Corruption: Functional or Dysfunctional?

It’s an old, persistent question in political economy, one that has echoed in bureaucratic hallways and academic debates from Jakarta to New Delhi: can corruption, in certain contexts, serve as a functional tool for economic efficiency? Is it always a hindrance, or can it occasionally act as a makeshift lubricant in systems riddled with red tape and administrative bottlenecks?

On the surface, the consensus among economists is straightforward. Corruption distorts incentives, erodes institutional trust, and leads to suboptimal allocation of resources. That much is well understood. Yet the real world, particularly in many developing economies, often operates outside clean theoretical models. Here, rules are not always enforced as written. Procedures, especially for businesses, can be labyrinthine. In such environments, corruption doesn’t simply emerge as deviance—it becomes a shadow mechanism for transaction, speed, and access.

This is where the so-called “grease the wheels” hypothesis enters the conversation. It suggests that in highly regulated or inefficient systems, petty corruption might actually enhance operational efficiency by helping firms circumvent bureaucratic delays. A small bribe, can fast-track a permit, expedite customs clearance, or smoothen approvals that would otherwise take months. In theory, this greases the machinery of economic activity when formal systems fail to do so.

Historical and contemporary examples are often cited to back this view. Indonesia during the Suharto era witnessed rapid GDP growth, even as corruption was embedded in virtually every state function. China’s early decades of reform are sometimes framed similarly where growth occurred hand-in-hand with informal networks of political patronage and opaque local deals. For some, these cases suggest that corruption, while morally undesirable, might not be entirely inimical to development.

But is this view intellectually and empirically defensible? Or does it reflect a dangerously shallow understanding of how economies evolve and institutions matter?

To interrogate this, one must move beyond anecdotes and look at structural consequences. Short-term transactional gains do not imply long-term systemic health. Corruption, even when it oils specific transactions, tends to undercut the very foundations on which sustainable and equitable economic growth rests.

First, consider allocative efficiency. In any reasonably functioning market economy, resources—capital, labor, land—ought to flow to their most productive uses. Corruption undermines this mechanism. Contracts do not go to the most efficient producers, but to those with proximity to power. Licenses are granted not based on technical merit, but based on personal ties or financial incentives offered to gatekeepers. Over time, this disincentivizes genuine innovation, suppresses competition, and leads to capital misallocation. The cost is not just economic—it is developmental.

India presents a particularly instructive case. Despite being a liberalizing economy for over three decades, the country continues to wrestle with procedural opacity and administrative overreach in many sectors. Entrepreneurs, especially in the small and medium-scale space, often find themselves navigating a Kafkaesque maze of permits, inspections, and regulatory ambiguities. In such a context, the temptation to rely on informal channels is high. Bribes become not just a means to get ahead, but a means to simply survive.

And yet, normalisation of this behaviour has long-term consequences. It entrenches a parallel system of incentives. It rewards compliance with informal norms over formal rule-following. It penalises the honest and the unconnected. What may seem like an expedient solution at the firm level results in systemic stagnation at the macro level.

Second, corruption creates dynamic inefficiencies. It not only distorts present outcomes but also alters the future path of economic development. Firms that invest heavily in political connections often reduce investments in productivity-enhancing areas—technology, skills, and product quality. After all, when rent-seeking yields higher returns than innovation, the rational choice is to seek rents. This creates an economy of influence, not value creation.

The Indian real estate sector provides a striking example. In several states, opaque land acquisition processes, irregular clearances, and discretionary zoning policies have created a nexus between developers, politicians, and bureaucrats. Projects are routinely delayed, not because of market forces, but because of rent extraction at multiple levels. The end consumer pays more. Urban planning suffers. Infrastructure deficits persist.

There is also a fiscal dimension to corruption that is often underemphasised. Public finance depends critically on citizen trust and institutional credibility. When taxpayers perceive that their contributions are being siphoned off by elites, tax morale erodes. In India, this has led to widespread underreporting of income, large informal sectors, and chronic revenue shortfalls. The consequences are manifold—poor infrastructure, underfunded education and healthcare systems, and a state that struggles to fulfill even its core functions.

The “grease” argument also assumes that corruption is somehow contained or predictable. But this is rarely the case. What begins as petty facilitation often evolves into systemic extortion. Bureaucracies become captured. Regulatory discretion becomes an instrument of rent-seeking. Reform becomes nearly impossible, because too many actors have a vested interest in maintaining the status quo.

This institutional entrenchment is what makes corruption especially dangerous in developing economies. It is not just about stolen funds or delayed projects but more about the corrosion of trust. It erodes the implicit contract between citizen and state. It fosters cynicism, breeds inequality, and ultimately undermines democratic legitimacy.

By contrast, countries that have tackled corruption systematically have reaped tangible economic benefits. Singapore is the most cited case, and not without reason. Its transformation from a graft-ridden colonial outpost to one of the world’s most efficient states was rooted in strong institutions, clear enforcement, and an unwavering political will. Corruption didn’t just disappear but was actively dismantled. The result? High levels of investor confidence, low transaction costs, and a state apparatus that could plan and execute policy effectively.

Even more relevant, perhaps, is Georgia’s post-2003 experience. By digitising services, eliminating redundant procedures, and empowering independent agencies, the state dramatically improved the ease of doing business. Police corruption, once endemic, dropped to near-zero levels within a decade. Investors took notice. Growth followed.

India has made some strides in this direction like e-governance initiatives, the GST regime, direct benefit transfers. These are positive steps. But the deeper political economy remains resistant. Many anti-corruption efforts are cosmetic, targeting low-level functionaries while leaving elite impunity intact. Real reform will require much more: judicial autonomy, administrative transparency, political financing reform, and perhaps most difficult of all, a cultural shift in how state-society relations are imagined.

So where does that leave us?

The grease-the-wheels argument is not just flawed rather fundamentally myopic. It mistakes individual convenience for collective progress. It assumes that what helps one actor in a dysfunctional system somehow improves the system itself. But corruption is not a workaround. It is a symptom of institutional failure, and over time, it becomes a cause of it.

In truth, corruption is not grease. It is grit. It clogs the gears, slows down the engine, and eventually burns it out. And the longer we tolerate it, the harder it becomes to build the kind of state capacity that modern economies require.

For India—and for many others—the question is not whether corruption can deliver growth. The question is whether growth can be sustained without confronting the corrosive effects of corruption head-on. If we are to build resilient, inclusive economies, the answer must be clear.

Malik Daniyal, Undergraduate Student, University of Delhi