Corruption in Latin America

1. Corruption in Latin America

2. Defining corruption • “Official corruption” is the misuse of public office for private gain. • Public office • Private gain • Misuse

3. Consequences • It breaks the cycle of democracy • It increases poverty and inefficiency • It generates more maldistribution of resources. • It delegitimizes the state (and democracy) • It can threaten democratic stability

4. How much corruption is there in Latin America? • How to measure: perceptions • Latin America is high but not the worst • No change in the last decade • Worst offenders: • Haiti, Venezuela, Paraguay • political parties • Is there “complicity” on the part of developed countries?

5. An economic theory of corruption • Corruption is a function of potential profit from corruption: • Profit =expected gain minus expected penalty • Expected gain (amount of gain * likelihood) is a function of • discretion and • available resources • Expected penalty (amount of penalty * likelihood) is a function of • transparency and • effective enforcement mechanisms

6. To reduce corruption Reduce expected gain, increase expected penalty, or both

7. Reducing expected gain • Profit = discretion + resources, so • Reduce discretion: • transparency, oversight, clear rules, overlapping functions, clear objectives • Reduce amount of resources handled by individual office holders: • Limit state purchases and sales, size of government programs

8. Pitfalls of reform • One prescription has been to shrink the state to reduce expected gain • fewer resources handled means fewer opportunities to gain, • but it can also mean an increase in discretion and a reduction in transparency • Shrinking the state implies: • Budget cuts in • Spending programs or • Regulatory programs • Privatization of state enterprises

9. Budget cuts • Spending cuts: • increase incentives if they just make the lines longer, the application processes more complex, or the number of offices that respond to the public less numerous • Instead, raise the bar for eligibility, or reduce demand somehow (by creating non-state opportunities) • If you cut buying in half, and there’s no place for suppliers to go in the private market, you increase the incentive for bribes by the suppliers • Try to provide alternative markets or increase monitoring

10. Budget cuts • Regulatory programs: • Ongoing operations: • Less inspectors may mean fewer bribes, but • It will be cheaper to bribe than to fix, so it could be counterproductive • Pre-certification: • Reducing personnel drastically increases scarcity and thus incentives for corruption

11. Privatization • In the long run, this should reduce corruption. • But the process may create opportunities for corruption: • creating lists of pre-qualified bidders • Large state enterprises are hard to value, and it’s easy to favor corrupt insiders with corrupt auctions • The sale can be accompanied with preserving the monopoly (formally or informally). • And after the sale the firms retain a relationship with the state, and may make payments for favorable treatment • If it looks like the result will be an inside deal and continued corruption, better not to sell.

12. Privatization • Temporarily but vastly increases the resources being handled • Is a one-time opportunity, so creates strong incentives to get it while you can • Might simply externalize corruption • Or might create long-term dependencies / oversight that create ongoing opportunities for corruption

13. Increasing the expected penalty • What is being done? • Freedom of Information Acts • Lobby regulation • Financial Disclosure Statements of Public Officials • Regulation of conflicts of interest • Ombudsman organizations • Protect Freedom of the Press • Improve prosecutorial performance

14. But who will run these institutions? Problem is: • WEAK institutions • Courts, auditors, bureaucrats • WEAK civil society • No independent press, co-opted organizations like unions and trade associations • WEAK opposition • No political fragmentation, or on the other hand, too many small, weak parties that depend on government resources to compete • Question is: Are these things improving right now in Latin America?

15. Conclusion The basic lesson of the economic model is that corruption can best be fought by • limiting the opportunities and rewards for paying and receiving payoffs, • not by searching for saintly people to staff government offices and run for office.