Comment on Corruption-BECKER

I agree with Posner’s basic approach to corruption, so I will elaborate on some ways to reduce corruption, refer to evidence where corruption actually helps performance, and offer a suggestion for why big-city corruption in America appears to have declined over time. I confine my comments to corruption in the public sector, although for every public official who is bribed, there is always a businessman, union official, or someone else in the private sector that is doing the bribing. By corruption I simply mean that public officials accept payments that violate some laws in order to affect the implementation of other laws or regulations. Corruption so defined is bad if it lowers efficiency in the economy or society- that is, if the cost imposed on everyone else exceeds the gain to an official. Good corruption raises efficiency, so while the corrupt official may gain, so does the economy and society as a whole. Clearly, in a country with bad laws, corruption by officials that enable businessmen and others to get around these laws may be helpful. The Soviet Union, for example, had terrible economic and other laws, and performed badly. Still, the widespread corruption that existed helped it to do much better than it would have if all officials followed the letter of the law. A preliminary study by a graduate student at the University of Chicago, Maxim Mironov, analyzes the effects of corruption on economic growth in 140 nations during the past decade. He finds that corruption in countries with weak institutions, defined by government effectiveness, the rule of law, and the quality of regulations, appears to help countries grow faster, whereas corruption in countries with good institutions slows down economic growth. For the remainder of my comment I concentrate on corruption that on balance is bad. Posner points out that corruption flourishes with a weak legal system, and with larger government. Obviously, if governments strongly regulate many activities, then companies, unions, and other groups that are regulated can do better if they can "bribe" officials to overlook or relax these regulations. So the wider is the reach of governments, the greater is the corruption potential. There was relatively little corruption in the Federal government of the US in the early 19th century primarily because the government did so little then. Other than narrowing the scope of government and strengthening legal institutions, what can be done to reduce (bad) corruption? One simple step is to improve the incentives of officials to act honestly. The incentive to be honest would be stronger when officials are better paid, and if they are fired from their well-paying jobs, and sometimes also punished rather severely if they are caught engaging in corrupt behavior. A few studies do support this conclusion that corruption thrives more in environments where officials are badly paid, such as policemen in Mexico. Corruption is reduced by greater competition between separate political jurisdictions and stronger competition for political leadership. This implies that corruption is lower in decentralized political systems compared to centralized systems. Various studies do indicate that democracies generally appear to have less corruption than totalitarian systems, although some of the corruption in totalitarian systems like the Soviet Union may be of the good kind because the laws are so bad. Corruption is reduced when information is more easily disseminated to the public. That is why a free press is such an important protector against greater corruption. The press is more effective in better educated societies, and various studies have shown that corruption is lower when education is greater. Education also helps cut corruption by improving political institutions, so part of the positive relation between the amount of corruption and the weakness of institution is the result of the positive connection between education and good institutions. Work in progress by Professor Edward Glaeser and others at Harvard University suggests that corruption in the US declined over time in part because education increased. This helps answer Posner’s question about why corruption in big American cities appears to have been declining. The steep growth in regulations over time would suggest growing, not declining, corruption. I believe the increase in education, combined with more vigorous competition among print and other media to disclose information about corrupt officials, and greater geographical mobility of many types of business have all contributed to the apparent decline over time in the amount of corruption in big cities.

Comments

[Lihuafang]

Dear Prof. Becker,

I am a researcher in Shanghai Institute of Finance & Law. My name is
LI-HUAFANG. I had translated your blog?"On Chinese Ownership: Some Reactions"?into Chinese. The
article was published in you and Prof Posner's blog. And our Institute
wants to use it in our inner magazine called "Think-tanks Review", it will
be used for academy ways only, so if can, we need an authorization
from you. You can fax your final decision to me: 86-21-68549221. Thank
you for your kindness.

