Poli 138D Midterm

Prevalence of Politically Connected Firms

The data suggests that Russia has the most politically connected firms. This means that many firms in Russia are susceptible to corruption and are highly suspect due to their connection to politics or political actors.

Oil and corruption: contributing factors

1. Scale of revenues- large bureaucracies as a share of government and as oil makes larger scale of revenues, corruption increases 2. Source of revenues- Most of government revenues come from oil, creates the rentier effect where the government is more accountable to oil companies than to citizens due to low taxation 3. Size of rents- Excess revenues above all costs, even normal profit margins, creates opportunity for corruption 4. Secrecy of revenues- high levels of oil means more secretive 5. Natural monopolies 6. Strategic importance

Modes of Privatization

1. Voucher based mass privatization- give away shares of a newly privatized company to citizens 2. Auctions- auction off shares in a newly privatized firm 3. Spontaneous privatization- stealing government assets 4. Liquidation- systematically sell off government assets 5. Capital market-based privatization- IPO's 6. Tenders and trade sales (auctions)- with small number of bidders 7. Management- employee buyout

Factors affecting corruption during privatization

1. control rights vs. cash-flow rights: who has control over assets vs. who gets the proceeds? 2. Speed: faster is better to reduce corruption 3. Administrative discretion: less discretion reduces corruption as the privatization process is more transparent 4. Transparency and information 5. Independent administration to ensure no stealing or selling of government assets.

UN survey of 40 organized criminal groups

3/4 of the sample use violence as an essential means of operation or as a moderate means. Violence and bribery are essential to criminal groups. There is a correlation between wealthier countries and less perception of organized crime. No relationship between organized crime and petty crime.

Foreign Corrupt Practices Act

A US law that makes it illegal for a US company to go abroad and bribe or knowingly conduct business with people who bribe foreign officials to retain business. As the number of bribery cases has risen over the years, this problem is becoming more pertinent. Settlements have been in the billions of dollars and cases have been tried more frequently in recent years. Nigeria and China have enforced the most cases of bribery.

Organized crime in Chongqing

A history of organized crime due to economic liberalization. Strong linkages between organized crime and public officials/high levels of corruption. Many gangs were protected and pardoned by public officials under the protective umbrella, and were able to conduct legal and illegal business practices

Grand Corruption

Acts committed at a high level of government that distort policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good

Corruption and Opinions about Privatization

All the Latin American countries are growing dissatisfied with privatization, but the more corrupt the country is on the Corruption index, the less growth in dissatisfaction of privatization.

Legal Approach to Defining Corruption

An action is corrupt if there is a misuse of public office for private gain that violates a country's laws. If the act in question does not violate the law, it is not corrupt, just unethical. Nye defined the legal approach as "behavior that deviates from the formal duties of a public role because of private-regarding wealth or gain, or violates the rules regarding the exercise of private-regarding influence." Scott agrees with this definition, but challenges it in three key ways: 1. Laws change over time, what was unethical then may be corrupt now, or vice versa. 2. Laws themselves can be unethical, undermining the whole system. 3. Comparisons across countries not uniform, as everywhere has different laws.

Experiences Approach to Measuring Corruption

The experiences model measures the percent of respondents who have actually had to pay bribes to government officials, and ranks the countries on levels of corruption this way. What we notice is that the countries with low levels of experienced corruption were more accurately portrayed in the perceptions index than high corruption countries.

Types of Corruption

Bribery, Speed money, extortion, kickbacks, fraud, embezzlement, peddling influence, clientelism, nepotism, abuse of public property

Enabling Criminal Actions

Bribes can help people smuggle goods and services across borders can harm economies and create dangerous black markets.

Petty Corruption and Health Care

Bribes for adequate health care occur in Chinese hospitals, where citizens will have to pay bribes into red envelopes called Hongbao to get quicker service and better access to surgeries, medicines, and doctors. Because the state regulates medicine, doctors and nurses often get paid as much or less than taxi cab drivers (Reuters article)

Reducing Costs

Bribes help citizens get relief from taxes or help companies get out of certain regulations that would cost them more money than a bribe (like Haiti and their building regulations)

Corruption in Yemen and Egypt

Corruption in Yemen is characterized by severe cronyism and a patronage system, where the ousted ruler Ali Abdullah Saleh was able to appoint is relatives and friends to high levels in the government and military, as well as to amass 30-60 billion dollars in personal wealth. In Yemen, they experience some of the highest rates of kidnapping, where they are exchanged for bribes and hostage money because people are so poor. Corruption in Egypt is also characterized by cronyism and patronage, where the army controls many industries and stifles growth by gifting private lands to friends and family to amass personal wealth.

