Corruption, Crony Capitalism and Growth

This is slowly making the rounds (excerpt):

Where Crony Capitalism Rose and Prosperity Fell (and Vice Versa)
By Matthew A. Winkler

With populists emulating autocrats from Azerbaijan to Zimbabwe, free markets are being forced to confront crony capitalism.

One response is visible in the reversal of fortunes of Malaysia and Indonesia. The two nations still wrestle with the politics of ethnicity and religion at odds with the capitalism of market competition….

…But the historic advantage that Malaysia, with just 30 million people, has enjoyed over its Southeast Asian neighbor of 250 million is disappearing amid a barrage of corruption allegations challenging Prime Minister Najib Razak….

Poverty, Corruption and Economic Growth

One of the puzzling things I’ve found in the empirical data is that corruption doesn’t seem to have any impact on economic growth (I found instead that corruption primarily impacts the variance of growth, but not growth itself or the level of development). It appears to matter what type of corruption is involved, and the institutional framework that a country has.

Here’s Ricardo Hausmann on the same subject (exceprt):

Fighting Corruption Won’t End Poverty

CAMBRIDGE – Countries are poor because governments are corrupt. And, unless they ensure that public resources are not stolen, and that public power is not used for private gain, they will remain poor, right?

It certainly is tempting to believe so. Here, after all, is a narrative that neatly aligns the promise of prosperity with the struggle against injustice. As Pope Francis said on his recent trip to Latin America: “corruption is the moth, the gangrene of a people.” The corrupt deserve to be “tied to a rock and cast into the sea.”

Perhaps they do. But that won’t necessarily make their countries more prosperous.

Comparing Malaysia With Singapore

I probably shouldn’t bother, but from TMI (excerpt):

When the success of one nation casts shadows on the failures of another

...That Malaysia, with her bounty of natural and human resources, has failed miserably to keep up with Singapore is a sad reflection of the policies we’ve undertaken in the last 50 years. Where one has chosen unwavering pragmatism and a merit-based administrative policy to push its nation forward, the other is still proclaiming the supposed inherent superiority of one race over others.

Singapore is able now to move beyond focusing entirely on economic policy, to addressing problems such as social mobility and a rapidly ageing society to further better the quality of life of its citizens. Malaysia seems to be obsessed with proposing-debating-and-proposing-again the implementation of hudud, instead of fighting the deeply-rooted disease of corruption and inefficiency which leads to the billions of ringgit that slip out of our country’s coffers every year.

I hate repeating myself, but:

The Paradox Of Plenty

There’s this somewhat understandable idea that because Malaysia is rich in natural resources, we are…well, rich. Or at least we should be, if the government had handled things properly....

...But there’s a slight problem with this mindset – the empirical evidence suggests that natural resources alone do not beget wealth or prosperity, that focusing on developing such assets actually undermines the foundation of long term growth and prosperity. In fact, in development circles, it’s more common to speak of natural resources as a “curse”, not a blessing....

…In Malaysia’s case, it’s probably more pertinent – and accurate – to wonder not why we aren’t rich when we have abundant natural resources, but rather how Malaysia has managed to grow so far and so fast despite the handicap of having abundant natural resources.

In addition, three links on my series on corruption and growth (here, here and here), or if you want the whole series, you can start from here. From Part III of the series (excerpt):

The idea that corruption has a dampening effect on income levels and/or growth is intuitively appealing, yet the data doesn’t appear to support any causal relationship of any kind. In fact, the conclusion appears to be that the relationship is technically spurious – corruption affects neither the level or growth of income, nor does income affect the level or rate of corruption (or should I say, the perception of corruption).

The difference in growth between Singapore and Malaysia really boils down to volatile commodity prices before Malaysia’s economy was fully diversified beginning in the 1990s. There are a few other things, which I won’t get into right now.

Natural resources are not a blessing. Anybody who watched oil prices plunge last year can certainly attest to that. Long term, any country relying on natural resources is not on a path to prosperity.

The statement that Malaysia is “…staggering behind most of her Asian peers,” is sheer hyperbole. Since 1965, the only countries to have overtaken Malaysia in real GDP per capita in East Asia is Korea and Taiwan – despite the fact that both had had institutionalised corruption during their highest growth phases. This also ignores that we have been making steady gains on both, as well as against developed country standards, in the last decade.

Lastly, on the (de)merits of pure meritocracy, try here, here and here.

Malaysia The Most Corrupt Nation?

Actually, that’s not what EY said. I wonder if the person writing the following actually read the report (excerpt):

Malaysia one of the most corrupt nations, survey shows

Malaysia has been ranked as one of the most corrupt nations and listed as a country which is most likely to take shortcuts to meet targets when economic times are tough, according to a recent survey by Ernst & Young, signalling that the government's Performance Management and Delivery Unit (Pemandu) has failed in its role to transform the economy.