Another reason I wrote the note for the problem from Adam Smith and
Vernon Smith. At a wordVernon found that people may not ration in
making some decisions, for instance, people often lack self-control,
are shortsighted, and overreact to the fear of losses. When people
decide about the distant future, they're roughly as rational as
economic textbooks assume. But when faced with a choice of whether to
consume something now or delay gratification, they can be as impulsive
as chimps. Adam also described the similar situation in The Theory of
Moral Sentiments. But you explain it as the result of a reasoned
decision process, don't you? I wonder more of your argument about
this.

En, by the way, this course in economics may be called Neuroeconomics
(Colin F.Camerer, Samuel Bowles, Herbert Gintis, David I.Laibson,
George Loewenstein). By linking economic behavior to brain activity,
however, neuroeconomics may finally supply the model that knocks
mainstream economics off its throne. The new theory should fit better
with reality, but it won't be as mathematically clean ? because I
think the brain is a confusing place, with different parts handling
different jobs. What's you opinion?

I am eager to hear from you. Best wishes!

LI HuaFang

[C# hack]

Comment on Corruption-BECKER

[Sage1776]

I would add that corruption is harder when the government official has general power rather than narrow power. Special interests would likely get more in return for investing resources in corrupting an official with narrow power as that official is more likely involved in handling decisions that will have an impact on the special interests than a government official with more general authority. According to this idea, administrative judges would be offered more bribes than general law judges, all else equal. However, an administrative judgeís expertise may make up for this increase in probability of corruption. The general public would also tend to be less concerned with those with narrow power. People, or at least the media, tend to ignore the appointing of administrative law judges and other judges with limited scope, such as the judges of the Court of Appeals for the Armed Forces, or the U.S. Court of International Trade.

[TheWinfieldEffect]

If I understand this post correctly, the argument can be summarized thusly: 'Corruption is good when incentives are aligned optimally, because the corrupt official not only serves his patron but also serves the public. By contrast, corruption is bad where the public official serves his patron at the expense of the public. Thus, it should be no surprise that corruption can lead to growth. Indeed, in a number of authoritarian regimes, networks of bribery and patronage have filled-in-the-gaps where political institutions normally would have done the trick. Turning to bad corruption, the way to reduce bad corruption is to expose it where it exists and to subject corrupt politicians to competitive elections; while good corruption can be sold to the public as to their benefit, bad corruption cannot be sold as such.'

I agree with much of this post. My only concern is as follows: are politicians supposed to serve some higher good, or are they merely hired guns for coalitions-of-interests? If politicians are no more than ambulance-chasers who write laws for their weepy clients, then good corruption is defensible simply because it is efficient. But if we believe that politicians are not mere soldiers-of-fortune in political battles, if we believe that politicians should aspire to statesmanship, then perhaps politicos should impose on themselves a higher ethical code of conduct than one that praises taking the highest bid in exchange for rendering of legislative services. I know I'd like my Senators to be more than mere legislative brokers.

The implication of this concern of mine is that drafting legislation becomes a bidding war. Why we would want George Soros to pay for legislation that benefits his interests is beyond me. George Soros is so rich that he can afford to pay off a legislator, pay for a blitzkrieg of commercials in the next election season, purchase the newspapers that cover the election, etc. He could even top Oprah and buy a majority of the electorate a car. In other words, there would be no way to measure whether the corrupt official was acting in concert with public opinion when his patron has bought off the means of measuring the degree of euphony. And Soros could either (1) defund any challengers to the corrupt official by financing FEC complaints and lawsuits against the challenger's campaign; or (2) buy off the challenger once the challenger has deposed the original corrupt official (co-opt the maverick).

Admittedly this is post is just a snapshot of what is presently in my mind, but the only way I can presently think of for a challenger to insulate himself from co-optation is to be rich himself (a Bloomberg, Rockefeller, Kennedy, Perot or Corzine candidate), or sincerely to believe in a higher norm, like personal integrity. Of course, this was my original point, sentences ago: perhaps we prefer our politicians idealistic than cynical.

Perhaps we prefer them to cherish values like personal integrity rather than merely to own billion dollar businesses. I know I would choose John McCain over Bill Gates any day of the week.

