Crippling economies around the world.
POLICY REVIEW
June/July 2009
In 1997, I moved to Laos to work for the United Nations Development Programme. Laos was desperately impoverished. The country’s infrastructure was primitive. A fifth of the nation’s children died in infancy. Adult life expectancy barely exceeded 50 years. Less than half the population was literate. The UNDP spent most of its time endeavoring to raise funds from international donors to rectify this situation, and what time it did not spend this way, it spent holding elaborate conferences on the theme of how better to raise funds to rectify this situation.
I quickly concluded that all this was a perfect waste of time. Laos was so corrupt that little of the money went to its intended beneficiaries, and the only conference that might have been of use — a conference on combating governmental corruption — was never held, presumably because the government would not permit it.
Provincial governors solicited aid for the same purpose from multiple donors. None of the donors were informed about the others. When money came in, it promptly disappeared, and no one knew where it went. I came across many artifacts documenting this: A typical memorandum blandly noted that a donation of $62,000 from the Vatican, for famine relief, had simply vanished. Nothing in this memo suggested that this was in any way remarkable or that something should be done about it; it might as well have been a reminder that everyone was expected to be present at the Thursday afternoon staff meeting.
During the time I was there, hearings were held on a proposal to build a massive dam in central Laos. It was to be funded by UN agencies. The project, like so many before it, was expected to wreak catastrophic environmental damage and enrich only a handful of Lao elite. This dissuaded no one from thinking it a good idea. This, too, was typical. The UN had solicited donor aid for the building of roads — who could object to roads? — but no sooner were these roads built than trucks stacked with logs began streaming out of the forest. Living large on the proceeds was an infamously venal Communist Party official known for murdering anyone who asked aloud whether it was a good idea to destroy one of the last intact, contiguous areas of tropical cover in Southeast Asia. Paramilitary logging conglomerates such as the DAFI group under General Bou Phon became warlords in the countryside. The deforestation caused massive flooding, destroying rice crops and leaving the peasants without food.
Whenever I suggested to my fellow aid workers that it was pointless to solicit donations before addressing the problem of corruption, they would shrug. “At least it’s better than Africa,” someone would say, and everyone who had worked in Africa would nod in vigorous assent.
I still receive the occasional e-mail from friends in Laos. From what they report, nothing has changed.
Laos is, nominally, a communist country, but above all it is a kleptocracy. It is easy and tempting for enemies of communism to say that all command economies are in fact kleptocracies — that this is their inevitable nature — but there is no special reason to believe the problem to be limited to the communist sphere. I live now in Turkey, a nominally capitalist country, and the blight of corruption is equally plain to see. It is not as bad as Laos, of course, but it is bad enough to severely deform the country’s economic and political life. Economists here, for example, believe that as much as 94 percent of the construction in Istanbul is illegal. “If the construction companies are fined, they just pay the penalties and keep on building,” I was told by the Turkish academic Osman Altu?, who specializes in the study of Turkey’s underground economy. “It’s not enough to stop them. The government doesn’t really clamp down because they need those companies to support them financially.”
Istanbul lies on a massive fault zone. This construction is not built to code. It is visibly shoddy in the extreme. When the big quake comes — and it will — tens of thousands will die. Communism won’t be to blame, and nor will the free market. Corruption will be.
UBIQUITOUS DISEASE
Corruption is, obviously, a grave problem around the world, and a particularly acute menace in the developing world. It is hard to nail down a definition of “corruption” that compasses all obvious examples of it, but like pornography, we tend to know it when we see it. Loosely, we may define it as the use of governmental powers for illegitimate private gain. This is similar to the definition used by Transparency International, the world’s best-known anti-corruption NGO, and the only influential one. Transparency justifies its existence thus:
Corruption has dire global consequences, trapping millions in poverty and misery and breeding social, economic and political unrest.
Corruption is both a cause of poverty, and a barrier to overcoming it. It is one of the most serious obstacles to reducing poverty.
Corruption denies poor people the basic means of survival, forcing them to spend more of their income on bribes. Human rights are denied where corruption is rife, because a fair trial comes with a hefty price tag where courts are corrupted.
Corruption undermines democracy and the rule of law.
Corruption distorts national and international trade.
Corruption jeopardizes sound governance and ethics in the private sector. Corruption threatens domestic and international security and the sustainability of natural resources.
Those with less power are particularly disadvantaged in corrupt systems, which typically reinforce gender discrimination.
Corruption compounds political exclusion: if votes can be bought, there is little incentive to change the system that sustains poverty.
The conclusion — Corruption hurts everyone.1
To anyone who has lived in a country where corruption is rampant, all of Transparency’s assertions will sound generally and intuitively true. My brother has been living in Haiti since the spring of 2007 — his wife is a UN peacekeeper there — and when recently I discussed the subject with him, he confidently and passionately averred that corruption was “the biggest problem in the world, bar none,” then regaled me with lurid anecdotes of corruption in Haiti that should give all U.S. taxpayers pause, given that it is their money lining the pockets of the Haitian officials who are, for example, stealing the tires off the SUVS lent to them by the UN, selling them in the market, and then demanding — and receiving — new tires. They then repeat the process.
But when it comes to policymaking, “generally and intuitively true” and “confirmed by abundant anecdotal evidence” is not specific enough. It does not tell us what we need to know to respond intelligently. It tells us nothing about the precise scope, nature, and real economic impact of corruption around the world. Right now, we have little idea. And because we have little idea, we pay far too little attention to the problem.
A DARK FIGURE
Corruption is not a particularly popular topic for academic research. It is by no means ignored — it is a thriving sub-specialty in institutional economics — but a quick search on Google Scholar under the terms “corruption” and “interest rates” will suggest something about the academic world’s research priorities. There are 492,000 entries for the former, 5,210,000 for the latter. Although there are many well-funded American think tanks devoted to studying and advancing free-market economic principles, there are none exclusively committed to studying and combating corruption. Cast your mind back to the most recent American presidential campaign. How many references can you recall to the candidates’ economic advisors? Now ask yourself the same question about their corruption advisors. If you’re drawing a blank, it is not because your memory is faulty.
The reasons for this are obvious. The term “corruption” compasses such practices as bribery, fraud, embezzlement, kickbacks, cronyism, and extortion. These are crimes. Like all crimes, they are difficult to study because those who commit them are not motivated — indeed, are particularly unmotivated — to cooperate with efforts to study them. In the best case, the data are buried; in the worst case, the researchers are buried. It is much easier and safer to study interest rates. But this is like looking for the lost keys under the lamppost because the light is better there.
It is my strong suspicion, based on my experience of living in corrupt countries, that it is vastly more important for policymakers, the media, and academics to devote their time and thought to promoting robust anti-corruption policies than to worrying about sound monetary policy — important, at least, that is, if their goal is to lift people out of poverty rather than to get tenure. Indeed, worrying about the niceties of monetary policy is literally an academic exercise when the problem of corruption remains unaddressed and unsolved.
But suspect is the operative word. I cannot prove this, and nor can anyone else. Nor can they prove the contrary. This is the heart of the problem.
In 1832, the Belgian mathematician and sociologist Adolphe Quetelet coined the phrase “the dark figure of crime.” By this he meant the true crime rate as opposed to the number of crimes recorded by the government. The dark figure, he suggested, would inevitably be much higher than the official figure, for people who commit crimes take pains to ensure that their endeavors do not come to the attention of the government. All of our reasoning about crime, Quetelet suggested — about its scope, nature, and impact — would be defective were we to rely upon official statistics.
For nearly two centuries, this problem has preoccupied criminologists, and while it has not been solved, its significance, at least, has been properly appreciated. The dark figure of crime has enormous ramifications for economics, too, but the significance of this has not yet been fully appreciated. Let us call this problem the dark figure of corruption. The dark figure of corruption, we may reasonably assume, is apt to be even larger by comparison with official statistics than the dark figure of crime, for the crimes, in this case, are being committed by the governments that are charged with recording them.
While we do not know how large the dark figure of corruption is, it seems reasonable to suppose that it is massive. Our efforts thus far to calculate it, however, have been wholly inadequate.
