Corruption in Latin America The effects on growth and decisions
Outline • What is Corruption and How is it Measured • Corruption in Latin America – some high profile cases • The Economics of Corruption • Corruption Helps the Economy? • Foreign Direct Investment • Social Impact of Corruption • Conclusion and Questions
I. What is Corruption • MW: Inducement to wrong by improper or unlawful means • For our purposes, we will focus solely on government corruption. • Powers granted beyond authorized by law. • Private benefit
Transparency International • www.transparency.org • Corruption Perceptions Index • Public sector • Snapshot of perceptions of corruption • Survey of surveys • http://media.transparency.org/imaps/cpi2009/
World Scores by Geographic Region – 2009 Country Averages • 8.1 - U.S. and Canada • 6.7 - Europe • 3.6 - China • 3.4 - India • 3.4 - South America • 3.1 - Central America
II. Latin American Corruption LA Country Scores 2009 • Chile 6.7 • Brazil 3.7 • Panama 3.4 • Mexico 3.3 • Argentina 2.9 • Venezuela 1.9
Chile – Augusto Pinochet • Positive economic growth • 2005 – Sens. Norm Coleman and Carl Levin • 125 secret bank accounts in 8 banks, family and friends hiding $27m. • Demanded that his victims' families pay for the bullets used to kill their loved ones
Argentina – Carlos Menem • Privatized 90% of state-owned industries, some for less than they were worth • Airport privatization organizer went to work for the winning bidder, then became the regulator • SEC charged Siemens $1.4 billion fine for paying $40 million to Menem and associates • $6 million to unnamed “new administration”
Nicaragua - Arnoldo Alemá • 1997 – 2002 • Stole $100 million in public money • Dec 2003 sentenced to 20 years in prison • TI rated him the 9th most corrupt leader in recent history
Venezuela – Hugo Chavez • 1998- Present • Record levels of corruption • Corruption for personal benefit • Oil agreements (Cuba) • Corruption in the Police
Panama – Noriega, Moscoso, Perez Balladares administrations Drug Trafficking, racketeering, and money laundering Corruption in local government History of new administrations campaigning on “Zero Corruption” platforms -Arias Madrid -Martin Torrijos
Demand Side of Corruption Studies examining coincidence of corruption with dozens of factors in 4 categories • Wealth • Education • Government • Population NOT causal relationships, but can expect to find corruption where these factors exist
Corruption and Wealth Countries with more perceived corruption have: • smaller GNP • larger CPI • higher inflation • fewer imports and exports • larger unemployment rate • relatively more expenditure and labor associated with food production • less available food • lower quality food • less electricity use
Corruption and Education Countries with more perceived corruption have: • relatively low rates of literacy • relatively low school enrollment percentages • relatively more students for each teacher in primary schools
Corruption and Government Countries with more perceived corruption have: • a republic form of government (not a constitutional monarchy) • been independent for a relatively short time • had recent changes in their constitution • relatively small government expenditures • not successfully fostered or consistently protected political rights and civil liberties.
Corruption and Populations Countries with more perceived corruption: • are relatively rural • have smaller percentages of citizens aged 15-64 • have fewer citizens either employed or seeking employment • have larger households • have higher fertility rates • have shorter life expectancies • have larger percentages of national consumption attributable to the wealthiest citizens • accept economic aid from other countries.
III. Economics of Corruption • Barrier to Entry • Inefficient Allocation of Resources • Suboptimal Outcomes for Government • Avoiding Market Solutions to Negative Externalities
Barriers to Entry Extend monopoly power Reduce competition
Inefficient Allocation of Resources Fixed amount of tax revenue available. Politicians need to allocate resources to many projects. CBA • Option 1: Increase the salary of public school teachers. The available pool of money is divided, and each teacher receives a small amount. • Option 2: Spend the money on a new bridge. The total available pool of money goes to one company. Qui bono?