[Norman]

I know the topic is political corruption but I as a 40 yr stock market professional I have seen many instances of corporate corruption including the current ones that are playing out and have played out in the courts. But I have never seen the massive corruption of major corps like Citigroup and Microsoft. Both of these corps seem to be in the news every week settling cases of 'wrong-doing' for >$100M each time as to make it obvious that the crossing of legal lines has been part of their corporate strategy. Why this hasn't been written up as such is beyond me. These companies are criminal, period. It is disgusting.

[ÿystein Sj¯lie]

Research by Glaeser and the other devlops have demonstrated that better paid officials are more likely to be corrupt, not less as Becker suggest. This is because officials with few restrictions and lots of power, had the opportunity both to press for higher wages and be corrupt.

Corruption is bad for the economic performance because it distorts incentives and increases transaction costs. Prof North estimated 15 years ago that transaction cost takes up 45 per cent of the US GDP. A small increase in this could be very costly. The market for corruption will never work very well, because the information will be blurred, there are usually a limited number of suppliers and the prices and quantity of the services will vary greatly over short periods of time.

The main bulwark against corruption is division of power. Division between different institusions (including the press), and between different people within the instituions. Heavy punishment on corrupt officials would also help.

An old story goes about a reporter asking an Italian official how he can be that wealthy. "Do you see the hospital on the hill," the official asked. The reporter nodded. "I took 10 per cent," the official told him, grinning. Asking the Zimbawean official the same question, the bureaucrat asked if the reporter saw the hospital. "No," said the journalist, confused. "I took 100 per cent," the official told him.

[i_am_james]

Dr Becker,

Your example of the Soviet Union as a nation of bad laws and "good corruption" is an interesting one. I would argue that while it's good in the short-term for reasons you mentioned, it can harmful in the long term, by creating a culture that does not value the rule of law. In such a case, making the transition from "bad laws" to "good laws" will be difficult.

For example, in the Soviet Union if you needed your toilet fixed, you had to bribe the plumber. The price of such "bribes" was set by (black) market forces. Such "good" corruption added efficiency to a system known for not being able to fix things, but it also created a culture that did not value rule of law and not only tolerated, but embraced corruption. Many of the "Russian barons" got rich stripping their country of its assets rather than building enterprises and have little interest in a competitive market. I believe that the recent Yukos episode was an example of the kind of dangerous legacy "good corruption" can leave.

The U.S. was founded by people who had a deep respect for the rule of law, and this value system gave our country the framework to develop fair markets. The long-term problem with "good corruption" is that it erodes respect for the rule of law - and when "bad laws" are changed to good, they are ignored the same way the bad ones were.

[Dan S.]

"...politicians are no more than ambulance-chasers who write laws for their weepy clients..."

Simply brilliant.

In response to the post, however, I also believe the net-effect of corruption to be a negative one. The posts seem to assume that a real market economy exists for the bribery of officials. This may be true, especially in the cited case of the former Soviet Union, but today in the US it appears to be a different set of circumstances.

Can a true market economy, and a net-positive effect, exist when only a small portion of the consumers in the market as a whole are able to participate? Stiff market regulations abound in our local economy, yet I do not know how I would go about (or if I would have the guts to) bribing an official, judge, or police officer. This leads me to believe that while others may be able to participate in this economy of fee-based government services, I am not.

Now perhaps I misunderstand the original intent of Posner's post, but even though a transaction between two people to sidestep an inefficient law may not have a direct negative economic effect on me, it leaves me under the duress of that inefficiency and therefore at an economic disadvantage.

Any thoughts?

[TheWinfieldEffect]

DAN S: "Now perhaps I misunderstand the original intent of Posner's post, but even though a transaction between two people to sidestep an inefficient law may not have a direct negative economic effect on me, it leaves me under the duress of that inefficiency and therefore at an economic disadvantage."

