Suharto F

Corruption? What kind?

Say it’s your life long ambition to manufacture Widgets in Africa. Since you were a small child, you’ve dreamed of your future as Africa’s Widget king. Now it’s time to make your dream a reality.

How could this go?

Scenario 1:

After cozying up to some people reputed to be well connected to the president – rounds of golf, wining-and-dining, the usual – you manage to secure an appointment for a face-to-face with the Big Man.

You walk in, nervous, and show the president the blueprints to your shiny new Widget factory. He’s excited. He tells you how passionate he is about these kinds of project, pledging his government’s support. He then tells you about another project he’s passionate about, the Presidential Scholarship Fund, to help poor children go to school. He tells you how much he would appreciate a donation – $750,000 would suffice – you know, for the children. You tell him you would be delighted to do that.

“You know,” he says, with a sly glance “the Ministry of Housing has an unused plot just up the road from the port – it would be ideal for your factory. There had been some plan to build apartments there but the project seemed to run into some trouble – I seem to remember the developer was not a supporter of the Presidential Scholarship Fund.”

You know perfectly well the Scholarship Fund “donation” is no such thing. You pay up anyway. You get the land for free.

Word gets around town that the president wants your widget factory built, and nobody messes with the president. The rest of the permits therefore flow easily. Within a year you’re making the finest widgets the country has ever seen.

Five years out you’re expanding, and looking at export markets. Seeing how well you’re doing, second-entrants start popping up near-by to manufacture copy-cat widgets, and more and more suppliers and service firms enter the market to service both your firm and theirs. To stay ahead of these copy-cats, you expand your R&D team to try to make a better widgets and continue to do so for a generation.

And of course, once a year, you make damn sure you remember to make that donation to the Presidential Scholarship Fund.

Scenario 2:  

After cozying up to some people reputed to be well connected to the president – rounds of golf, wining-and-dining, the usual – you ask for help getting an appointment with the Big Man.

“I could do that,” your new friend says, “but you know it’s hard for me to go to State House and ask for an appointment in my beat up old Toyota…” You buy your contact a BMW. A week later, you have your appointment.

You walk in, nervous, and show the president the blueprints to your shiny new Widget factory. He’s excited. He tells you how passionate he is about these kinds of project, pledging his government’s support. He then tells you about another project he’s passionate about, the new yacht he wants to buy his son  - $1.5 million would suffice – you know, for the children. You tell him you would be delighted to do that.

Word gets around town that your pockets are yacht deep. Every office you go to expects a cut. The municipal planning office wants a cut, the land registry office wants a cut, the construction workers’ union wants a cut, the environmental protection office wants a cut, the local cops, the labour law inspectors, the local military garrison… everybody wants a cut. The process takes time, and by the time you’re done paying the last bribe, the municipal planning permit has already expired, so they get a second bite at the cherry.

Two years later, your widget factory is built. But the shakedowns are ongoing. Worse, they’re unpredictable. There doesn’t seem to be any coordination. New administrators come in and worry their tenure won’t be long, and so they shake you down hard, trying to get as much as possible out of you as quickly as possible.

You complain to your friend the president and he tells you he’ll have a word with some of his underlings, but he has his own troubles too: now his daughter is jealous, imagine that, because she didn’t get a yacht and of course the widget business being so profitable and all perhaps you could help.

Your financial planning is a mess. You can’t really calculate cashflows because demands for kickbacks come more or less at random, from all sides, with no coordination.

Within a few years the factory is closed. Everybody you hired is unemployed.

Now, a Westerner looking at Scenario 1 sees corruption, just like in Scenario 2. And he’s not wrong! There’s a clear bribe involved. In giving you state land for free, the president in Scenario 1 is diverting public goods to private ends. That’s illegal pretty much everywhere. If you’re from the U.S., Scenario 1 leaves you just as exposed to a prosecution under the Foreign Corrupt Practices Act as Scenario 2.

But the developmental implications are completely different!

This is the insight at the heart of Tim Kelsall’s brilliant, new(ish) book, Business, Politics, and the State in Africa.

Starting from the realist premise that pretty much every developing country there’s ever been has been highly corrupt, Kelsall asks a rather obvious question: how come some of these super-corrupt countries go on to achieve good developmental outcomes while others just seem to sink deeper and deeper into the mire?

From there, it’s just a hop, skip and a jump to asking what kinds of corruption can drive development outcomes, and what kinds retard those outcomes. 

[Tiny aside: Kelsall is, of course, too much of a gentleman and a scholar to call it all "corruption" - such brutality is fit only for bloggers. He settles on "rent-management" as his key euphemism. I can see the appeal of that: "corruption" isn't an analytical category, it's a moral judgment. It's a word that tends to close minds and end debates, rather than open them. But we shouldn't be too precious about it, either: that thing that he aseptically describes "rent-management" is what normal people call corruption.]