Corruption and Human Development

Corruption is defined as the "misuse of public office for private gains," and the idea of corruption in this sense is relatively new- it formed as states moved away from vast empires ruled by a single monarch to a nation-state represented by multiple levels of bureaucracy, legislators, judiciaries, and executives. Higher levels of corruption are correlated with lower levels of human development and are correlated with bad institutions and colonial legacies.

Petty Corruption

Everyday abuse of entrusted power by low and mid-level public officials in their interactions with ordinary citizens who are trying to access basic goods or services

Suharto and Grand Corruption

Fisman and Miguel reading. Suharto is one of the most corrupt leaders in history, embezzling billions from Indonesian firms. He set up Yayasans, which are non-profit presidential charities that were fronts to launder money. He and his family members and friends are connected to hundreds of firms in Indonesia, and when Suharto got sick and died, the economy of Indonesia plummeted because so many firms were dependent on his power and connections.

Types of Petty Corruption

Four main types of petty corruption: 1. Equalizing supply and demand 2. Providing incentive bonuses 3. Avoiding Costs 4. Enabling Criminal Actions

Petty Corruption on the Vietnam-China Border

From the Endres reading. Vietnamese officials in charge of monitoring imports from China often "make law" by accepting bribes to allow Chinese importers to bring in more than is legally allowed. They also allow contraband into Vietnam in exchange for bribes. However, the officials also re-formulate laws and negotiate laws with Chinese importers, either bending rules or ignoring laws and allowing these officials to do as they please. Now these importers are subject to arbitrary lawmaking by these officials, and the lack of regulation and singularity in law makes importing difficult and expensive.

Petty Corruption and Imports: South Africa vs. Mozambique

From the Sequeira and Djankov reading. In the reading two ports are examined, one in South Africa and one in Mozambique. In South Africa, the port exhibits collusive forms of corruption, where public officials and firms collude to avoid tariffs. Firms pay bribes to avoid being charged tariffs. In Mozambique, the port exhibits coercive methods of corruption, where officials will coerce bribes out of firms just to get them to do their jobs properly. The South Africa port had more business even from people in Mozambique- it was better to import your good to South Africa then Mozambique than straight to Mozambique due to the inefficiency of the officials.

Baksheesh

Gifting/Granting. A common practice in Yemen where officials demand "user payments" or grants in the form of baksheesh. Even at airports to get your luggage or to have someone check your passport it is common culture to pay baksheesh.

Public Interest Approach to Defining Corruption

If the action of misuse of public office for private gain is harmful to the public interest, it is corrupt. However, what constitutes the "public interest"? How can one measure the effects of acts on public interest, an how can one measure the effects of public interest on corrupt acts? This definition is problematic because it is hard to establish a causal connection, which makes it hard to qualify acts as certainly corrupt or not.

Public Opinion Approach to Defining Corruption

If the public thinks an act of misuse of public office for private gain is corrupt, then it is corrupt. But what if there are disagreements over whether something is corrupt? Not everyone will agree unanimously, the gray areas will be impossible to decide. This could lead to further corruption, as public opinion can be influenced and swayed easily

United Nations Oil-For-Food Scandal

In Iraq, money from oil exports went to food and medicine for the poor. However, Saddam Hussein was able to skim off money from these oil revenues to support his regime and they didn't buy food or medicine for the poor. They smuggled oil into Syria and other regions and then charge a surcharge per barrel which was how they were able to skim money.

Informality

In countries with high levels of petty corruption, many firms will practice and operate unlicensed because its is cheaper than paying all the bribes associated with getting your business licensed by the government. This largely affects the developing world, where every official at every level wants a bribe for basic services

Pharmaceuticals in China

International and multinational corporations pay bribes to get into pharmaceutical and medical devices industries in China. It is impossible to get into the industry without paying bribes, whether you are a foreign or domestic firm. You cannot sustain business without paying bribes.

