__WPS 2 q48 POLICY RESEARCH WORKING PAPER 2048 Corruption in Economic Corruption is a major obstacle to economic development. It Development reduces domestic investment, discouragesforeign direct , , n , ~~~~~~~~~~~~~~~Investment, Inflates Beneficial Grease, Minor Annoyance, government ing,aand 1 1 ~~~~~~~~~~government spen-ding, and or Major Obstacle? shifts government spending away from education, health, Shang-Jin Wlei and infrastructure maintenance toward less efficient (more manipulable) public projects. International pressure against corruption is useful, but nmore critical is reform of domestic institutions and a focuw, on the incentive problem. Aouse of power by public officials should not pay. The World Bank Developmenit Research (Group PublicEconormiics U Febr-uary 1999 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized