Fighting graft with economics misses the moral imperatives

2008-11-1  |     NEWSPAPER EDITION

MANY cures have been proposed for the global epidemic of corruption.

Some countries show TV serial melodramas featuring the downfall of corrupt officials, while some African village pastors deliver anti-corruption sermons.

In their new book "Economic Gangsters: Corruption, Violence, and the Poverty of Nations," authors Raymond Fisman and Edward Miguel try to understand what motivates people to break the law, the consequences of their actions and the implications for prevention.

Their effort stands out among many others for their cool-headed application of economic cost-benefit analysis to this shady human behavior.

Business people everywhere in the world spend a tremendous amount of time and money to cultivate official ties, because official patronage can greatly help business.

In the US many senior government officials are former or future CEOs.

Vice President Dick Cheney left his job as CEO of energy giant Halliburton to join George W. Bush's presidential ticket in 2000, and there were indications of corporate favoritism during the Iraqi occupation when Halliburton got many lucrative contracts.

In an ingenious way, the authors tries to figure out how much these ties are worth.

In doing this, they look for unexpected political events, and measure how the share prices of politically well-connected companies are affected.

The price differences are presumed to be the net worth of the connections.

The study suggests that in many countries cultivating official ties through corrupt practices is a high-return, low-risk investment.

This explains why a huge number of official spouses and children operate fabulously successful businesses.

It also explains why corruption is hard to stamp out.

The suspected officials can always reject accusations by claiming that their sons and spouses just happen to be more clever, have business savvy and more than ordinary discipline.

In China, outright cash bribes are old fashioned, replaced more and more by trade offs in personnel arrangements, junkets, inside trading tips, or highly paid corporate sinecures.

Absent miracles or accidents, it is virtually impossible to build an ironclad case against corrupt officials within modern legal infrastructure.

When political favoritism becomes the norm of doing business, we see why the not so highly paid civil servants' positions become so sought after.

Deterrents

According to the authors, the implications for weeding out corruption are: Boost the economic returns for staying on the right side of the law.

Would economic incentives, an independent legal structure and vigorous press supervision actually check bad behavior?

I have serious doubts. As we can see, corruption is extremely cost-efficient and low-risk.

"Yet most people still do the right thing most of the time. Probably more than fines or jail time, what constrains us from breaking the law is the fact that it just isn't right. We're constrained by conscience," the book observes.

Could ideological indoctrination instill a sense of propriety in officials?

I prefer to think that fear of divine retribution, the appeal to conscience, and ethical scruples are the more effective deterrents than external checks.

Especially in places where bribe-offering becomes the norm to get things done, and failure to conform spells trouble.

Many believe there is something wrong with bribe offering, but when it is expected of them, individuals can do precious little.

How many parents in China have not offered seasonal presents to kindergarten teachers?

While the book offers a penetrating analysis of bribe-offering as a rational economic investment, it must look beyond economics to build up an effective anti-graft toolkit.

Poverty

By definition, economic gangsters are those lawless thugs (many wearing expensive suits) not encumbered with ethical scruples, who behave in their narrowest self-interest, by cheating on taxes, restaurant bills, or killing off business rivals.

"When placed in desperate circumstances all people are reduced to the rational calculus of survival, with conscience a forgone luxury," the authors conclude.

They enumerate a litany of current ills, including poverty in Africa, terrorist threats in the Middle east, fast-diminishing tropical rain forests and general environmental degradation -- without correctly identifying the true gangsters (economic or otherwise).

Hence their condescending tone in echoing Professor Jeffrey Sachs' observation that "the wealth of the rich world ... make[s] the end of poverty a realistic probability by the year 2025."

These ills are actually interconnected.

With a bit of philosophical insight they might claim that "the wealth of the rich world makes poverty a realistic probability."

The plight of Africa is less the result of famine, than of the greed of the rich, whether in a historical or current sense.

Historically, "Most of the forty-odd African countries south of the Sahara were stitched together during the European 'Scramble for Africa' in the 1880s with no attention to language, ethnicity, or history," the book says.

In elucidating how economic deprivations lead to wars, how wars lead to poverty, and citing Africa's legacy of war, the authors all but forgot that this legacy had been the bequests of Western colonialists and imperialists.

As the rich are fighting a losing battle against excessive calories, many poor Africans and Asians are fighting to maintain their basal metabolism. And there is causal relationship here.

"Failed states can provide a lawless sanctuary for international organized crime and terrorist groups that profit from the illicit trades in arms, drugs, and rare minerals, like diamonds," the authors state.

Not only terrorists profit from arms and rare minerals -- they are small potatoes compared with some countries that regard these activities as part of normal trade.

These countries have been consistently evading their responsibility on climate change, burning more fossil fuels, heating up the earth, resulting in more African famines. Their obsession with cars can translate into sub-Saharan deaths.

The recent global crisis, instead of making them reflect on their way of life, affords some countries just another excuse to renege on their avowed emissions cut commitments, to boost growth.

Methodology

The authors aspire to follow the same rigorous methodology as researchers in medical sciences.

This works and does not work.

The book's economic analysis of corruption is largely balanced, objective, and insightful.

For instance, the authors try to establish statistical correlation between the number of parking tickets a diplomat (with diplomatic immunity) gets and the corruption indices of the country they represent.

The conclusion: Parking violations and unpaid fines are high for those diplomats from societies where corruption is prevalent.

But this statistical analysis leaves out many variables, such as the level of income of the diplomats, location of the violations, and other factors.

As the book points out elsewhere, US diplomats failed to pay millions of dollars of traffic congestion fees in London.

But the authors go way too far when they seek to establish a connection between the density of US carpet bombing in Vietnam and its post-war prosperity, with the implication that from an economic point of view, wiping out backward infrastructure may lead to great leaps forward.

Which again raises the issue of moral judgment in economic society.

Economic activity is an amoral activity.

When a bearings maker starts to care whether his bearings will end up in a bicycle or in a gun, production is no longer possible.

Similarly, when a country begins to consider whether it should export to a country that is invading or plundering another state, globalized trade would stop.

When the authors announce that "not all regimes are benevolent -- many are corrupt and abusive," the condescending tone is unsettling.