Malaysia, along with China, has the highest levels of bribery and corruption anywhere in the world, according to the latest report, Asia-Pacific Fraud Survey Report Series 2013.

Corruption Is Higher Than Perceived

From a recent World Bank policy research working paper (abstract):

Misunderestimating corruption
Kraay, Aart; Kraay, Aart; Murrell, Peter

Summary: Estimates of the extent of corruption rely largely on self-reports of individuals, business managers, and government officials. Yet it is well known that survey respondents are reticent to tell the truth about activities to which social and legal stigma are attached, implying a downward bias in survey-based estimates of corruption. This paper develops a method to estimate the prevalence of reticent behavior, in order to isolate rates of corruption that fully reflect respondent reticence in answering sensitive questions. The method is based on a statistical model of how respondents behave when answering a combination of conventional and random-response survey questions. The responses to these different types of questions reflect three probabilities -- that the respondent has done the sensitive act in question, that the respondent exhibits reticence in answering sensitive questions, and that a reticent respondent is not candid in answering any specific sensitive question. These probabilities can be estimated using a method-of-moments estimator. Evidence from the 2010 World Bank Enterprise survey in Peru suggests reticence-adjusted estimates of corruption that are roughly twice as large as indicated by responses to standard questions. Reticence-adjusted estimates of corruption are also substantially higher in a set of ten Asian countries covered in the Gallup World Poll.

Managing Natural Resources

I haven’t time to read the report, but via this Reuters article printed in The Star, comes another NGO looking at global issues of governance (excerpt):

The 2013 Resource Governance Index

The Resource Governance Index (RGI) measures the quality of governance in the oil, gas and mining sector of 58 countries. From highly ranked countries like Norway, the United Kingdom and Brazil to lowranking countries like Qatar, Turkmenistan and Myanmar, the Index identifies critical achievements and challenges in natural resource governance.

Isolation And Governance

I have to admit I read these twin papers with a smirk on my face (abstracts):

Isolated Capital Cities and Misgovernance: Theory and Evidence
Filipe R. Campante, Quoc-Anh Do, Bernardo V. Guimaraes

Motivated by a novel stylized fact – countries with isolated capital cities display worse quality of governance – we provide a framework of endogenous institutional choice based on the idea that elites are constrained by the threat of rebellion, and that this threat is rendered less effective by distance from the seat of political power. In established democracies, the threat of insurgencies is not a binding constraint, and the model predicts no correlation between isolated capitals and misgovernance. In contrast, a correlation emerges in equilibrium in the case of autocracies. Causality runs both ways: broader power sharing (associated with better governance) means that any rents have to be shared more broadly, hence the elite has less of an incentive to protect its position by isolating the capital city; conversely, a more isolated capital city allows the elite to appropriate a larger share of output, so the costs of better governance for the elite, in terms of rents that would have to be shared, are larger. We show evidence that this pattern holds true robustly in the data. We also show that isolated capitals are associated with less power sharing, a larger income premium enjoyed by capital city inhabitants, and lower levels of military spending by ruling elites, as predicted by the theory.

Isolated Capital Cities, Accountability and Corruption: Evidence from US States
Filipe R. Campante, Quoc-Anh Do

We show that isolated capital cities are robustly associated with greater levels of corruption across US states, in line with the view that this isolation reduces accountability, and in contrast with the alternative hypothesis that it might forestall political capture. We then provide direct evidence that the spatial distribution of population relative to the capital affects different accountability mechanisms over state politics: newspaper coverage, voter knowledge and information, and turnout. We also find evidence against the capture hypothesis: isolated capitals are associated with more money in state-level campaigns. Finally, we show that isolation is linked with worse public good provision.

I don’t need to spell it out, do I?

Technical Notes

1. Campante, Filipe R. and Quoc-Anh Do & Bernardo V. Guimaraes, "Isolated Capital Cities and Misgovernance: Theory and Evidence", NBER Working Paper No. 19028, May 2013

2. Campante, Filipe R. and Quoc-Anh Do, "Isolated Capital Cities, Accountability and Corruption: Evidence from US States", NBER Working Paper No. 19027, May 2013

Political Manifestos And Government Waste

Here’s a thought:

Let’s imagine, just for the sake of argument, that you’re a voter in an election campaign – just hypothetically speaking of course.

One party issues a manifesto. It has a lot of bright ideas which you like, but there are some parts which aren’t very appealing to you, and you don’t know how much of the manifesto proposals are going to be implemented. You’d rather not vote for a party that puts forward policies which you don’t agree with.

