Corruption • Corruption in general • Recent examples – overview – Auditing politicians in Brazil (Ferraz and Finan) – Truckers paying bribes in Indonesia (Olken and Barron) – Getting a driver’s license in Delhi (Bertrand, Djankov, Hanna, and Mullainathan) – Paying parking tickets in the US (Fisman and Miguel) Corruption • Use of public office for private gain – Bureaucratic corruption – Political corruption • Before 1990: a bit of corruption could be good for growth. Why? – Kleptocrat cares about the size of the pie. – Bribery may allow firms to get things done quickly. • More recent view: corruption is one of the most important impediments to development => why? • Corruption wastes taxpayers’ money. • Policies implemented solely to generate opportunities for bribery. • Undermines the rule of law - lax contract enforcement is hard for businesses. A big deterrent to firms. • Wade’s article leads to more uncertainty about water timing and less well-maintained irrigation systems. – Bribes are high where uncertainty is high. Decentralized VS Centralized Corruption • Decentralized - many bribe takers, not a coordinated effort. • Centralized - leader organizes all corruption and determines the shares going to each person. • With decentralized the total theft rate will be higher (more road blocks) but may actually have less bribe revenue because of that (fewer travelers). Thus, decentralized corruption has the worst incentives for growth. • Centralized corruption is not as bad since corrupt leader cares about growth and the size of the pie and will limit the amount lower level officials take. Creating a new firm. • In Bolivia follow 20 procedures, wait 82 business days, pay $2,696 in fees. • In Canada follow 2 procedures, wait 2 business days, pay $280 in fees. • In Georgia (the country) you can go through 12 procedures, wait 70 days, and pay $270, or you can pay a legal advisory company that does it for you $450 and have it ready in 3 days! Which are the most corrupt countries? • Data from 2009 from Transparency International. • Based on business people and country analysts' perceptions of corruption, defined as abuse of public office for private gain. • Questions include bribery, kickbacks in procurement, embezzlement, and strength of anticorruption policies. • Thailand is ranked 84!! 1 New Zealand 9.4 2 Denmark 9.3 3 Sweden, Singapore 9.2 5 Switzerland 9.0 16 Austria 7.9 17 Japan, UK 7.7 19 US 7.5 84 Thailand 3.4 178 Burrma 1.4 179 Afghanistan 1.3 180 Somalia 1.1 Overview of Corruption Studies • Auditing politicians in Brazil (Ferraz and Finan) • Starting in April 2003 as a policy by Lula. Randomly choose municipalities to audit every month. Gets info on all funds transferred to the municipality from the federal govt from 2001 on and finds out what happened to them. Post the findings on the internet and give them to the media. By July 2005 have reports for 669 municipalities. • Corruption includes fraud in procurements (e.g. limiting the number of bidders to benefit friends), diversion of funds (giving funds to a phantom firm that exists only on paper), and over-invoicing goods and services (paying more than it is worth). • Of 669 municipalities 79% had corruption, and among those the average number of incidents was 2.45. • There were elections in Oct 2004. 369 audits before that and 300 audits after • Compare re-election rates for mayors in audited vs non-audited municipalities. – They find no effect of auditing on re-election rates. – It doesn't matter whether or not there was an audit, it mattered what the audit found. • Compare re-election rates for mayors with low corruption and those with high corruption. – Findings of higher corruption lead to lower re- election rates. Those mayors for whom no corruption was found are then much more likely to be re-elected. – Looks like voters are expecting around 1 corruption incident per mayor. • Look at effect of media and having a local radio station in your municipality. • (22% of municipalities have a local radio station.) • Biggest effects are when there are pre-election audits and a local radio station. If there is no local radio station then the audits are much less useful. • Did a similar analysis with newspapers and finds nothing. People don't really read the newspaper. • In sum - auditing can be quite helpful but need some way of getting the information to the voter (radio?). With no information transmission there are no effects of auditing. • In addition, while the auditing does have an impact on political accountability, we still don't know if it has an effect on reducing corruption. • Maybe the politician's new best option is to be super corrupt in a first term and not get re-elected rather than to not be corrupt but be in power for two terms. Truckers paying bribes in Indonesia (Olken and Barron) • Enumerators ride along with truckers recording bribes paid on 304 trips (observe 6000 payments). What do truckers pay for? • i. Pay military and police to avoid harassment. • ii. Pay at weigh stations to avoid fines for driving overweight. • iii. Pay protection to criminal organizations (avoid theft or • Payments average $40, or 13% of trip costs. (53% fuel, 14% cargo loading and unloading, 10% salary, 5% food and lodging) • Road passes through Aceh and N Sumatra. Indonesian govt withdraws police and military from roads in Aceh to enforce a peace agreement. No change in number of road blocks in N Sumatra. What happens? Average bribe paid in N Sumatra increases. But, not enough to offset revenue lost from reduction in checkpoints in Aceh. • Evidence of price discrimination - surplus that can be extracted varies depending on checkpoints. Downstream checkpoints have more bargaining power and receive higher bribes. Also charge more to people with newer trucks and more valuable cargo. Getting a drivers license in Delhi (Bertrand, Djankov, Hanna, and Mullainathan) • Followed 822 people while they got a driver's license. Average license getter pays 1080 rupees, or 2.5 times the official 450 fee. 60% don't take the exam.54% are unqualified to drive according to an independent test. • People