April 15, 2003

Notes: Corruption

From Andrei Shleifer and Robert Vishny (1992), "Corruption," Quarterly Journal of Economics 108, pp. 599-618:

Corruption with theft spreads [when the state is too weak to monitor and control its own functionaries] because observance of the law does not survive in a competitive environment... the buyer has no incentive to inform on the official... the likelihood that corruption is detected is much smaller... a further incentive for corruption.... Because corruption with theft aligns the interests of the buyers and the sellers, it will be more persistent than corruption without theft, which pits buyers against sellers.... [T]he first step to reduce corruption... accounting system... prevent theft from the government...


... the weakness of central government... allows... agencies and bureaucracies... independent bribes on private agents seeking complementary permits... entry of these agencies into regulation is free... bribe burden on private agents... infinity. A good illustration of this problem is foreign investment in post-Communist Russia. To invest in a Russian company, a foreigner must bribe every agency involved in foreign investment... foreign investment office... industrial ministry... finance ministry... local government... legislative branch... central bank... state property bureau, and so on. The obvious result is that foreigners do not invest in Russia...

Posted by DeLong at April 15, 2003 04:34 PM | TrackBack

Comments

Brad,

I don't have access to the Quarterly Journal of Economics, but something strange struck me about the second portion you quoted. If I'm parsing it correctly, it seems to suggest that endemic corruption in Russia is due in large part to weak central government, when surely a more accurate argument would lay the blame on an excessively PERVASIVE government.

In my experience, corruption in less-developed countries has had more to do with the sheer number of hoops private entities have had to jump over to do business, rather than the strength of central government per se. The more import and export licences, registration certificates, seals of approval and so on required to set up shop, the more room there is for bureaucrats to squeeze would-be investors.

Posted by: Abiola Lapite on April 15, 2003 07:46 PM

Steensgaard ("Asian Trade Revolution of the XVII Century" p. 112; citing Van Klaveren "Korruption", 1957-8): "Historically, corruption goes hand in hand with a money economy".

He's talking about the early modern Asian trade, when increased liquidity (silver) allowed money to be drained off in bribes, etc. The even greater liquidity of electronic transfer should exacerbate things. This can be seen all over the old Soviet Union, the Third World, and the first world too.

The solution in the early modern was competition between less and more corrupt jurisdictions, plus efficient, strictly-controlled, semi-private semi-governmental institutions such as the Dutch and British East India Companies.

Posted by: zizka on April 15, 2003 09:01 PM

I know he's an old mate and all, but c'mon Brad, you have to admit that there's something a bit hilarious about quoting Andrei Shleifer on the subject of dodgy deals in Russia. Perhaps the final sentence could be adjusted to read "foreigners do not invest in Russia unless they are attached to the HIDD and have massive conflicts of interest".

Posted by: dsquared on April 15, 2003 10:55 PM

Abiola's comment reminds me a lot of Brad's review of Brink Lindsey's Against the Dead Hand (to my shame, I've only read the review, not the book itself). In it, Brink Lindsey evidently wrote about how to be weak and laissez-faire, a state must in actuality be extremely strong, with some corrupt countries, such as Thailand, being not strong enough to be minimalist in their approach, because they lack the ability to control their own functionaries.

So, in the case you're talking about, Abiola, in which corruption is caused by a highly interventionist state, which seems to go against weakness as an explanation for corruption, perhaps the state is interventionist because it is weak.

I really don't know how well that explanation fits the facts, and you doubtless know infinitely more about this than I do, but perhaps the contradiction of states that seem objectively weak in terms of being able to enforce laws, maintain a monopoly on coercion, etc. also tending to be bloated and interventionist in terms of interference with market processes.

You can find it here:

http://www.j-bradford-delong.net/movable_type/archives/000327.html

Posted by: Julian Elson on April 16, 2003 01:37 AM

“If I'm parsing it correctly, it seems to suggest that endemic corruption in Russia is due in large part to weak central government, when surely a more accurate argument would lay the blame on an excessively PERVASIVE government.”

