Raymond Fisman, Columbia Business School

Some questions – and

answers – on corruption

November 13, 2013

Questions and answers on corruption

How much corruption is there, really?

What are the social

consequences of corruption?

Approaches to fighting corruption

Rich countries are less corrupt

3

-2-1

01

2

corr

up

tion

4 6 8 10 12logGDPPC

But a lot of variation with income groups

4

-2-1

01

2

corr

up

tion

4 6 8 10 12logGDPPC

BDI

BEN

BFA

BGD

CAF

CIV

CMR

COM

ERI

ETH

GHA

GIN

GMB

GNB

HTI

KEN

KGZ

KHM

LAO

LBR

LSO

MDA

MDG

MLI

MOZ

MRT

MWI

NER

NGA

NPL

PAK

RWA

SDN

SENSLE

TCD

TGO

TJK

TMP

TZA

UGA

ZAR

ZMB

ZWE

-.5

0.5

11

.5

co

rrup

tion

4.5 5 5.5 6 6.5logGDPPC

But a lot of variation with income groups

5

-2-1

01

2

corr

up

tion

4 6 8 10 12logGDPPC

AGO

ALB

ARM

AZE

BIH

BOL

BTN

CHN

COG

CPV

DZA

ECU

EGY

FJI

FSMGEO

GTMGUY

HND

IDN

IND

IRQ

KIR

KSV

LKA

MARMKD

MNE

MNGNIC PHL

PNG

PRY

SLB

SRBSWZ

SYR

TKM

TONTUV

UKR

UZB

VNM

VUT

WSM

-1-.

50

.51

1.5

co

rrup

tion

6.5 7 7.5 8logGDPPC

On the virtues of efficient corruption

"Yes, there was corruption.

Yes, he gave favours to his family

and his friends, But there was real

growth and real progress. I think

the people of Indonesia are lucky.”

(Lee Kwan Yew, 2008)

6

“Rouba mas faz”

The private benefits of connections

7

…and the social costs

8

Evidence on effects of corruption

Politician benefits Company benefits

Social Consequences

• Licenses and contracts

• Trade protection

• Credit access

• Reduced competition

• Increased inequality

• Production distortions

● What’s the relevant counterfactual? – Suharto’s theory of orderly corruption

– What would be the consequences of tightened rules? (Whac-a-mole effect)

● Tax evasion versus tax avoidance

● Why bother evading laws when you can just change them?

On responding to corruption

The private benefits of connections

11

The financial benefits of public office

Mayawati Kumari,

ex-Chief Minister

of Uttar Pradesh

Pre-election disclosures: 2004

$400,000 in assets

Pre-election disclosures: 2008

72 properties

54 bank accounts

$13 million in assets

Official income: 2004-2008

$30,000 per year

Mandatory asset disclosures since 2004

13 11/1

4/20

13

The private returns to public office

● “Balance Sheets” for 2 points in time allows for an

estimate of politicians’ asset accumulation

● Compare asset growth of election winners versus

election runners-up

11/1

4/20

13

14

Assets Liabilities and Net Worth

(1) Movable Assets (3) LiabilitiesCash Loans from Banks amnd Fis

Deposits Loans from Inidviduals

Bonds Debentures and Shares in Companies Dues

Motor Vehicles

Jewelry

…

(2) Immovable Assets Net Assets = (1) + (2) - (3)Land Buildings

…

Winners’ assets grow 3-5% p.a. faster

15 11/1

4/20

13

“Excess” Asset Growth

% o

f o

bse

rva

tio

ns

Source: Fisman, Schultz, and Vig, 2013

In (high-corruption) BIMARU states

“Winner’s premium” is 10% PA

16

For Ministers, Winner’s Premium = 12% p.a.

17

Connections matter, but at what cost?

18

Corruption: grease in the wheels of commerce?

The costs of circumventing regulation

19

Two men jailed for

corruption linked to Lotus

Riverside collapse

Corruption fuels China mine

disasters Corruption the killer in China

rail crash

Corruption Charges Hit

China’s Food & Drug

Regulator, Again

“Corruption is one major reason why accidents happen again and again…It is high time that we took a careful look at connections between local coal mine owners, local officials and the safety watchdog. These links have set up barriers against strict safety supervision.”

Li Yizhong, Minister of Production Safety (2005)

On the social costs of corruption

Political connections and worker deaths

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

2008 2009 2010 2011

De

ath

s p

er

10

,00

00

wo

rke

rs

PoliticallyConnected=0 PoliticallyConnected=1

Source: Fisman and Wang, 2013

Fighting corruption

Rules

Technology

Culture

Who will enforce anti-corruption rules?

23

Service Branch Corruption Ranking

Police 1

Land Records 2

Housing 3

Water 4

NREGS 5

Forestry 6

Electricity 7

Health 8

PDS 9

Banking 10

Education 11

Service Branch Corruption Ranking

Police 1

Land Records 2

Housing 3

Water 4

NREGS 5

Forestry 6

Electricity 7

Health 8

PDS 9

Banking 10

Education 11

Source: Transparency International India, 2008

A pictorial history of corruption enforcement in HK

24

1960s 1970s 1980s 1990s 2000s

“If Hong Kong can change, why can't we?”

25

2002 2003 2004 2005 2006

On the failure to change in Kenya

26

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Kenya's global corruption ranking, 1996-2011

Source: Governance Matters, 2012

Difference in governance, HK vs. Kenya

27

Borrowing good governance: Charter Cities

28

Good governance zone

Enforcer of rules

Borrowing good governance: Charter Cities

29

Problems with crowd-sourced governance

30 Kenya I paid a bribe

On the role of rules vs culture among diplomats

“Diplomatic immunity affords [all] foreign diplomats

in America a blank check for bad behavior.”

A simple model of culture and corruption

32

Driver P

olic

em

an

Offer Bribe Pay Fine

Solicit Bribe (5,-5) (-50,-50)

Collect Fine (0,-50) (0,-10)

Reforming a culture of corruption

Super-citizen Mockus

Changing culture in Bogota

Enforcement works, if you can do it

35

1

10

100

1,000

10,000

Total monthly diplomatic parking violations

Bloomberg gets

OK to tow cars

of diplomats

On reforming corruption – last word

36

“Public policies must bring together legal

developments with their informal correlates

(moral and cultural norms and regulations), in

order to achieve changes in people´s

behaviour, attitudes and justifications for how

they live their lives.” (Antanas Mockus, Global

Economic Symposium, 2009)

“Social problems can’t be solved through

better rules or better attitudes – you need both”

37

Thank You!

Gaming of rules - death quotas

38