Corruption
Alexander Tabarrok
December 2005
• Corruption is common around the
world. Corruption includes bribes,
kickbacks, nepotism, siphoning of
revenue etc.
• Corruption can occur at the highest levels of
government as in the Phillipines which Marcos
ran like a monarchy or at the lowest levels as
when a government official needs to be bribed to
do his job.
• Corruption aint just something that happens to
poor countries.
– Between 1990 and 2002 federal prosecutors
convicted more than 10,000 US government officials
of corruption.
– Corruption is more common in developing countries
but not limited to developing countries.
Measuring
Corruption
•
•
•
Least Corrupt
Most Corrupt
Iceland
9.7
…Indonesia
2.2
Finland
9.6
Iraq
2.2
New Zealand
9.6
Liberia
2.2
Denmark
9.5
Uzbekistan
2.2
Singapore
9.4
Congo, Dem.
Republic
2.1
Sweden
9.2
Kenya
2.1
Switzerland
9.1
Pakistan
2.1
Norway
8.9
Paraguay
2.1
Australia
8.8
Somalia
2.1
According to the
Corruptions
Perceptions Index of
Transparency
International the
least and most
corrupt countries as
listed (10 pt scale
with a higher number
being less corrupt).
Austria
8.7
Sudan
2.1
Netherlands
8.6
Tajikistan
2.1
United Kingdom
8.6
Angola
2.0
Luxembourg
8.5
Cote d'Ivoire
1.9
Canada
8.4
1.9
Hong Kong
8.3
Equatorial
Guinea
Nigeria
Germany
8.2
Haiti
1.8
USA
7.6
Myanmar
1.8
Source:
http://www.transparency.org/cpi/2
005/cpi2005.sources.en.html#sou
rces
France
7.5
Turkmenistan
1.8
Belgium
7.4
Bangladesh
1.7
Ireland
7.4
Chad
1.7
The most common
measures of
corruption use
surveys of
international
businesses and
other observers to
ordinally rank
countries.
1.9
Corruption is Correlated with Low GDP
(Note that in this graph the X axis is Control of Corruption)
Source: Acemoglu (2004)
.
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Control of Corruption
1
In international studies corruption is correlated with low GDP, reduced
investment, low growth (weakly), low education, and increased fractionalization.
It’s not always clear which is cause and which effect – probably both – more on
this in a later slide.
Note that the more corrupt
countries are political
instable.
The causal relationship
could go either way.
Corruption in the United States
•
In 2003 USA Today (Dec. 18, 2003) had this to say about former Illinois
governor Mark Ryan:
“The indictment alleges that Ryan, a Republican, awarded lucrative
government contracts and leases to family and associates; accepted cash
payments, vacations and gifts from state contractors, and lied to FBI agents in an
effort to obstruct the investigation. The indictment alleges the acts spanned his
career as secretary of state and governor.
"Basically, the state of Illinois was for sale to family and friends," U.S. Attorney
Patrick Fitzgerald said….”
•
And here is the Associated Press (Nov. 28, 2005) on Representative Randy
Cunnigham:
“Rep. Randy "Duke" Cunningham tearfully resigned Monday after pleading
guilty to bribery and admitting he took $2.4 million to steer defense contracts
to conspirators using his leadership position on a congressional
subcommittee.”
Most and Least Corrupt States in the United States
(as measured by Federal convictions per capita, 1976-2002)
Glaeser and Saks (2005) in Global Corruption Report 2005.
Problem of Reverse Causality
•
Problem of reverse-causality. Could a poor economy generate corruption?
Yes. Suppose, for example, that:
1. The efficiency of the bureaucracy rises with government wages. This could
occur, for example, because you have to pay government workers high relative
wages to get them to say no to corruption.
2. Poor countries have particulary hard times of keeping government wages high
relative to corrupt alternatives.
3. Then as a country gets richer it can pay higher government wages and becomes
less corrupt but it is better economic conditions that create higher wages not the
reverse.
•
•
•
•
Mauro thus introduces Ethno-linguistic fractionalization as an instrument.
Ethno-linguistic fractionalization measures how diverse a country is in terms
of language – probability that two randomly chosen citizens will speak
different language.
Idea is that ethno-linguistic fractionalization causes corruption but is not
itself caused by economic growth. Thus if ethno-linguistic fractionalization
can be shown to reduce growth rates then this is evidence that corruption
causes lower growth and this evidence is free of reverse causality.