For Kelsall, there are a couple of key ingredients to the successful organization of corruption for development: it needs to be centralized, and it needs to be focused on the long-term. 

The go-to example here is Indonesia: a country that, from 1967 through 1998 saw stellar rates of investment, growth and poverty reduction alongside a famously, deliriously corrupt state. Suharto managed to steal tens of billions of dollars at the same time poverty rates in Indonesia were falling from 60% to under 15%.

Why? Because corruption was centralized around the president and his family, who were consciously trying to maximize their take over the long term.

Suharto wouldn’t allow petty officials in the ministries or the regions to competitively shake-down investors: he decided who got shaken down and for how much, and then he kicked bribes down the chain in the form of patronage. Centralization – whether in a person, like Suharto, or an organization, like the Chinese Communist Party – prevents the kind of kleptocratic free for all that can sink a country’s developmental prospects.

But centralization is not enough: you need some kind of a longer time horizon so you’re maximizing your take over time. The alternative in Mobutu-style Zairian kleptocracy, which certainly was centralized, but was so rapacious in its demand for more-loot-NOW that it just wasn’t compatible with longer-term investment and growth.

Whether Kelsall is right that centralization and a long-term focus are the key ingredients in the developmental corruption stew I don’t know. Probably there’s much more to say on this subject.

What I do know is that this is a conversation that’s long overdue. Moralistic tirades about corruption won’t help countries develop. A more mature, realistic and clear-eyed views of the kinds of corruption that help and the kinds that hinder in the context of a limited access order just might.

13 thoughts on “Corruption? What kind?”

  1. So development has failed because there has not been enough centralised and long-term corruption; we didn’t have enough good corruption only the bad sort that hindered development? Obviously this man is nuts. Only a developer could think like this. He might just say let’s stop prosecuting people under FCPA because it is hindering development under the good sort of corruption.

    Imagine also you are not making widgets but want to pay for a government service and that you are a poor little peasant with hardly two shillings to rub together. But you save up, go to the office and then get shaken down by some clerk loaded with the proceeds of corruption. You go home in the mutatu and he gets into his 4wd parked round the corner and drives up to his widget factory. Hey but the corruption paid for development so who cares. Fed up with it all. Next time I rob Chase Manhattan in NYC my defence plea will be the money is going for development. Just call me Robin Hood. Not.

    1. Bueno, your beef is probably more with my quick little gloss than with Kelsall’s argument. He’s a scholar. And as a scholar he’s tackling a Big Serious Question (TM) – how come nearly all successful developing countries remain deeply corrupt in the transition from poverty to middle-income status and only *then* start to make serious stabs at transparency? It’s a question worth asking.

    2. Couldn’t see a reply link so have just put it here.

      I agree there is a big question to ask and know that the school who see corruption but say it is the only way to get development done, would generally not agree with corruption. Yet, it is not just about the money which is stolen, whether by a big man or a clerk, it is about the society and culture it creates. Corruption becomes the way of life. The position is not for the job function; it is to get the extra. Corruption becomes the all. If the corrupt spent their energies not in corruption but in positive development with these energies plus the money developing counties would be much further ahead than they are.

      Also, development aid would have been at least double if corruption was not so rampant. It is like the guy who comes looking for $20 for some project but you suspect it will go down the swannee. You might give him $10 but not $20 because you are willing to waste $10 but not $20. It becomes a case of not what does he need but how much am I prepared to lose hence there is a reduction in the aid. If corruption had been tackled differently things would be much further forward.

      Professor Stephenson, Harvard, has an excellent blog covering many issues on corruption and is very firmly against a tolerance of the same. If you may allow a link to it, it is, http://globalanticorruptionblog.com.

      I do agree that the subject needs more attention and a further aspect is not so much private businessman using his own cash to pay off someone so that he can build a factory but use of development money and corruption. Now that needs looking at. Question, is development above the law in relation to corruption but business is not.

  2. In this example, it appears that the real question is not centralization, it is quantum.

    Widget-maker Toro can afford a reasonable number of bribes, but not too many. And that means that the iron-willed dictator, who doesn’t permit bribery, except to his own family, is better for widgets than someone who presides over a more chaotic, everyone-for-himself situation.

    But of course the best situation for widget-maker Toro would be if no bribes were permitted at all. Is this really so unattainable?

    1. Bueno, cuz

      1-The dictator needs the bribes not just to fit out some great palaces but also to kick them down the ladder in the form of patronage. The Indonesian model was that local Suharto supporters implicitly agreed not to shake down businesses in return for a share of the spoils, and Suharto kept spreading around the spoils as long as they bought him local support and loyalty. We’re again in corruption-as-a-mechanism-to-preserve-stability here.

