Extensive literature argues that reducing trade costs can substantially increase income and improve welfare in trading countries, particularly in the developing world where these costs are highest. In 2007, a shipping a container from a firm located in the main city of the average country in Sub-Saharan Africa was still twice as expensive, and six times more time-consuming, than shipping it from the US. It was also twice as expensive and just as time-consuming as shipping a similar container from India or Brazil, according to the World Bank. As a result, a significant portion of international aid efforts has in recent years been channeled to reducing trade costs and improving logistics in the developing world. Evidence is growing on how corruption in transport networks can significantly increase the cost of moving goods across borders.

A recent paper “Corruption and Firm Behaviour” investigates how different types of corruption affect company behavior. Firms can face two types of corruption when seeking a public service: cost-reducing, “collusive” corruption and cost-increasing “coercive” corruption. Using an original and unusually rich dataset on bribe payments at ports matched to firm-level data, the authors observe how firms respond to each type of corruption by adjusting their shipping and sourcing strategies. Cost-reducing “collusive” corruption is associated with higher usage of the corrupt port, while cost-increasing “coercive” corruption is associated with reduced demand for port services. Data suggests that firms respond to the opportunities and challenges created by different types of corruption, organizing production in a way that increases or decreases demand for the public service. This can have important implications for how we identify and measure the overall impact of corruption on economic activity. The data further allows us to understand the bribe setting behavior of different types of public officials with implications for the design of anti-corruption strategies.

In our setup, firms have the choice to ship through two ports: Maputo in Mozambique, and Durban in South Africa. The majority of firms in our sample are equidistant to both ports while a subset of firms will be significantly closer to the more corrupt port of Maputo. Survey data revealed that the choice of port is driven primarily by the interaction between transport and corruption costs at each port. Transport costs are linear to the distance between each rm and the ports, while corruption costs are determined by the type of product the firm ships. Our main measure of the distortion caused by corruption is how rms shipping products that are more vulnerable to corruption will opt to go the long way around to avoid a closer, but more corrupt port. We also nd suggestive correlations between the level and type of corruption rms face at each port, which directly affects the cost of using port services, and firms’ decision to source inputs from domestic or international markets.

Source: Corruption and Firm Behavior (December 2011) by Sandra Sequeira and Simeon Djankov.

Related articles

• Trade costs and corruption in Ports of Durban and Maputo (mpoverello.com)