Does ethno-linguistic fractionalization cause corruption? Yes – it is
correlated and recall the SV argument that competitive serial corruption is
the worse kind and this is the kind of corruption that ethno-linguistic
fractionalization is likely to support.
Does ethno-linguistic fractionalization reduce growth? Yes, thus this
suggests that there is some link between corruption and reduced growth.
Problem of Reverse Causality 2
•
Using data from the United States Glaeser and Saks (2004) show that
states which are richer and better educated (and hence better monitors of
the government) have less corruption. States which are more
homogeneous also have less corruption (hetreogenity increases
divisiveness ala Olson and may promote corruption as a form of pie
dividing, also less common goals more power centers in hetereogeneous
societies).
– To control for the possibility of reverse causality Glaeser and Saks show that
corruption in the 1990s is lower in states that had high education levels in the
1920s and high per capita income in the 1940s
• The idea is that education in the 1920s could have an effect on corruption today
because it is correlated with education today but education in the 1920s cannot be
affected by corruption today. (Same with per capita income in the 40s)
•
•
•
Glaeser and Saks find weak evidence that corruption lowers state economic
growth.
Thus a strong causal effect appears to run from growth, especially in the
form of higher income and better education, to less corruption but the effect
of corruption on growth is relatively weak.
We should be careful about drawing too many conclusions about the rest of
the world from studies of the United States. As we will discuss later in the
United States we have corruption of politics by economics elsewhere we
have corruption of economics by politics which is much more serious.
Measuring Corruption: Micro Studies
•
•
In Uganda, Reinikka and Svensson (2004) compared the amount of money given out
to schools with money received and found that almost 90% of the money
disappeared in the transfer – most of the money went to government officials and
politicians.
In Indonesia the government subsidized rice to be given to the poor. Olken (2005)
compared administrative data on the rice given out with survey data on the rice
received. He found that on average there was an 18% loss (interestingly most of the
loss came from a few districts with ethnically heterogeneous populations and low
population densities – Why?)
–
•
In the United States corruption is more difficult to document. Obviously, we see
corruption when corrupt officials are caught. It is very difficult, however, to draw a
direct connection between dollar donations and votes once one controls for ideology
and district characteristics.
–
•
Taking into account the loss from corruption and the cost of taxation may make the program
welfare reducing instead of welfare enhancing. Hence corruption can make redistribution
very difficult.
It is illegal to buy votes but it is not illegal to buy candidates!
Indirect evidence,however, is suggestive that many things matter other than votes.
For example, in May of 2001 the political world was rocked when Jim Jeffords
switched parties from Republican to Independent thereby throwing the Senate from
the Republicans to the Democrats. As the switch became known the stock market
returns of those firms that had given heavily to Republicans fell significantly relative to
those firms that had given to Democrats.
Why Corruption is Bad
• Corruption reduces wealth because it acts as a tax on productive
activity. Government spending is often wasteful but the corruption
tax has zero offsetting beneficial expenditures.
• The tax is highest in the case of serial competitive competition when
the double monopoly problem can create severe welfare losses.
• Corruption encourages government control over the economy.
• Corruption distorts the direction of economic activity (recall our
discussion of Olson) encouraging people to exit the productive
areas of the economy and enter the corruption sector.
Types of Corruption 1
Corruption with Theft vs. Corruption w/out Theft
(Shleifer and Vishny, 1993)
• Corruption without Theft
– There is a government bureau responsible for issuing
a passport, license, permit etc.
– There is an official cost.
– In corruption without theft the official price must be
paid no matter what.
– Thus, for corruption without theft the total price is
always higher than the official price.
• Corruption with Theft
– The bureau accepts a bribe and issues the permit but
does not record the transaction. In this case the total
price may be, but is not necessarily, below the official
price.
Analysis
•
•
Buyers prefer corruption with theft because of the possibility of
lower prices.
Could corruption with theft be welfare enhancing? Partial effect is
good but total effect could be very bad.
–
–
–
–
–
–
•
Corruption with theft unites briber and bribee in secrecy against the
government so it is difficult to police.
Corruption with theft is self-reinforcing. Every corrupt firm makes it
more difficult for other corrupt firms to operate.
Thus corruption with theft is likely to grow.
Corruption with theft pits government against briber and bribee.
Since it raises price, corruption without theft, tends to pit briber against
bribee.
Corruption without theft, therefore, has some natural limits.