THE CORRUPTION PERCEPTION INDEX
Broadly speaking, efforts to assess the true corruption rate have to date focused on three methods. First, corruption is measured by anecdote. In some cases, these anecdotes are very compelling indeed. Careful financial audits of specific projects, for example, can establish beyond reasonable doubt that those projects were tainted by malfeasance. This method of measurement does not give us much of a sense of the bigger picture, however. Even if an audit turns up evidence of corruption in a particular project, this does not say anything about whether the problem is typical in that country, or whether the problem is getting better, or worse, or why.
Second, corruption is estimated by studying a country’s institutional features. In other words, researchers ask such questions as, what are the incentives for corruption? How transparent are procurement practices? What safeguards against corruption have been put in place? The underlying assumption in this research is that there is a direct relationship between institutions (which are visible) and the corruption rate (which isn’t), and that by studying the former, we can reliably estimate the latter.
This method too may give us useful insights from time to time, but the problems with such an approach are massive and obvious. If a country does not have a dedicated anti-corruption police task force, for example, should we conclude that it must be rife with corruption? Or perhaps there was so little corruption there in the first place that no one ever saw the need to create one? Salt Lake City’s vice squad is smaller, less well-funded, and less experienced than Miami’s, but it would obviously be a mistake to conclude from this that there must be more vice in Salt Lake City than Miami. Yet this is precisely the kind of assumption that undergirds this kind of research.
Third, and most influentially, there is the collection of survey data. Of these, by far the most important is Transparency International’s Corruption Perception Index. The CPI is based upon polls of corporate executives, public officials, and private citizens who have been asked detailed questions about their experiences of corruption. The results are aggregated in various ways to permit cross-country comparisons and to monitor corruption over time.
While we do not know how large the dark figure of corruption is, it seems reasonable to suppose that it is massive.
The CPI is taken extremely seriously: It is enormously influential, for example, in determining levels of foreign direct investment. It is generally treated by policymakers and the media as a source of hard, reliable data.
It is not. The problems with this kind of research are myriad. First, and most obviously, government officials do not appreciate it when their countries feature prominently on these lists. They often hamper the work of anti-corruption activists to the point of making it impossible for them to collect data at all.
Next, specific measures of corruption are imperfectly related to overall corruption. A survey question about corruption in the police will not necessarily tell us anything interesting about corruption in public procurement. The answer to the question, “What precisely is corrupt?” will vary dramatically from country to country and from culture to culture. Knowing, for example, that Turkey is mid-rank on the cpi will not tell you what you absolutely must know to formulate robust anti-corruption policy in Turkey. For example, in Turkey it is widely held, and probably true, that it is necessary to pay a bribe to receive a government tender — a larger bribe, I am told, if the conservative Democratic Party is running the local government, a slightly smaller one if the governing Justice and Development Party is running the show. The army, however, is usually believed to be incorruptible — and again, I suspect that this is true. No one could construct effective anti-corruption policies here without knowing this, but it is not reflected in Turkey’s Transparency International ranking.
Corruption varies greatly from city to city, too: The U.S. ranks low on the CPI, but plainly, it is easier to buy off a politician in some American cities than others, and everyone knows it — had Rod Blagojevich been governor of Nebraska, no one would have said, “Well, that’s the Omaha machine for you.” A national anti-corruption drive that focused resources equally on Minneapolis and New Orleans would be absurd. This information, too, is critical to anyone attempting to formulate an effective anti-corruption policy, but it is not reflected in Transparency International’s cross-country rankings.
Next, given the inherent opacity of corruption, using these kinds of survey methods to study it is highly problematic. The public is often simply wrong, or deeply confused, about its prevalence. For example, if you ask a dozen Istanbul residents whether it is worthwhile to report a burglary, at least half of them (I have put this to the test) will tell you that it is pointless, because the police are cooperating with the burglars and taking a share of their proceeds. This belief is reflected in data from, for example, the International Crime Victim Survey.
Here’s the tricky part, though: I recently asked Turkey’s former interior minister and head of the police inspection board why this perception was so widespread. The problem, he replied, was not police corruption, but the court system. Turkey, he said, had rushed to bring its legal system into compliance with eu norms. This had made it harder to put innocent people behind bars, but had also made it more likely that criminals would go free or receive what the average Turk considers a trivial punishment. Many in the West would think this a salutary development, but it is a source of confusion and frustration to Turkey’s crime victims.