First, I doubt you misunderstood the post! Your take is rather fascinating and, as far as I discern, slyly on-point. However, I dubious that I can render justice to your comment, so feel free to point out where I have gone afield.

That said, just to play Devil's Advocate, why wouldn't a pandering politician be exactly whom you would need to bribe (e.g., with votes) in order to alleviate the pressure of that inefficiency's duress?

Furthermore, what conditions do you think would prevent such an opportunist from inserting himself into the market of political pandering (e.g., Pat Robertson denouncing Chavez; Jesse Jackson praising Chavez; Al Sharpton protesting military bombing in Vieques to endear himself to Puetro Rican voters in New York, etc.)?

[TheWinfieldEffect]

Just to cross-post a relevant point:

THEWINFIELDEFFECT: "[T]he coexistence of bribery and the legal system may be a sophisticated form of political price-discrimination; those who can afford the bribe pay the bribe-price; those who can afford to go through the system pay a premium for the privilege of using it."

Feel free to comment on this idea!

[a]

http://www.nytimes.com/2005/08/30/international/asia/30bangalore.html?hp&ex=1125460800&en=c3e71df2565ff550&ei=5094&partner=homepage

[jdhouston]

I'm guess I'm not surprised to find an economic lens being used to rationalize a behavior that subverts free markets, public duty, voting, and equal protection of the law. It is not that far from the use of economic improvement in KelovNewLondon to undermine protection of private property. I'm only surprised to find a commentary ignoring those effects coming from a judge.

[anonymoous]

I didn't see any mention of "lobbying" in either of your comments on corruption. Coming from a 3rd world country where corruption is rampant, whereas lobbying is not, I was completely taken aback by the amount of lobbying in the US. I have lived here for 6 years.

After looking at the way lobbyists work, and the causes they espouse, I see absolutely no difference between corruption and lobbying. Any comments on what you see as the distinction between corruption and lobbying.

[ben]

anonymoous

I see absolutely no difference between corruption and lobbying. Any comments on what you see as the distinction between corruption and lobbying.

I can think of two broad distinctions: one, lobbying is directed at influencing the writing of regulation while corruption is directed at subverting established regulation, so each attacks a different part of the production chain. Two, lobbying is legal and corruption is not.

An interesting question is whether lobbying and corruption might be expected to undermine the process by which good (efficient) regulation drives out bad. Posner argues corruption does indeed undermine this process, a source of corruption's harm. Does lobbying?

fyi Becker has mentioned on this blog before his views on lobbying.

[Jack]

Although Prof. Becker touched on this in his last point regarding the decrease of corruption in American cities, I'd like to make one comment:

I think the proliferation of media outlets and information sharing technology probably has had the greatest impact in that arena. It can be explained less in terms of increased competition among the news media, and more by sheer size and volume of communication resources. What I mean to emphasize is the vast numbers of people that outlets now reach compared to news media 30-50 years ago. Stories of corruption that may have once reached a very limited audience (thus allowing an official to salvage a tarnished reputation) are now broadcast to larger and larger audiences creating more widespread outrage, from which an official can not hope to recover. The fear of widespread public embarrassment that has such a debilitating effect on job security probably explains the decrease in such corrupt behavior more than anything else.

[guerby]

Hi,

I believe the internet is an efficient weapon in the fight against corruption because it enables zero cost publication of government spending as they go together with various other documents and then every (connected) interested citizen can check them. This was not possible in the paper world, where only paid professionals (journalist) had practical access to these documents (time to dig them up).

Laws that force official to make more government information available in electronic format in a timely manner are probably the more cost effective way to deal with corruption in western societies.

Sincerely,

Laurent

[Anonymous]

Better payment and Stronger legal enforcement may deter some corruptions, however the conclusion may be too quick.In China, there are many corrupted officials who took millions, sometimes billions, often they were stored underground untill the police found them. What are their incentives? I think it is an insatiable stomach for money that cannot be dealt with by better payment. Moreover,better payment and stronger legal enforcement may become only a starting point for an arm race between black money and the decent money.

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