Opinions About Privatization in Russia and Latin America

Latin American countries have gained a lot of wealth from privatization and have seen economies grow. In Russia, while the public was initially on board with privatization, over time they felt as though they had lost more than they gained by privatizing. In Latin America, the sentiment against privatization is also growing stronger in recent years.

Procurement and Concessions

Procurement and concessions are two forms of grand corruption. Procurement involves purchasing goods and services for the government, often times through pre-agreed deals with firms for discounted rates in exchange for business. Concessions involve granting of rights, land, and property by government to firms.

Perceptions Approach to Measuring Corruption

Measuring how corrupt a country is by asking people's perceptions of levels of corruption in their country. This is not entirely accurate, as it bases corruption on people's perceptions, not their actual experiences with corruption. Could create a false sense of corruption or non-corruption in a country that isn't indicative of reality. This ties into The Guardian article that argued TI's perception index wasn't valid because it creates an elite bias.

Gestores

Mexican intermediaries who paid bribes to politicians on behalf of Walmart. Had developed codes for the bribes to avoid implication, and made $16 million in "donations" to the Mexican government

Intermediary Selling in China

Multinational corporations will sell their products to regional distributors who will pay bribes to intermediaries that operate on the small scale to sell the products to hospitals. By separating the corporation from the corruption, it makes it harder to trace back up the chain.

Providing Incentive Bonuses

Officials use bribes to speed up bureaucratic procedures, finalize procedures, or to provide better treatment. This can slow up whole governmental processes and make the government not function without bribes, which is extremely inefficient.

Petrobras Case

Petrobras, a Brazilian oil company, contracted out inflated bids to construction companies in a huge money laundering scheme that gave kickbacks to politicians and campaigns. Gave money to front companies who paid off people at Petrobras and political parties.

Perceptions of Organized crime vs. Perceptions of corruption

Places with high perceptions of organized crime tend to have high perceptions of corruption as well. However, there is an anchoring problem, and it is hard to compare perceptions across countries because standards vary so much

Top companies and privatized companies

Privatization was perceived to reduce corruption and increase efficiency, but had an adverse affect in Egypt where the government used privatization to make deals and favor people in return for kickbacks. It became a very corrupt practice. In most countries, the top companies are privatized.

Procurement and Concessions: Effects on Grand Corruption

Procurement and Concessions affect high-level officials by: 1. creating inefficient investments due to bribes 2. Favoring short-term projects to see quick kickbacks 3. Overpaying for procurements to ensure bribes and undercharging for concessions to get bribes Affect firms by: 1. Reducing capital investments due to expropriation risk 2. Favor short term projects 3. Expedited extraction of resources 4. Invest in political connections over capital/innovation

Washington Consensus

Refers to a set of 10 specific economic policies that are the standard reform package for developing countries rocked with corruption crises. Some of the prescribed policies include macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy. The point at issue is less what is included in the Consensus than what is missing, including such areas as institution-building and targeted efforts to improve opportunities for the weakest in society.

Motives for Corruption during privatization

Speed- to slow down the privatization to allow corruption to take place Insider information Misrepresenting value Retaining monopoly power Other factors

Suharto's Health, Political Connections, and Stock Price Changes

Suharto was so entrenched in Indonesian firms that hundreds could be connected to him in one way or another, and being connected to Suharto was a way to ensure success, until his health began to decline in 1996. When his health declined and he ultimately died, many companies stocks' plummeted, as being politically connected to Suharto was not advantageous anymore. This fall in stocks created an economic crisis all because of one man, showing how corrupt Indonesian business is.

Global Corruption Barometer

The Global Corruption Barometer is another measurement tool of Transparency International to measure the percentage of respondents from each country that reported having to pay bribes to government officials. This method of measuring corruption is more accurate to the reality of certain countries, but only captures bribes. Because there are so many other types of corruption that occur on higher levels than the citizen level, it is not an all-inclusive measure to accurately predict just how corrupt a country is.

Oil Production by Region

The Middle East and North America are the two largest oil producers, but oil is produced all over the world.