often go through agents to get their license. Only 23% of those with agents take driving test while 89% of those without agent do. 53% of those with agent fail independent test vs 25% of those who did not have agent. • 822 participants divided into one of three groups. • i. Control - just asked to return when they got their license to fill out survey. • ii. Bonus - offered a bonus of 2,000 rupees if they could get their license in 32 days (minimum is 30 days). • iii. Lesson - provided with up to 15 free driving lessons. • Results - 61% got license within 180 days. On average took 42 days. • i. Bonus group more likely to get license and get it quickly, don't take test and drive badly. Lesson group also more likely to get license and pay less. Most extra money goes to agents. • ii. How do agents affect outcomes? • iii. New Delhi prohibits agents so people just (illegally) go somewhere else. You should go based on your address. • iv. Comparison of New Delhi livers with and without agents. Paying parking tickets in the US (Fisman and Miguel) • Is corruption cultural? Diplomats in NYC had immunity until 2002 so they didn't get into trouble if they didn't pay their parking tickets. • High correlation between country's corruption measure and number of unpaid parking tickets. In 2002 when immunity ends, the relationship disappears. Corruption (II) Spotlight on Indonesian Road Building How best to reduce corruption? • Corruption creates efficiency cost. • It has been suggested that corruption may be a major contributor to the low growth rates of many developing countries. • Despite the importance of the problem, it is difficult to measure corruption. • Becker and Stigler (1974) suggests that the right combination of monitoring and punishments can control corruption. • Problem? Transfer corruption between officials. • An alternative approach which has gained prominence in recent years is to increase grassroots participation by community members in local-level monitoring. • Monitoring public projects is a public good => free riding problem • Olken (2007) examine these 2 alternative approaches to fighting corruption. He designed and conducted a randomized, controlled field experiment. Details • Setting • Implementation • Accountability • Audits Setting • National Indonesian government sponsored a development program funded through a loan from the World Bank. • Finances 15,000 villages each year. • Usually for small scale infrastructure or for startup capital for micro-credit. • Average grant is $8,800. Average annual village budget is only $7,800 so this is big. Implementation • Each year a village puts together a proposal. • Most common project is to cover a dirt road with sand, rock, and gravel. • Data comes from 608 road projects from 2003-2004. • If project is funded, meeting is held to plan construction. • No contractors are allowed and no more than 3% of costs can go to implementation team for their time. Accountability • Lump sum grant at three points in time. • 40% of money is disbursed at first, then accountability meeting, then another 40%, then another meeting, then another 20%. • Must submit final accountability report to be eligible for grant in next year. • Meetings attended by 40-50 adults Audits • Types of corruption include inflating the cost of inputs, inflating the quantity of inputs, putting false workers on the payroll, etc. • After the projects were completed, engineers dug core samples in each road to estimate the quantity of materials used, surveyed local suppliers to estimate prices, and interviewed villagers to determine the wage paid. • Missing expenditure = difference between what the village claimed the road cost to build and what the engineers estimated it actually cost to build = 24% across the villages in the study • Missing expenditure => corruption Experiments • External monitoring • i. Audit Treatment - villages were told at first meeting that they'd be audited for sure, either during or after construction. Told that results would go to elected officials and to villagers. Could affect the probability of getting a grant in the future and villagers could be angry. 1-4 months after start of construction, audit 1 village in each subdistrict to show them this was for real. All villages were told they would be audited again later. • Local-level Monitoring • ii. Invitation Treatment - Anybody could go to the meeting, but in practice they don't go unless they're formally invited. Randomly gave 300-500 invitations. Sent home with kids from school or gave to elders to distribute. • iii. Invitation with Comment Treatment - in some invitation villages they also added an anonymous comment form to the Experiment • Audit randomized at the sub-district level. • Invitations randomized at the village level. • Did the randomization work? • Not so well for audit treatment. Results • Main independent variable is the reported amount spent minus the independent account spent, as a percent. • Audits decrease corruption. • But, still 20% missing when audits are 100% certain to happen. • Where does corruption come from? Comes from quantities. Why? • Main results for invitations. They do have an effect on attendance and speaking up. • They do have an effect on the number of corruption related issues brought up and whether a `serious' response will be taken. But, find no effect whatsoever of invitations on corruption. • Does this imply that government auditing can reduce corruption while grass-roots monitoring is not helpful? • Are audits cost effective? They cost $355 each and reduce the amount lost by $468, plus you probably get a better road too, etc. Conclusion • Increasing the prob of external audits substantially reduced missing funds from 27.7 to 19.2%. • Why not larger? • Increasing in grassroots participation in monitoring reduced only missing labor expenditures, with no impact on materials and overall. • Why? What does this imply? • Issuing anonymous comment forms reduced missing fund only if the forms were distributed via schools, completely bypassing village officials.
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