IV. Corruption Helps the Economy? We naturally think of corruption as a bad thing. However, this may not always be the case. Having: 1) Good laws 2) Evenly enforced is best, but this does not exist everywhere
Bad Laws • If the Government has created laws that slow the ability to start businesses that generate economic activity, they might harm the public. • A corrupt government official that then takes a bribe to speed up the process actually benefits the economy. • Google Public Data - Time Required to Legally Start a Business
V. Foreign Direct Investment Perceived corruption decreases FDI levels because it lowers expected returns. “Why is corruption so much more taxing than a tax?” Wei (1997) Expected profits: Profit= (l-q)f(x)-c(x)
FDI and Transparency For every 1 point on the CPI index there was an increase of 40% in foreign investment. - Drabek and Payne (1997) The difference in CPI between two countries effects the investment decision. - Habib and Zurawiki (2002)
Social Implications of Corruption What are the effects on society in relation to social, institutional, and political legacies in certain nations? Can strong economic and social foundations be built without Rule of Law; can economic development be sustained without these factors? Most importantly, is there good governance?
Repressive Regimes and Terror: The Dark Age • Authoritarian regimes-policies designed to eliminate or terrorize into compliance • National Security Doctrine • Anti-subversive War • Secret police, death squads, “disappearance” as means • Politics of Anti-Politics • Politicians became the threat to civilians
Chile: Leadership Under Pinochet & Allende • Allende was elected through a populist movement with little margin for victory with minority party in Congress • Pinochet continued to crush economic and social rights under his leadership • Amnesty Law (1978): Perpetrators of human rights abuses could not be prosecuted
Peru • State of Emergency Declaration • War between Shining Path and counter-insurgency forces • 70,000 deaths overall • Sexual violence against women usually claimed as wartime violence • Formations of representative women’s groups
Guatemala “If you are with us, we’ll feed you; if not, we’ll kill you.” General Rios Montt (1982) Estimated 333 children stolen between 1977-1989 Presidential ministry determined 45,000 people disappeared during the nations civil war (1960-1996) Loss of law and human rights
The Argentina Effect “The free market only worked for big companies, not common people. This was a wealthy country, but it’s been devastated by its leaders.” Citizens view the problem as the result of privatization with corrupt politicians Lack of respect for government authority
Argentina Before 1930, Argentina nearly 70 years of political stability • Rapid economic development • 1930-1983 significant political instability throughout country • Numerous military coups, 25 presidents, 22 years of military rule, 13 years of “Peronism”
The Dirty War: 1976-1983 • Seven year campaign by Argentine government against suspected dissidents and subversives • “Los desaparecidos””The disappeared” In an attempt to allay growing opposition the military launched a new campaign to regain Las Islas Malvinas (the Faulkland Islands)
Societies Divided • Divisions within societies is anything but homogenous. • Challenging to find the right design to move forward from different histories and their legacies • Confession, reconciliation, truth, justice
Human Rights Pressures • “Nonviolent activities carried out by transnational networks and states with the primary purpose of improving individual rights by creating economic and political costs for repressive government.” • Darren G. Hawkins
“Kettle, you are black.” The United States and Europe are not free from corruption, of course. 2009 - William Jefferson, D-LA, sentenced to 13 years of prison. $90,000 in cash found in his freezer at home.
“I’ve got this thing, and it’s f***ing golden.” 2009 – Expense reports by British Members of Parliament for dog food, reimbursement for residential moat cleaning, etc. 2008 –"I've got this thing, and it's f______ golden…I'm just not giving it up for f______ nothing.“ Rod Blagojevich 2004 – FBI investigates whether multi-billion dollar contracts awarded to Halliburton were legal.
Fighting Corruption OECD Working Group on Bribery in International Business Transactions Considered by TI to be the Gold Standard Foreign Corrupt Practices Act
U.S. Law - FCPA The Foreign Corrupt Practices Act of 1977 makes it illegal for U.S. persons to bribe foreign government officials. Amended in 1998 to make it illegal for these practices to take place within the United States.
Cargill in Latin America “We don’t do it.” “Some companies get permits in 6 months. It takes us 2 years. But it is not worth it to us. We have been in business for over 100 years, and we plan on being in business for the next 1000. We will wait. If it looks like we will never get the permits, we will go somewhere else.” -Mr. Sergio Rial, Senior Director for Latin America.