Then the next party also issues its manifesto, which also has many ideas you like and are in fact similar to the first party’s. Unfortunately, there are a few proposals which you don’t like very much either, but these are quite different from the first. Nor are you sure that all these promises will be fulfilled.

Rank And File: The Corruption Perception Index

You can’t miss it in the news over the past few days – Malaysia’s ranking in Transparency International’s Global Corruption Perception Index has “improved” from 60th in 2011 to 54th. Or has it?

A friend told me the methodology had changed, and so it has (details here; warning: pdf link). This made me a little upset, because its clear that most of the work I put in for this series of posts was mostly wasted.

More relevant still, its also clear that the CPI rankings in previous years are pretty much worthless for tracking both corruption and the perception of corruption over time.

Illicit Outflows: Here We Go Again

Another report to add on to the GFI report on global illicit fund flows a year or so back:

Malaysia lost RM893b in illicit outflows, research shows

KUALA LUMPUR, July 22 ― A colossal RM893 billion was siphoned out of Malaysia’s economy into tax havens abroad between 1970 and 2010, a London-based research has revealed, placing the country among the top 20 nation in the developing world labelled as “losers” of capital flight.

The sum is more than triple that of Malaysia’s national debt total, which amounted to RM257.2 billion in 2011, according to previous media reports.

Incomes, Governance And The Middle Class

A new working paper from the World Bank looks at the impact of the middle class on public policies (abstract; emphasis added):

Do middle classes bring institutional reforms?
Author: Loayza, Norman; Rigolini, Jamele; Llorente, Gonzalo;

Summary: The paper examines the link between poverty, the middle class and institutional outcomes using a new cross-country panel dataset on the distribution of income and expenditure. It uses an econometric methodology to gauge whether a larger middle class has a causal effect on policy and institutional outcomes in three areas: social policy in health and education, market-oriented economic structure and quality of governance. The analysis find that when the middle class becomes larger (measured as the proportion of people earning more than US$10 a day), social policy on health and education becomes more progressive, and the quality of governance (democratic participation and official corruption) also improves. This trend does not occur at the expense of economic freedom, as a larger middle class also leads to more market-oriented economic policy on trade and finance. These beneficial effects of a larger middle class appear to be more robust than the impact of lower poverty, lower inequality or higher gross domestic product per capita. That may be linked to the evolution of the middle class: they are more enlightened, more likely to take political actions and have a stronger voice. They also share preferences and values for policy and institutional reforms, as well as higher stakes in property rights and wealth accumulation.

I don’t think this paper will stop the debate over which comes first – the chicken, or the egg? Or in this case, democracy and governance, or incomes? But it’s more firmly on the side of incomes and income distribution coming first, or to be more precise, to demonstrate that incomes and income distribution do have a causal effect on policies and governance.

The Nexus of Corruption and Income Part V

[Warning: this post is highly graphics intensive]

Last month, I did a series on the relationship between corruption measures and income levels and growth which you might want to revisit before reading through this post (Links: Part I, Part II, Part III, and Part IV). Reader Shihong asked if there’s any differences to the relationships if we subdivide the dataset by income levels. The short answer is, yes there is, and the differences are pretty interesting too.

To recap, the corruption measure used here is from Transparency International’s Corruption Perception Index (CPI) from 1995 to 2011, which captures through surveys the perception of corruption in each country on a scale ranging from zero (totally corrupt) to 10 (corruption free). GDP data is sourced from the IMF September 2011 World Economic Outlook database, in PPP adjusted current international dollars.

The International Drivers Of Corruption

The OECD has a new publication looking at corruption at an international level and its causes:

International Drivers of Corruption
A Tool for Analysis
OECD Publishing

Corruption and other governance problems result primarily from processes generated within the domestic political economy. There are major international factors, however, that interact with domestic processes: international drivers of corruption. This report introduces an analytical tool to help readers understand how these international drivers of corruption affect governance and corruption at the country level. It provides a means for identifying those drivers that matter most for domestic governance, as well as opportunities for international actors to work more effectively to improve governance in specific country contexts.

I have no idea what's inside the book, but it's supposed to provide an analytical toolkit to identify corruption emanating from international sources and what can be done about it. Unfortunately the OECD, unlike most other multilaterals, tends to charge for their publications (this one’s USD29). Anybody want to buy the book and tell the rest of us what it actual says?

The Nexus Of Corruption And Higher Income Part IV

For all those who are interested in playing around with the dataset I used for the first three parts of this series, I’ve uploaded it to Google Docs. Just follow this link.

In this instalment, I’m going to narrow down the investigation and concentrate on one particular question that seems to be cropping up more frequently. And that’s the idea that if only Malaysia had less corruption, we’d be on par with countries like South Korea and Taiwan.

