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Friday, March 17, 2006

Measuring Corruption

The Economist looks at some of the ways economists measure corruption:

Digging for dirt, Economics Focus, The Economist: Corruption ... is not easy to measure. Vast amounts of money flow through public hands. How much is diverted into private pockets? ... Fortunately, a growing number of economists, not least at the bank, are turning to the tricky task of quantifying corruption. ...

Some of the biggest ... were attracted to Iraq's oil-for-food programme, which ran from 1997 to early 2003. Under the scheme's original terms, Iraq sold its oil to whomever it chose... The proceeds ($64 billion in 2000 dollars) were paid into an escrow account and spent largely on food and medicines, under UN supervision. American intelligence officials estimate that Iraq received $230m-240m in bribes from those eager to buy its oil. Economic intelligence, as applied by Chang-Tai Hsieh and Enrico Moretti, of the University of California, Berkeley, suggests that it got far more. As they point out, Iraqi oil, such as Basra Light, is a close substitute for Arabian Light. Before UN sanctions, there was no systematic price difference between the two. But in 1997-98, Basra Light fetched $2 a barrel less; in 2000-01, the gap was more than $5. Bidders would be happy to offer bribes, kickbacks and political favours to secure oil this cheap. Indeed, they could pay up to $5 billion and still break even. ... Messrs Hsieh and Moretti reckon Iraq collected $700m-2 billion.

Although a lot of money, this is a small proportion (1-3%) of Iraq's oil revenues. Petty corruption often cuts more deeply. During Indonesia's rainy season, the dirt tracks that connect Javanese villages to their fields often become impassable. According to one estimate, every dollar spent surfacing these roads ... brings benefits worth $3.30 over the roads' lifetime. But Indonesia suffers from widespread corruption, collusion and nepotism. Some of the World Bank money allocated to village infrastructure ends up greasing palms not smoothing gravel.

But how much? ...Ben Olken, of Harvard University, dug deep into the sand and stone to find out. He reports the gap between what a village claims it spent on a road, and what he and his engineers reckon the road really cost. They left little to guesswork. ... they surveyed quarries, labourers, truckdrivers and suppliers. ... they dug holes in the roads, taking a sample of the material that had gone into their construction. And then they built their own “test roads”... Mr Olken calculates that on average 28% of reported spending went missing, mostly because roadbuilders skimped on materials...

He reaches an unfashionable conclusion. The bank puts great store by “empowering” the poor to keep their officials honest. In Indonesia, villages must hold public hearings before they get the second and third slices of their money. ... For all its romantic appeal, monitoring by villagers suffers from a free-rider problem. If your neighbour keeps a beady eye on road spending, you can benefit from his vigilance without making an effort yourself. Why, then, should you bother? But by the same logic, why should he?

Mr Olken puts his faith in a less fashionable ally: auditors. A group of villages, chosen at random, were told that they would be audited at the end of the project. This threat reduced missing expenditures by about eight percentage points, to 20% or so. The audits are not cheap ... and auditors have been known to lapse into cosy collusion with those they scrutinise. But done properly, Mr Olken says, bean-counting is a promising way to extend the useful life of roads.

A victory for centralised accountancy over local democracy, then? Not quite. Mr Olken shows that corrupt officials care both about their chances of being caught and about the severity of the punishment... The threat of an audit weighed more heavily on village heads who were politically insecure... Detection cannot be left to the village, but punishment can be. On this point..., Kautilya, writing 2,300 years ago, offers a helpful observation: as punishment for the theft of public property by government servants, he recommended smearing the offenders with cow dung and ashes.

    Posted by on Friday, March 17, 2006 at 01:09 PM in Economics, Market Failure | Permalink  TrackBack (0)  Comments (5)

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