What can end poverty: fighting corruption, or a capable state?

Wali’s note: Studying public-sector corruption and its link with development or poverty alleviation fascinates me. I have developed a global Development-Corruption Matrix (above, see post here) which is waiting for the attention of economists and social scientists to establish the correlation. No success yet though.

But this post is not about my matrix or its future. It’s about corruption and its link with poverty alleviation. Particularly when all popular leaders in the poor or developing countries in their rallies mention corruption as a populist slogan, and ironically, when the Transparency International (TI) – globally tasked to measure and report corruption perception index (CPI) – admits in its annual report: Not one single country, anywhere in the world, is corruption-free.

This is a big claim. So, what do we do?

A Harvard professor today wrote on Project Syndicate what we already know: Fighting corruption won’t end poverty. A capable state does.

Ricardo Hausmann is a former minister of planning of Venezuela and former Chief Economist of the Inter-American Development Bank, is Professor of the Practice of Economic Development at Harvard University, where he is also Director of the Center for International Development (CID).

Hausmann is Chair of the World Economic Forum’s Global Agenda Meta-Council on Inclusive Growth.

Contrasting the World Bank’s Control of Corruption Indicator (CCI) with World Bank’s Government Effectiveness Indicator (GEI), he makes some really useful analysis.

You would just love the piece. Particular the last para.

By Ricardo Hausmann

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.
Consider the data. Probably the best measure of corruption is the World Bank’s Control of Corruption Indicator, which has been published since 1996 for over 180 countries.

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The CCI shows that while rich countries tend to be less corrupt than poor ones, countries that are relatively less corrupt, for their level of development, such as Ghana, Costa Rica, or Denmark, do not grow any faster than others.

Nor do countries that improve in their CCI score, such as Zambia, Macedonia, Uruguay, or New Zealand, grow faster. By contrast, the World Bank’s Government Effectiveness Indicator suggests that countries that, given their income level, have relatively effective governments or improve their performance, do tend to grow faster.

For some reason – probably related to the nature of what NYU’s Jonathan Haidt calls our “righteous minds” – our moral sentiments are strongly related to feelings of empathy in the face of harm and unfairness. It is easier to mobilize against injustice than for justice.

We are more enthusiastic to fight the bad – say, hunger and poverty – than to fight for, say, the kind of growth and development that makes food and sustainable livelihoods plentiful.

Sometimes switching from the “bad” to the corresponding “good” is simply a matter of semantics: to fight against racism is to fight for nondiscrimination. But, in the case of corruption, which is a bad that is caused by the absence of a good, attacking the bad is very different from creating the good.

The good is a capable state: a bureaucracy that can protect the country and its people, keep the peace, enforce rules and contracts, provide infrastructure and social services, regulate economic activity, credibly enter into inter-temporal obligations, and tax society to pay for it all.

It is the absence of a capable state that causes corruption (the inability to prevent public officials, often in collusion with other members of society, from subverting decision-making for private gain), as well as poverty and backwardness.

Some might argue that reducing corruption entails the creation of a capable state; the good is created out of the fight against the bad. But is it? Teachers and nurses often do not show up for work, but that does not mean that performance would improve much if they did.

Policemen may stop asking for bribes, but that will not make them any better at catching criminals and preventing crime. Curtailing side-payments does not imply the ability to manage concession contracts or collect taxes.

Aside from prosecuting some bad apples, measures to fight corruption typically involve reforming procurement rules, public financial-management systems, and anti-corruption legislation. The underlying assumption is that the new rules, unlike the previous rules, will be enforced.

Above: No one country, anywhere in the world, is corruption-free, admits Transparency International in 2016 annual report.

That has not been Uganda’s experience. In 2009, under pressure from the aid community, the government enacted what was billed at the time as the best anti-corruption legislation in the world; and yet all corruption indicators have continued moving south.

Uganda is not an exception. My colleague at Harvard, Matt Andrews, has documented the failure of public financial management reforms designed to prevent graft. And the reasons for these failures are not specific to financial management.

All organizations need to be perceived as legitimate. They can create this perception by actually performing the function for which they were created, which is difficult.

Alternatively, they can borrow from the natural world a strategy called isomorphic mimicry: just as non-poisonous snakes evolve to resemble a poisonous species, organizations can make themselves look like institutions in other places that are perceived as legitimate.

And this is what the anti-corruption agenda often ends up stimulating: the creation of organizations that are more obsessed with abiding by the new and burdensome processes than they are with achieving their stated goals.

As Harvard’s Lant Pritchett, Michael Woolcock, and Andrews argue, when inept organizations adopt “best practices” such as financial management systems and procurement rules, they become too distracted by decision-distorting protocols to do what they were established to do.

As Francis Fukuyama has pointed out, the development of a capable state that is accountable and ruled by law is one of the crowning achievements of human civilization. It involves the creation of a shared sense of “us,” an imagined community on whose behalf the state acts.

Above: Visualizing the Relationship Between Corruption and Economic Growth Around the World. Source: HowMuch

This is not an easy task when societies are deeply divided by ethnicity, religion, or social status. After all, who is the state for? All Iraqis or just the Shia among them? All Kenyans or just the Kikuyu? What is to prevent the ethnic group currently in power from diverting resources to itself on the argument that “it’s our turn to eat?”

Why shouldn’t those currently in control of the state transform it into their patrimony, as in Venezuela, where, more than two years after former President Hugo Chávez’s death, his daughters still occupy the presidential residence?

The fight against corruption mobilizes all of us because we want to do away with evil and injustice. But we should remember that casting the bad into the sea does not imply the sudden appearance on our shores of the good that we need.

Courtesy: Project Syndicate