The Nexus Of Corruption And Higher Income Part III

[I’ve been working on this for over a week now, hope you enjoy it. Since this is a very long post, I’ve split it into three parts. This is Part III]

Continued from Part II

Conclusion

The idea that corruption has a dampening effect on income levels and/or growth is intuitively appealing, yet the data doesn’t appear to support any causal relationship of any kind. In fact, the conclusion appears to be that the relationship is technically spurious – corruption affects neither the level or growth of income, nor does income affect the level or rate of corruption (or should I say, the perception of corruption).

Here’s some of the reasons why I think the results came out the way they do:

The Nexus Of Corruption And Higher Income Part II

[I’ve been working on this for over a week now, hope you enjoy it. Since this is a very long post, I’ve split it into three parts. This is Part II]

Continued from Part I

Analysis

We should start off first by formalising the correlation into a regression. Using an unbalanced panel estimation with fixed effects on the sample data above (translation: we do a regression that covers all countries simultaneously over time), we get the following results (standard errors in parenthesis):

Ln(GDP) = 8.49 (0.06) + 0.26*Ln(CPI) (0.04)

What this says is that a 1% increase in the CPI score is associated with a 0.26% increase in the level of income.

The Nexus Of Corruption And Higher Income Part I

[I’ve been working on this for over a week now, hope you enjoy it. Since this is a very long post, I’ve split it into three parts. This is Part I]

This post isn’t a defense of corruption. It’s not an April Fool’s joke either.

There’s no doubt that corruption weighs on an economy and on society through many different channels – through higher costs of doing business, to redistribution of income, through reducing the rewards of entrepreneurship, through social and economic inequality, through reducing the level of trust in society (indirectly contributing to all the problems listed above, and more).

But…

There’s this meme I’ve been hearing and reading that if we can just handle corruption, Malaysia would easily become a high income nation.

Graft And The Central Bank

This weekend’s news about the arrest and charging of an ex-assistant governor of BNM is sad news for Malaysia’s institutional development (excerpt):

Ex-BNM assistant governor charged

KUALA LUMPUR: Former Bank Negara assistant governor Datuk Mohamad Daud Dol Moin, 58, has claimed trial at a Sessions Court here to two counts of accepting bribes amounting to RM100,000 from a businessman to help procure a contract from the central bank.

The contract was to print RM5 polymer bank notes by Note Printing Australia Ltd.

Dressed in a dark suit, he calmly pleaded not guilty when the charges were read out to him at about 11am yesterday.

He was accused of receiving two bribes of RM50,000 from Abdul Kayum Syed Ahmad at Dome Restaurant, Bangsar Shopping Centre, on Dec 1, 2004, and Feb 16, 2005.

If convicted under Section 11(a) of the Malaysian Anti-Corruption Commission Act, he can be jailed up to 20 years and fined five times the bribe amount, for each charge.

As I recall, the last time someone that high up in the central bank was charged with abusing his position was the case of former Assistant Governor Datuk Abdul Murad Khalid back in the late 1990s, which turned into a political circus involving Anwar Ibrahim.

Be that as it may, this case is more straightforward and for that very reason more discouraging. We are after all talking about alleged corruption pure and simple. That it involves subsidiaries of the Reserve Bank of Australia, as well as two other regional central banks is beside the point.

About the only saving grace here is that the MACC hasn’t hesitated in charging a senior official, though given that BNM is populated by technocrats rather than politicians and the international dimensions of the case, it isn’t much of one.

A black mark for BNM, and a setback for the credibility of its internal controls.

Department of “Duh”: Corruption Not Good For Growth

Believe it or not, the empirical evidence on the effect of corruption on economic growth isn't clear. The same can also be said for democracy and democratic institutions. In a new article on VoxEU, Campos and Dimova review the literature (excerpts):

Corruption does sand the wheels of growth

Does corruption sand or grease the wheels of economic growth? This column reviews recent research that uses meta-analysis techniques to try to provide more concrete answers to this old-age question. From a unique, comprehensive data base of 460 estimates of the impact of corruption on growth from 41 studies, the main conclusion that emerges is that there is little support for the “greasing the wheels” hypothesis…

Corruption: Real or Perceived?

Corruption remains a sore point among Malaysians, to the point where it was actually included as a national KRA under the Government’s GTP program. PEMANDU is claiming that progress on this issue is on track:

Corruption NKRA on track

TRANSPARENCY International's corruption perception index on Malay­sia may have shown a slight reduction from 4.5 in 2009 to 4.4 this year but some of the component surveys of the CPI have been indicating improvements in 2010…

…While Pemandu acknowledges that if one were to look only at Transparency International's Corruption Perception Index, there is a slight reduction, it means that "a lot more work has to be done".