Oil and Perceptions of Corruption

The countries with low perceptions of corruption tend not to be large oil-exporting countries. As you move further down the list, the number of oil-exporting countries increases, suggesting that oil and high levels of corruption are correlated.

Crony Capitalism Index

The crony capitalism index measures how much of a countries GDP among billionaires is in crony sectors, or sectors with a lot of rent seeking. These industries include casinos, coal, timber, defense, banking, infrastructure, oil, airports, etc. These sectors are highly corrupt and can indicate corruption in government as well. Wealth in developing countries often comes from crony sectors

Equalizing Supply and Demand

The government gives services at below market price, creates a price duality between the government and the market. Because the government has cheaper access to goods, bureaucrats can charge bribes to people for access to these goods. Bribes make the state price more equal to the market, but differs largely in consequences. If the benefit is scarce, officials can use their power to influence the quality or quantity a person can get with their bribe. If a benefit is only available to those who qualify, an official can decide who qualifies and/or speed up the qualification process. These consequences undo the purpose of regulations.

Natural Resources and control of corruption

The linear downward sloping graph indicates that as a country increases their exports of natural resources, their corruption control score decreases. This means that countries with high levels of natural resource exports have low levels of control for corruption, indicating a strong correlation between high corruption and high resource exports

Micro-level Approaches to Measuring Corruption

There are three ways to use micro-level approaches to measure corruption: 1. Estimate by subtraction: see the example of the researcher who went to Indonesia and took out chunks of the road to determine how much money was spent fixing the road compared to how much money was budgeted for it. This is a way to get a real number for a level of corruption. 2. Direct Observation: A researcher drove around Indonesia and observed the number of times he was asked to pay bribes by toll road operators, as well as how much money each bribe was. This was a direct way to measure corruption. 3. Estimate by market inference. These approaches give the most accurate detail of corruption, but are the most costly and are not indicative of global trends or even national trends, it is very specific.

Thick Borders

Thick borders refers to the level of market access each country has, the thicker the border means the less access that country has to world markets, and less access other countries have to that market. The borders tend to be thickest in developing regions, as bribes and regulations increase the cost of moving goods within and without countries. Within counties that have thick borders, there are a ton of toll roads where bribes are payed and corrupt acts take place, creating less incentive to do business there.

Hongbao

This term came from the Reuters article, and refers to the red envelope that Chinese patients have to put bribes in to receive adequate health care from medicine practitioners. This Hongbao gives doctors incentive to practice medicine, because their otherwise low salaries means they have little desire to perform quality work for their patients. Corruption is necessary for the health care industry in China.

Corruption Perceptions Index

Used by Transparency International, the Corruption Perceptions Index is one of the most commonly used tools for measuring corruption. It asks businesspeople and country experts to score their countries on levels of corruption, but is highly controversial. Some argue this index is not indicative of actual levels of corruption, and can create bad policies due to a lack of actual knowledge of how corruption is affecting citizens. Even though it is flawed, TI thinks it is the best system available.

Corruption potential by privatization type

Voucher based mass privatization and liquidation ensure the least opportunity for corruption. Management-employee buyout and spontaneous privatization have highest risk of corruption.

Walmart in Mexico

Walmart was Mexico's largest private employer, owned by Walmart USA. Experienced huge expansion and growth so that competitors couldn't catch up with Walmart. Was caught paying bribes to streamline expansion- direct payments, gift cards, quicker permits to get things done faster.

Procurement and Concessions: Motivation to Bribe

Ways government officials can partake in procurement or concessions is by: 1. Manipulating who's on the list of pre-qualified bidders for government contracts 2. Give inside information to favored firms 3. Structure bidding so that the only qualified bidder is your preferred firm 4. Select the favored firm as the winning supplier/contract recipient 5. Increase prices or reduce quality to other firms to give advantages

Accompany-bidding firms

When a firm pays another firm to submit bids for contracts at lower rates to ensure that said firm gets the contract. Having multiple companies submit bids that you paid them to submit to ensure your product gets the bid.

Firm Perceptions and Experiences With Corruption

World Bank Surveys shows that around 35% of all countries identify corruption as a major constraint on their business. This corruption can come through bribe payments, or through gift-giving to receive licenses and other government approvals to conduct business, and has led many firms to practice unlicensed due to high corruption.