Monday, July 5, 2010

Rambling on about Corruption

Imagine a customs agent sitting at his/her desk in at a boarder between two impoverished nations. They pull you over and ask to examine your papers. You have a visa, and all the documents you thought you needed. The agent solicits a bribe from you, you give in and pay the equivalent of 20 USD. How do you feel? Cheated?

What if that agent can't afford to pay for school for his/her children on the less than meagre salary they receive without your bribe? Would you feel any different? What if that bribe went to something less noble like fuelling his/her alcohol addiction? Different still?

How is a tax diffferent from this bribe? Is the guise that all taxes fund happy social programs what legitimizes them? Isn't it just as likely that the inflated yet legitimate salary of a high ranking civil servant will go to booze? And still isn't it more efficient for a customs agent to gain his/her salary on the spot by extorting cash from travellers?

I have too many questions.

One of my favorite economists who is concerned with corruption is Daniel Kaufmann. He answers some of my questions quite well. Here he shows that corruption does not 'grease the wheels' of growth. He claims that "if bureaucrats have control in determining the extent of regulatory burden and red tape delay so to extract bribes" the efficiency of the system falls. He surveys thousands of multinational firms and finds that the ones that say no to bribery deal with less red tape.

Trouble with this study begins at the fact that it is a survey and firms must volunteer their information. I wonder what incentives the firms had to lie about their practices. Cue the old paradox of believing someone who admits to lying.

"I lied"
"You did?"

In any case I believe his conclusion. Even if it were more efficient in terms of overhead, or red tape, more corruption is bad for business simply because it is the powerless that ultimately suffer. The powerless lose power to corruption.

Ah, the intricacies of corruption. I imagine a spectrum of corruption where on one side lies the powerful that abuse their power to gain money but ultimately function as they would normally his/her job (such as our border friend). On the other side lies the powerful who change the outcome of their work on account of their illicit gains. Can you slide across the spectrum on stolen ice skates or are you fixed by your moral compass? Is the greasy palm of a customs agent always likely to stop illicit goods from entering?

To get an idea of how vast, pervasive and serious corruption is, here is a nice graph that ill just throw in for fun from Global Financial Integrity:

More money flows out of impoverished nations because of corruption than flow in because of charity tourism and remittances:

Just to clarify: "The term, illicit financial flows, pertains to the cross-border movement of money that is illegally earned, transferred, or utilized. Illicit financial flows generally involve the transfer of money earned through illegal activities such as corruption, transactions involving contraband goods, criminal activities, and efforts to shelter wealth from a country’s tax authorities."

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