corrupt leaders

An old joke: a bureaucrat from
Sani Abacha's Nigeria visits a
bureaucrat in Suharto's
Indonesia and is impressed that
his Indonesian counterpart lives
in a nice house and drives a
Mercedes. "Do you see that road?
Ten per cent," the Indonesian
explains.
A couple of years later the visit is
reciprocated. Suharto's man
finds the Nigerian civil servant in
a palace with a pair of Ferraris.
"Do you see that road?" says the
Nigerian, gesturing at virgin
rainforest. "One hundred per
cent."
There is more to the joke than
meets the eye, of course:
Indonesia managed to combine
severe corruption with many
years of strong growth, while
Nigeria stagnated over a similar
period. Corruption matters, but
so does the type of corruption.
And here is a conundrum.
Technocrats have long offered
economic policy advice to
powerful people in developing
countries, yet powerful people
may have much more to gain by
ignoring the advice and lining
their own pockets. The problem
is so severe it is a wonder that
economies ever develop at all.
But the situation is not hopeless,
because contrary to the joke, it
may be better to get 10 per cent
of a booming economy than 100
per cent of a stagnating one.
A new working paper from
Michael U. Klein of the Frankfurt
School of Finance and
Management argues that if elites
profit from corruption and
control the levers of policy, we
should ask ourselves what sort
of policy advice might appeal to a
corrupt bureaucrat while still
being sound economics?
Consider the traditional form of
corruption: paying bribes in
exchange for favourable
treatment. This may be harder
than it looks, even in a society
where corruption is common:
one must still find corrupt
partners, establish a deal, and
secretly enforce it.
Klein, who studied Nigeria in the
1980s, gives some baffling
examples of behaviour that may
have been designed to drive
away the honest and leave only
the corrupt. In one case, the boss
of an engineering company
arranged to meet the managing
director of a large public
enterprise after many requests
and much waiting. When finally
brought into the managing
director's office, he found his
counterpart facing the wall. Four
hours passed; the only sound
was that of a radio playing. Then
the managing director turned
and a deal was struck.
The waste involved in arranging,
monitoring and enforcing
corrupt deals can be immense –
Klein has found that transaction
costs of large projects rise from
3 per cent to at least 10 per cent
in "complicated" environments.
Prosecutions for corruption can
be tough to pull off, says Klein,
because big Nigerian firms had
no accounts in the late 1970s.
(There was also a national
tradition of fires breaking out in
accounting departments.) All this
is dreadfully damaging for
growth.
What might work better, while
still satisfying the avarice of a
country's elite? One idea would
be for elites to hold direct stakes
in commercial firms. But the
result would still look like a mafia
town: too much emphasis on
squashing competition and not
enough on meeting the needs of
customers.
Perhaps this is why export
markets have proved such an
important element in the success
of many Asian economies:
domestic markets may be sewn
up in corrupt deals, but the
government can still insist on
export success as a precondition
for political favours. Only
productive firms are allowed to
join the corrupt club – with
export markets a good test of
genuine productivity. For a case
study, consider decades of South
Korean growth.
Perhaps there is a touch of
fatalism about all this. Eventually
one would hope for a world
where corruption is very rare.
While we're waiting for that, it's
worth asking how even a
corrupt economy can achieve
growth.