Fighting corruption – Economics focus

OUT of every dollar Uganda allocated to education in 1995, just 20 cents reached the country’s schools. The rest was lost to local patronage politics. In Zhanjiang, one of China’s coastal cities, a smuggling ring wrested control of the city’s customs house and port authorities. About 100 officials, including the vice-mayor, were implicated in the ring, which smuggled goods worth more than $7 billion past China’s borders in the 1990s. In Russia, the infamous loans-for-shares scandal in 1995 allowed the state’s biggest firms to fall into the lap of some of the government’s biggest bankrollers. Yukos, an oil company worth as much as $40 billion last year, was forfeited to Mikhail Khodorkovsky, an oligarch, for little more than $300m.

From dodging duties to grabbing state assets, corruption comes in many forms, petty and grand. It can be immensely lucrative and hugely damaging, corroding the rule of law, the legitimacy of government, the sanctity of property rights, and incentives to invest and accumulate. In a paper for the Copenhagen Consensus project*, Susan Rose-Ackerman of Yale University documents corruption’s ill-effects; she also evaluates some attempts to fight it.

A mechanical analysis of costs and benefits fails to do justice to the problem. A bribe, for example, might be deemed a mere transfer from the bribe-payer (who counts it as a cost) to the bribe-taker (who welcomes it as a benefit). The net cost may be zero. Funds diverted from their proper uses often earn lower rates of return of course: the money devoured by Ugandan politics would have been better spent on Ugandan schools. But this is not always true. A firm that evades onerous taxes might make better use of its money than the government it has cheated.

Countries perceived to be largely free of corruption, according to Transparency International’s worldwide surveys, do tend to be richer. But countries that suffer quite high levels of corruption range quite widely in income, from the poor (Ethiopia) to the quite well off (Argentina). Is clean government then a luxury good; something that richer people demand, but poorer people can do without? Such a conclusion would be too complacent. Corruption is a drag on growth, even if many other factors also intervene. According to one study, Colombia’s GDP would rise by as much as a fifth if corruption there fell to British levels.

Some forms of corruption are more damaging than others. Political scientists, adopting terminology coined by the late Mancur Olson, divide extortionists into two types: the “roving bandits”, who steal everything they can, then move on to their next victim; and the “stationary bandits”, who monopolise theft in their domain. Roving bandits are more damaging to investment and commerce. The stationary bandit knows that a thriving economy, fleeced lightly and regularly, has more to offer than an economy killed off by extortion.

At worst, the bandits can capture the state itself. Instead of bending or breaking the rules for private gain, the state’s captors can, in effect, buy the rules they want. In some cases, such as Russia under the oligarchs, wealth captures power. In others, power captures wealth. Indonesia’s long-standing dictator, Suharto, also had many business interests. One student of corruption tracked the fortunes of the listed firms that enjoyed his patronage. Shares on the “Suharto Dependency Index” fell whenever he was rumoured to be in poor health.

Can dirty hands wash themselves?

Those who benefit from corruption will resist efforts to curb it. Thus, reformers must ally themselves with those who lose out from corruption, or have no stake in perpetuating it. Such allies might be found at the “grassroots”, Ms Rose-Ackerman suggests, among the local people whom the government is ultimately supposed to serve. After discovering that it was losing 80% of its education spending to corruption, the Ugandan government started publishing the amounts due to each school in the local newspapers. With this information, local teachers and parents made sure that as much as 80% of the allocated funds actually reached the schools. Ms Rose-Ackerman warns that not every example of local engagement is as encouraging. Devolving power to the grassroots often simply devolves corruption to a more local level.

Another, opposite tactic is to enlist the help of disinterested outsiders. The World Bank, for example, has set up an international advisory group and an independent watchdog to ensure that revenues from a lucrative oil pipeline between Chad and Cameroon are well-spent. Sometimes, exposing governments and businesses to international shame is enough. That is the rationale of Transparency International’s worldwide campaigns against corruption.

Anti-corruption reforms need to make self-dealing more costly, and honesty more rewarding. Customs officers and taxmen, for example, might do their job more diligently if permitted to keep some of the revenues they collect. Tunisian cities have gone one step further, charging private firms a fixed sum for the right to raise taxes on their citizenry. Governments can also discourage tax evasion by lowering and simplifying their tax rates, Ms Rose-Ackerman suggests. Russia’s tax revenues have improved as a result of its flat, 13% tax rate.

But helping governments raise taxes effectively makes little sense if they spend that money wastefully. An old World Bank project to improve the tax-raising apparatus of Mobutu Sese Seko, the kleptocratic former ruler of what is now Congo, invites Ms Rose-Ackerman’s deserved scorn. She also describes how some governments deliberately pursue white elephant projects, bereft of public utility, but rich in opportunities for graft. A country’s taste for such boondoggles shows up clearly in its demand for cement, she notes. Italy consumes three times as much per person as Britain. Ms Rose-Ackerman proposes creating benchmarks for the efficient use of capital to help expose such wastefulness.

Corruption per se does not do as much harm as poverty or disease, Ms Rose-Ackerman admits. But no public effort to cut poverty or curb disease can hope to succeed if its energies and finances are dissipated in bouts of self-dealing and embezzlement. Curbing corruption, Ms Rose-Ackerman suggests, is not an alternative to tackling any of the other global ills. It is a precondition for doing so.

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