Corruption in Latin America

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

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

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?

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

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

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

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

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

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

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.

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

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

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?

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.