Nope, many of Russia’s problems are indeed due to its weak government. This nation has suffered from both extremes of too much---and too little government. It must seek a rational balance between the two. Russia’s current predicament reminds me once again why I’m not a lunatic Libertarian. I candidly concede that a free market economic system has no chance of success without being underpinned by stable democratic political institutions. Please consider reading all of Adam Smith’s “Wealth of Nations---and not just those passages that seem to support your ideological predilections.

Posted by: David Thomson on April 16, 2003 03:55 AM

Re: David Thomson

Why do you assume that I haven't read all of "Wealth of Nations?" Your assumption is wrong. Besides, Adam Smith hardly constitutes the last word in economic reasoning - perhaps you've heard of Ricardo, Say, Mill, Marshall, and a whole bunch of other fellows who came after him?

In any case, I'm arguing from my own empirical experience in dealing with LDC bureaucrats - please explain to me what my "ideological predilictions" have to do with what I've seen in the flesh. Do you have any such experiences to draw on yourself?

Posted by: Abiola Lapite on April 16, 2003 06:09 AM

>>Please consider reading all of Adam Smith’s “Wealth of Nations---and not just those passages that seem to support your ideological predilections.

Can I get this straight, David ... are you claiming that you have read all of Adam Smith's "Wealth of Nations"?

(Abiola; David T has something of a history on this board of claiming to have read books he hasn't read).

Posted by: dsquared on April 16, 2003 10:18 AM

Abiola,

> it seems to suggest that endemic corruption
> in Russia is due in large part to weak central
> government, when surely a more accurate
> argument would lay the blame on an excessively
> PERVASIVE government

It's a little more complicated than that. The Russian government is very pervasive when it comes to controlling mass media or collecting VAT and excise taxes. But it is extremely weak when it comes to protecting citizens from wrongdoing by regional governments.

On paper, Russia does not have regional and local law enforcement; all law enforcement personnel are employees of the Ministry of Internal Affairs (more commonly known by its Russian acronym, MVD). In practice, law enforcement personnel is never rotated (there's no equivalent of FBI-style transfer from Memphis to Seattle), the recruitment is also exclusively local, so you get all sorts of cozy relationships between regional and [supposedly] federal officials. Throw in a complete absence of a federal judiciary system, and you begin to get the picture... One hand washes the other, as opposed to checks and balances...

The end result is that in today's Russia an equivalent of Orval Faubus would (and often does) run unchecked...

Posted by: Nikolai Chuvakhin on April 17, 2003 07:32 PM

So, the correct statement is that corruption occurs when the central Bureaucracy is insufficiently strong to control its constituent parts, no matter the scale of government overall.

I would argue that the solution to Russia's problem (that the central government is too weak to control the powerful and intrusive regional governments) isn't merely more central government, but rather much less regional government. That may require some more strong central government, as well. (My impression is that Russia reformed from the "inside out" with massive decreases in central government oversight with very few decreases in the actual role of government in the outlying areas. In essence, they dealt with having too many cops by firing all the internal affairs officers while leaving everyone else in place.) They also privatised by selling all their industry to a bunch of government officials - like if we decided tomorrow to privatise Amtrack and the Post Office by selling them to Dick Cheney and leaving the current administrators in charge. Not exactly the most useful approach, nor the one most prone to avoiding corruption. (In essence, they put the regulators in charge of business, and told them to regulate themselves.)

Posted by: rvman on April 18, 2003 09:10 AM

rvman,

> I would argue that the solution to Russia's
> problem (that the central government is too
> weak to control the powerful and intrusive
> regional governments) isn't merely more central
> government, but rather much less regional
> government.

Nope; it's less of both plus a strong and truly independent judiciary branch... Right now, Russia doesn't even have a corps of court marshals. Three largest items on the expense side of the Russian federal budget (except interest on debt, which is the largest) are national defense, law enforcement (which, incidentally, does not include courts; they are a separate, and much smaller, line item), and financial aid to regions.

Posted by: Nikolai Chuvakhin on April 18, 2003 05:39 PM
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