The more corrupt a country, the more likely it is to impose capital controls. As a country improves its public institutions over time, it tends to gradually liberalize its capital accounts. Removing capital controls prematurely could reduce rather than improve the country's economic efficiency.The extent of bureaucracy varies extensively across countries, but the quality of bureaucracy within a country changes more slowly than economic policies. Bai and Wei propose that the quality of bureaucracy may be an important structural determinant of open economy macroeconomic policies - especially the imposition or removal of capital controls.In their model, capital controls are an instrument of financial repression. They entail efficiency loss for the economy but also generate implicit revenue for the government. The results show that bureaucratic corruption translates into the government's reduced ability to collect tax revenues. Even if capital controls and financial repression are otherwise inefficient, the government still has to rely on them to raise revenues to provide public goods.Among the countries for which the authors could get relevant data, they find that the more corrupt ones are indeed more likely to impose capital controls, a pattern consistent with the model's prediction. To deal with possible reverse causality, they use the extent of corruption in a country's judicial system, and the degree of democracy, as the instrumental variables for bureaucratic corruption. The instrumental variable regressions show the same result: more corrupt countries are associated with more severe capital controls.The results suggest that as countries develop and improve their public institutions, reducing bureaucratic corruption over time, they will choose to gradually liberalize their capital accounts. Removing capital controls prematurely when forced by outside institutions to do so could reduce rather than improve their economic efficiency.This paper - a product of the Development Research Group - is part of a larger effort in the group to understand the consequences of corruption and public governance.

The extent of bureaucracy varies extensively across countries, but the quality of bureaucracy within a country changes more slowly than economic policies. The authors propose that the quality of bureaucracy may be an important structural determinant of open economy macroeconomic policies - especially the imposition or removal of capital control. In their model, capital controls are an instrument of financial repression. They entail efficiency loss for the economy but also generate implicit revenue for the government. The results show that bureaucratic corruption translates into the government's reduced ability to collect tax revenues. Even if capital controls and financial repression are otherwise inefficient, the government still has to rely on them to raise revenues to provide public goods. Among the countries for which the authors could get relevant data, they find that the more corrupt ones are indeed more likely to impose capital controls, a pattern consistent with the model's prediction. To deal with possible reverse causality, they use the extent of corruption in a country's judicial system, and the degree of democracy, as the instrumental variables for bureaucratic corruption. The instrumental variable regressions show the same result: more corrupt countries are associated with more severe capital controls. The results suggest that as countries develop and improve their public institutions, reducing bureaucratic corruption over time, they will choose to gradually liberalize their capital accounts. Removing capital controls prematurely when forced by outside institutions to do so could reduce rather than improve their economic efficiency.

Bureaucratic quality in terms of the level of corruption varies widely across countries, and is in general slow to evolve relative to the speed with which many economic polices can be implemented such as the imposition of capital controls. In this paper, we study the possibility that quality of bureaucracy may be an important structural determinant of open-economy macro-policies, in particular, the imposition/removal of capital controls, and financial repression. We first derive a model that delivers such a result. Bureaucratic corruption translates into reduced ability by the government to collect tax revenue. Even if capital control/financial repression is otherwise inefficient, as long as the government needs the revenue for public goods provision, it would have to rely more on capital control/financial repression. For all countries for which we can obtain relevant data, we find that more corrupt countries are indeed more likely to impose capital controls, a pattern consistent with the model's prediction. The result of this paper suggests that a premature removal of capital controls mandated by outside institutions could reduce rather than enhance economic efficiency.

The National Bureau of Economic Research, Inc. (NBER) presents an abstract of the June 2000 working paper entitled "Quality of Bureaucracy and Open-economy Macro Policies," written by Chong-En Bai and Shang-Jin Wei. The full text of the paper may be purchased online. This paper develops a model that shows the importance of bureaucracy as a structural determinant of open-economy macroeconomic policies. The authors find that a premature removal of capital controls mandated by outside institutions could reduce economic efficiency.

Recent research demonstrates that the quality of public institutions is crucial for a number of important environmental, social, economic, and political outcomes, and thereby human well-being. The Quality of Government (QoG) approach directs attention to issues such as impartiality in the exercise of public power, professionalism in public service delivery, effective measures against corruption, and meritocracy instead of patronage and nepotism. This Handbook offers a comprehensive, state-of-the-art overview of this rapidly expanding research field and also identifies viable avenues for future research. The initial chapters focus on theoretical approaches and debates, and the central question of how QoG can be measured. A second set of chapters examines the wealth of empirical research on how QoG relates to democratization, social trust and cohesion, ethnic diversity, happiness and human wellbeing, democratic accountability, economic growth and inequality, political legitimacy, environmental sustainability, gender equality, and the outbreak of civil conflicts. The remaining chapters turn to the perennial issue of which contextual factors and policy approaches—national, local, and international—have proven successful (and not so successful) for increasing QoG. The Quality of Government approach both challenges and complements important strands of inquiry in the social sciences. For research about democratization, QoG adds the importance of taking state capacity into account. For economics, the QoG approach shows that in order to produce economic prosperity, markets need to be embedded in institutions with a certain set of qualities. For development studies, QoG emphasizes that issues relating to corruption are integral to understanding development writ large.

Refer review of this policy book in 'Journal of International Development, vol. 10, 7, 1998. pp.841-855.