A national anti-corruption drive that focused resources equally on Minneapolis and New Orleans would be absurd.
Establishing what’s really going on, however, is no trivial matter. All we now know is that survey data will not necessarily give us an answer in which we may place much confidence. Yet the formation of intelligent public policy requires just such an answer. Should scarce taxpayer money be spent to enlarge the internal investigations branch of the Turkish police department? What if this means diverting it, say, from schemes to improve compliance with earthquake building codes?
Likewise, foreign businessmen who have lost a bid for a major tender may find it comforting to believe that the tender process was corrupt. This may be easier to accept, psychologically, than the idea that they lost to someone who worked harder. No doubt this would be easier news to report to their superiors in their home office.
Profound distortions in perception may even arise from the very act of attempting to measure them: International businessmen are for obvious reasons interested in the phenomenon of corruption and therefore aware of the CPI. The CPI thus becomes a self-fulfilling prophecy. What was reported to be the worst country in one year will be regarded as the worst come the next.
Finally, even assuming that the data gathered from various surveys is roughly accurate, the analysis to which it is then subjected results in a product that is, if not meaningless, less meaningful than it looks. For example, the standard deviations in the raw data from closely-ranked countries — and even from more distantly ranked countries — are so high that the proposition “Country a is more corrupt than Country b” is not at all statistically significant.
There are other significant and very questionable assumptions built into almost every step of Transparency International’s methodology. To figure out whether these assumptions should undermine our confidence in their conclusions, we would have to know whether their conclusions are reasonably stable across a range of other studies making slightly different assumptions — and we don’t, because there are none.
When the CPI is released, it usually receives a great deal of serious press attention, followed by political congratulations or recriminations, as appropriate. “Corruption in India has increased marginally in the last two years, taking its position from 72 to 85 in the list of the world’s corrupt countries, according to global watchdog Transparency International,” Express India reported gravely last year, explaining that the integrity score was based on a “mathematical calculation,” devised by a “Switzerland-based professor.”2 The reader is obviously to assume that these mathematical calculations are as precise as those used to calculate the mean fatigue load of an aircraft wing and twice as reliable as a Patek watch. But in fact, when Transparency asserts that India is the 85th-most corrupt country in the world, it really means something on the order of, “India is a good deal more corrupt than Denmark and quite a bit less corrupt than Somalia.”
And we didn’t need Transparency to tell us that.
THE PROBLEM THAT DEMANDS SOLVING
I do not mean to criticize Transparency harshly. They do extraordinarily important work, if only because they have succeeded in raising the profile of the issue. They have broken taboos around the world against discussing corruption and generated pressure for substantive reforms the globe around, such as the OECD’s Anti-Bribery Convention. They do not pretend to measure corruption, per se, but rather the perception of corruption. Having an accurate measure of the former would surely be more useful, but we should not complain about having a vague measure of the latter — it’s better than nothing. It is not Transparency’s fault that despite their disclaimers, many people assume a tight correlation between perception and reality.
But the major problem — how do we measure corruption? — is unsolved.
Attention to this problem is particularly needed now, for economies around the world are collapsing briskly. Efforts to assess the reasons for this have generally been focused on problems visible to the naked eye — speculative bubbles, regulatory failure, faulty fiscal or monetary policy, poorly constructed trade policy. All of these are real problems and worthy of attention. But in the absence of a proper weighting of the role of corruption, our reasoning, as Quetelet warned, is apt to be defective and our conclusions — and thus our policy prescriptions — in error.
The global economic crisis has reinvigorated a great debate about free markets and laissez-faire capitalism. Members of two distinct ideological camps are again facing off solemnly. After a long sojourn in intellectual Siberia, stern critics of market liberalization have recently found that the world is listening to them with renewed interest.
Corruption should, in principle, be an issue about which the left and the right are in agreement. Accurately assessing levels of corruption and combating it in all its forms should be a priority on both sides of the ideological aisle. The limited research that has been done suggests that corruption is neither more nor less prevalent in countries with large state sectors.3 It is an independent variable.
