Corruption in Latin America

The effects on growth and decisions

Outline

I. What is Corruption and How is it MeasuredII. Corruption in Latin America – some high

profile casesIII. The Economics of CorruptionIV. Corruption Helps the Economy?V. Foreign Direct InvestmentVI. Social Impact of CorruptionVII. Conclusion and Questions

I. What is Corruption

MW: Inducement to wrong by improper or unlawful means

For our purposes, we will focus solely on government corruption.

A. Powers granted beyond authorized by law.

B. Private benefit

Transparency International

www.transparency.org Corruption Perceptions Index

Public sector Snapshot of perceptions of corruption Survey of surveys

http://media.transparency.org/imaps/cpi2009/

World Scores by Geographic Region – 2009 Country Averages 8.1 - U.S. and Canada 6.7 - Europe 3.6 - China 3.4 - India 3.4 - South America 3.1 - Central America

II. Latin American Corruption

LA Country Scores 2009Chile 6.7Brazil 3.7Panama 3.4Mexico 3.3Argentina 2.9Venezuela 1.9

Chile – Augusto Pinochet

Positive economic growth 2005 – Sens. Norm Coleman and Carl Levin 125 secret bank accounts in 8 banks, family and

friends hiding $27m. Demanded that his victims' families pay for the

bullets used to kill their loved ones

Argentina – Carlos Menem

Privatized 90% of state-owned industries, some for less than they were worth

Airport privatization organizer went to work for the winning bidder, then became the regulator

SEC charged Siemens $1.4 billion fine for paying $40 million to Menem and associates

$6 million to unnamed “new administration”

Nicaragua - Arnoldo Alemá

1997 – 2002 Stole $100 million in public money Dec 2003 sentenced to 20 years in prison TI rated him the 9th most corrupt leader in

recent history

Venezuela – Hugo Chavez

1998- Present Record levels of corruption Corruption for personal benefit Oil agreements (Cuba) Corruption in the Police

Panama – Noriega, Moscoso, Perez Balladares administrations Drug Trafficking, racketeering, and money

laundering Corruption in local government History of new administrations

campaigning on “Zero Corruption” platforms

-Arias Madrid

-Martin Torrijos

Demand Side of Corruption

Studies examining coincidence of corruption with dozens of factors in 4 categories

Wealth Education Government PopulationNOT causal relationships, but can expect to find

corruption where these factors exist

Corruption and Wealth

Countries with more perceived corruption have: smaller GNP larger CPI higher inflation fewer imports and exports larger unemployment rate relatively more expenditure and labor associated with food

production less available food lower quality food less electricity use

Corruption and Education

Countries with more perceived corruption have:

relatively low rates of literacy relatively low school enrollment

percentages relatively more students for each teacher

in primary schools

Corruption and Government

Countries with more perceived corruption have: a republic form of government (not a

constitutional monarchy) been independent for a relatively short time had recent changes in their constitution relatively small government expenditures not successfully fostered or consistently

protected political rights and civil liberties.

Corruption and Populations

Countries with more perceived corruption: are relatively rural have smaller percentages of citizens aged 15-64 have fewer citizens either employed or seeking employment have larger households have higher fertility rates have shorter life expectancies have larger percentages of national consumption attributable to the

wealthiest citizens accept economic aid from other countries.

III. Economics of Corruption

A. Barrier to Entry

B. Inefficient Allocation of Resources

C. Suboptimal Outcomes for Government

D. Avoiding Market Solutions to Negative Externalities

Barriers to Entry

Extend monopoly power

Reduce competition

Inefficient Allocation of Resources

Fixed amount of tax revenue available. Politicians need to allocate resources to many projects. CBA

Option 1: Increase the salary of public school teachers. The available pool of money is divided, and each teacher receives a small amount.

Option 2: Spend the money on a new bridge. The total available pool of money goes to one company.

Qui bono?

Suboptimal Outcomes

Negative Externalities

IV. Corruption Helps the Economy?

We naturally think of corruption as a bad thing. However, this may not always be the case.

Having: 1) Good laws 2) Evenly enforced

is best, but this does not exist everywhere

Bad Laws

If the Government has created laws that slow the ability to start businesses that generate economic activity, they might harm the public.

