if some sort of coordination mechanism exists
between customs officers – those implementing trade policy, and politicians – those
making the policy, the level of protection might be set to maximize the income from
corrupt practises given the constraints imposed by politics and international rules. There
are nevertheless two much simpler potential mechanisms that do not involve
coordination. First, Rose-Ackerman (1997, 56) notes that “once a pattern of successful
payoffs is institutionalized, corrupt officials have an incentive to raise the size of bribes
demanded and to search for alternative ways to extract payments”. Hence, whenever
firms have begun using bribes to lower their costs, politicians and public servants are
given an incentive to set the height of barriers in order to maximize their corrupt
incomes. The causal chain between corruption and trade policy could therefore go the
3


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