Nonetheless, the idea that economic crises may be attributable to corruption, rather than capitalism, arouses special ire on the left. The anti-globalization movement’s darling, Naomi Klein, pours scorn on the idea in The Shock Doctrine: “When in doubt, blame corruption,” she sarcastically titles the sub-heading of her discussion of Russia, in which she argues that “the real problem with the blame-Russia narrative is that it pre-empts any discussion of what the whole episode has to teach about the true face of the crusade for unfettered free markets.”4
The sentiment is echoed by Joseph Stiglitz, who unlike Klein is a serious and thoughtful economist with much of merit to say about the importance of accompanying market liberalization with institutional reform. “The advocates of globalization,” he writes, “when confronted with its glaring failures, try to shift the blame to the developing countries themselves, to their corruption. . . . With or without corruption, globalization, in the way that it has been carried out, has worsened the plight of many developing countries. I believe that Argentina would have had its crisis, given its fixed exchange rate, given the fall in the value of the currency of its trading partners, especially that of Brazil, even if there had been absolutely no corruption.”5
A question for them both: How do you know?
How would they, and how would anyone, know how much corruption there is in Russia or Argentina — and if they do not know this, how can they say with any credibility what effect it has had on these economies?
I will answer the question for them. They don’t know, and neither does anyone else. Our inability even to estimate the dark figure of corruption is an enormous lacuna in our understanding of these problems. Even if we cannot answer the question with precision, we should recognize that the question, at least, is highly significant, and worthy of far more effort to answer it than it receives.
My own suspicion — and I can no more prove it than Klein and Stiglitz can prove theirs — is that the role of corruption in precipitating economic catastrophe is significantly underestimated. I say this because I have seen, up close, the way corruption fatally undermines institutions that must be robust for economies to work, creating insecurity of property, a judiciary that doesn’t properly enforce contracts, dubious banking practices, and a serious lack of regulatory oversight. I have spoken, over and over again, to people who believe that nothing they might try to do — politically or economically — will ever work, for the system is too corrupt. When this belief is widely held, everything in a society, from entrepreneurialism to family relations, is polluted by frustration, pessimism, apathy, cynicism, and despair.
I have also seen, firsthand, the analytic confusion to which corruption gives rise. When free-market reforms are implemented by a kleptocratic government, the failure of prosperity to blossom like a daisy after a spring rain cannot truly be entered as evidence against the theory that free markets produce efficient outcomes. Nor, for that matter, does the desperate poverty of peoples living under nominally socialist regimes that are in truth less Marxist than simply mobbed-up refute the idea that government intervention in the economy may, under certain conditions, have salutary economic effects. Nonetheless, these are generally the conclusions drawn, particularly in the popular imagination, particularly in the developing world.
When corruption causes free-market reforms to fail, as I suspect it often does, this is ammunition for the left’s own shock-doctrine troops. The recent convulsions in the world economy will inevitably be the excuse, the world around, to enlarge government power, curb economic freedom, and diminish the role of markets. This will solve nothing and make the situation worse. It is thus particularly important that the role of corruption now be properly and prominently appraised.
The fact that this is very hard to do should not mean that no one tries to do it. We have not had nearly as much success curing cancer as we would like, although we can cure syphilis quite easily. This does not mean that ten times more funding should go to syphilis research than cancer research. Corruption is the cancer of economics, with all that the metaphor implies — it is enigmatic, poorly understood, hydra-headed, deadly, and often hidden until it is too late. If the patient is riddled with it, the treatment of other afflictions will be no more than a temporary palliative.
1 Available at https://www.transparency.org/about_us (accessed May 11, 2009).
2 “India slips in Corruption Perception Index: Transparency International,” Express India (September 23, 2008).
3 See, e.g., the literature survey in Johann Graf Lambsdorff, “Consequences and Causes of Corruption — What Do We Know from a Cross-Section of Countries?” Diskussionsbeitrag 34:5 (2005).
4 Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism (Macmillan, 2008), 304.
5 Joseph Stiglitz, “The Overselling of Globalization” in Michael M. Weinstein, ed., Globalization: What’s New? (Columbia, 2005).