Corruption in Latin America

1
Corruption in Latin America
2
Defining corruption

• Official corruption is the misuse of public
  office for private gain.
• Public office
• Private gain
• Misuse

3
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

4
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?

5
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

6
To reduce corruption

• Reduce expected gain, increase expected penalty,
  or both

7
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

8
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

9
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 theres 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

10
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

11
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
  its 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.

12
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

13
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

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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?

15
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.