      2-Where I think Kelsall’s argument is strongest is when you realize that there just really aren’t any counterfactuals. At all. Every country that is now rich was once very poor, and when you look at its transition from very-poor to middle-income you find some system for limiting entry into markets, creating “rents”, guiding rents to high return activities and bringing in a level of predictability.

      Of course, *in*principle* it sure seems like clean government should be the best solution. But it’s really hard to find any historical instances of that. Instead, what you find is countries gradually moving to make rents more predictable, less chaotic, and then over time – but only once they’ve reached middle-income status – moving to bring in real transparency mechanisms.

      Maybe I need to learn more about Botswana and Rwanda as I hunt for counterexamples, though…

  3. Scenario 2 is much more common for local businesspeople, most of whom start with Scenario 3, which is to say low level corruption without any protection from the guy(s) at the top, and either sink even quicker than the poor guy in 2 or never get their heads above water at all. Welcome to Egypt, as my favorite Cairo taxi guy used to say.

    This whole conversation reminds me of one of my favorite development jokes, which has apparently been around for 30 or 40 years. I’ve seen it attributed to Nyerere, but who knows. See the Economist version:
    http://www.economist.com/blogs/feastandfamine/2013/09/corruption-and-stereotypes

    The point is that there is a difference between a parasite that sucks blood but leaves the host more or less functional and one that kills it. Nobody likes parasites, but if you’re going to have one, the first type is obviously preferable.

    While I am steadfastly against th eargument that corruption greases the wheel and is therefore ok, US history points to one possible exception: corruption brings forward returns on long-term projects that might not otherwise be financiable. Prime case in point: the US railroads, which were actually a giant land grab (one square mile for each mile of track built), facilitated by “the best Congress money could buy.” Henry Flagler got two miles because he was building on swamp, aka the Florida coastline, and acquired over a million acres of it, developing such well-known places as Miami, Daytona, Homestead, and later on Key West. For more on this, see Dee Brown’s great book, “Hear that Lonesome Whistle Blow.”

  4. I like these kind of discussions. Sod the morals, let’s just examine the practical implications.

    One thing that is missed from the above, but maybe covered in Kelsall’s book is that corruption does not always have to be financial in nature. Singapore is arguably the ultimate developmental state, but I don’t think Lee Kuan Yew got stinking rich; he just corrupted the levers of power to stay v firmly in his hands.

    More significantly, a potential corollary of Kelsall’s analysis is that Western donors’ insistence on pesky details like elections is bad for development because it encourages short termism. In the West we get legal short-termism with tax cuts just before elections. In developing countries we get rampant corruption everywhere. So when African dictators claim their people are not ready for full democracy maybe they have a point?

    1. One of the important points North does in the “Limited Access Orders” paper is that those societies are in a different “equilibrium state” (although he later muddles it up again with taking about progressing in different LAO levels). So in other words (if one follows the LAO argument), there is no such thing as “not yet ready for democracy” but rather that it simply does not work as intended given the LAO context (i.e. no progression involved).

      The overall problem with the entire argument (also evident in this post about corruption) is that you step on a very slippery slope on accepting this kind of bad governance as given and sort of fixed. And once you have accepted that, it’s either play along or pull out entirely (or taking over by force as an unlikely option).

      So while the (scientific) analysis and argument is compelling, the implications are not.

    2. One thing I do know: Western companies may need some smelling salts after being asked for a bribe – or their lawyers may over-rule it on FCPA-liability grounds – but Chinese companies certainly don’t. Or Malaysian companies. Or Brazilian companies.

      We’re no longer living in 1958: “we” (in the West) don’t get to say “bad you, no capital for you!” and that’s the end of the story.

      The world is multipolar now, so the only choice the west has is whether to compete or bow out and cede the field to competitors from late developing countries.

  5. Yes, as I said it seems like a “play along or pull out” option.

    However I hope there is a way to break that intrinsic logic of LAO and probably the only way of doing that is breaking the LAO equilibrium state.

    Or to quote Mr. Buckminster Fuller:
    “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete”

  6. I would say front up and spend elsewhere rather than play along or pull out. Reward the non-corrupt and see what that does to the corrupt. Part of the game has been turn a blind eye and so let the status quo continue.

    BTW, FT, what is your analysis of the WB database referred to on Blattman. It would seem that over 30 years and 120 countries to go down from 60000 potentials to 2400 actuals is somewhat strange. How many WB projects are involved or it other orgs projects. How many WB projects were over that 30 years.

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