Total effect of corruption with theft could be worse even when
partial effect is beneficial. Hence S. and V. suggest
“the first step to reduce corruption should be to create an accounting
system that prevents theft from government.”
Types of Corruption
Monopoly Corruption
A monopolist controls corruption at all levels.
•
•
•
Kingdoms
Marcos’s Phillipines
Communist dictatorships.
Serial Corruption
More than one government or part of government
each of which must be paid.
• Post communist Russia.
• Some African countries without strong
government.
Leads to double-monopoly problem – toll booth
analogy.
Free Entry makes the situation worse.
Competitive Corruption
There is more than one seller of
favors.
Parallel Competition
Multiple officials each of whom can provide the
same good.
• The United States – sometimes.
• Federalism
Leads to Bertrand competition.
Free entry makes the situation better.
• Competitive corruption can be a lot worse than monopoly
corruption, especially serial competitive corruption.
– Thus, anarchic government can be worse than strong unitary
government.
• What accounts for which societies have which types of
corruption?
– Open question! Here are some ideas.
– Monopoly corruption needs to be enforced – easier in small,
homogeneous society with few rulers. Harder in societies where
other natural bases of support exist such as tribes, religious
groups etc.
– Autocratic regimes can enforce monopoly corruption.
Huntington (1968) has argued that corruption increases with
democracy. Makes sense if democracy comes with a weak
regime and we are talking about a shift from monopoly to serial
corruption.
• Appropriate policy: Create competition in the provision of
government goods while intensively monitoring theft.
•
•
•
•
Corruption increases the
incentive to create
welfare reducing
monopolies!
The theory is supported
in the data, corrupt
countries have greater
regulation of entry and
less free trade.
In the free-market
democracies we tend to
think of corruption as
corruption of politics by
economics. But in many
corrupt countries what
we are really talking
about is corruption of
economics by politics.
Interesting implication of
the bribe model: What
happens when the
official price rises?
$
B ribes
O fficial
P is like
MC
Q P ermits
D
MR
For a Soviet firm o r a bu re aucracy t hat must p ay the price it charge s to a
central bu reau the p rice is like a M C. The bu re aucrats wan t to maximize
bribe reven ues wh ich is the d iff erence b etwe en t he m arginal willing ness
to pay an d th e off icia l p rice
0
200
400
600
800
Time to License a Warehouse
is
Lower in Less Corrupt Countries
2
4
6
CorruptionIndex
TimeDays
Fitted values
8
10
Corruption/Rent Seeking and
Innovation
•
•
•
•
•
•
Is rent-seeking likely to attack the innovation sector or the production sector
more severely?
Private rent seeking such as crime will go for where the money is, it will go
after existing stocks of wealth. Quoting MSV “Bandits steal crops, lawyers
sue deep-pocket corporations, and armies invade rich countries.”
In contast public rent seeking will to a larger extent go after innovation.
Innovation by definition is new and often requires permission, permits,
licenses, import quotes and so on. Innovators have demand for these
government provided goods. Established firms do not need so many of
these goods since they have bought them already.
In addition, the innovators are typically not part of the existing elite. The
established producers are insiders and will likely want to prevent the
innovators from disrupting their own good life.
Innovators often have risky projects which makes them especially
vulnerable to rent-seeking. If the project is succesful the government
expropriates. If it is unsuccesful the innovator bears the loss. Tails I win,
heads you lose.
Thus corruption/rent-seeking can be particulary bad for innovators.
Corruption/Rent-Seeking/Depredation and the Self-Fulfilling
Bad Equilibrium
From Murphy, Shleifer and Vishny (1993).
•
Consider the following model. There are three
activities.
1. Produce a cash-crop, i.e. produce a crop for market sale – this
pays alpha.
2. Subsistence production – i.e. product for your own family only or
produce a crop that will feed you but has negligible market
value (e.g. potoatoes) – pays gamma.
3. Rent-seek, ie. tax or steal from the producers of the cash-crop.
You cannot rent-seek from subsistence farmers.
•
•
Note that if more and more people choose rent-seeking
then the returns to the cash-crop will fall. What can
happen in this model?
n is the number of rent-seekers.
Case 1: Property Rights are Well
Protected
Case 2: Property Rights are Poorly
Protected
Case 3: Multiple Equilibria
Well Protected Property Rights
Multiple Equilibria
Poorly Protected Property Rights
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Corruption - George Mason University