A corrupt government official that then takes a bribe to speed up the process actually benefits the economy.

Google Public Data - Time Required to Legally Start a Business

V. Foreign Direct Investment

Perceived corruption decreases FDI levels because it lowers expected returns.

“Why is corruption so much more taxing than a tax?” Wei (1997)

Expected profits: Profit= (l-q)f(x)-c(x)

FDI and Transparency

For every 1 point on the CPI index there was an increase of 40% in foreign investment. - Drabek and Payne (1997)

The difference in CPI between two countries effects the investment decision. - Habib and Zurawiki (2002)

Social Implications of Corruption

What are the effects on society in relation to social, institutional, and political legacies in certain nations?

Can strong economic and social foundations be built without Rule of Law; can economic development be sustained without these factors?

Most importantly, is there good governance?

Repressive Regimes and Terror: The Dark Age Authoritarian regimes-policies designed to

eliminate or terrorize into compliance National Security Doctrine Anti-subversive War

Secret police, death squads, “disappearance” as means

Politics of Anti-Politics Politicians became the threat to civilians

Chile: Leadership Under Pinochet & Allende Allende was elected through

a populist movement with little margin for victory with minority party in Congress

Pinochet continued to crush economic and social rights under his leadership Amnesty Law (1978):

Perpetrators of human rights abuses could not be prosecuted

Peru

State of Emergency Declaration

War between Shining Path and counter-insurgency forces 70,000 deaths overall

Sexual violence against women usually claimed as wartime violence Formations of representative

women’s groups

Guatemala

“If you are with us, we’ll feed you; if not, we’ll kill you.” General Rios Montt (1982)

Estimated 333 children stolen between 1977-1989

Presidential ministry determined 45,000 people disappeared during the nations civil war (1960-1996)

Loss of law and human rights

The Argentina Effect

“The free market only worked for big companies, not common people. This was a wealthy country, but it’s been devastated by its leaders.”

Citizens view the problem as the result of privatization with corrupt politicians

Lack of respect for government authority

Argentina

Before 1930, Argentina nearly 70 years of political stabilityRapid economic development1930-1983 significant political instability

throughout countryNumerous military coups, 25 presidents, 22

years of military rule, 13 years of “Peronism”

The Dirty War: 1976-1983

Seven year campaign by Argentine government against suspected dissidents and subversives

“Los desaparecidos””The disappeared”In an attempt to allay growing

opposition the military launched a new campaign to regain Las Islas Malvinas (the Faulkland Islands)

Argentina Chile Brazil Uruguay

Population in 1988

32 million 13 million 144 million 3 million

Death/Disappearance

20,000-30,000

3,000-5,000 284-364 109 (killed)163 (Disappeared/tortured)

Ratio per 100,000

62.5-93.75 per 100,000

23-35 per 100,000

21 per 100,000

Political Prisoners

30,000 60,000 25,000 60,000

Ratio per 100,000 of political prisoners

93.75 per 100,000

461.5 per 100,000

17.6 per 100,000

1 per 500 (imprisoned for 6+ years)

Societies Divided

Divisions within societies is anything but homogenous.

Challenging to find the right design to move forward from different histories and their legacies Confession, reconciliation, truth, justice

Human Rights Pressures

“Nonviolent activities carried out by transnational networks and states with the primary purpose of improving individual rights by creating economic and political costs for repressive government.”

Darren G. Hawkins

“Kettle, you are black.”

The United States and Europe are not free from corruption, of course.

2009 - William Jefferson, D-LA, sentenced to 13 years of prison. $90,000 in cash found in his freezer at home.

“I’ve got this thing, and it’s f***ing golden.”

2009 – Expense reports by British Members of Parliament for dog food, reimbursement for residential moat cleaning, etc.

2008 –"I've got this thing, and it's f______ golden…I'm just not giving it up for f______ nothing.“ Rod Blagojevich

2004 – FBI investigates whether multi-billion dollar contracts awarded to Halliburton were legal.

Fighting Corruption

OECD Working Group on Bribery in International Business Transactions

Considered by TI to be the Gold Standard Foreign Corrupt Practices Act

U.S. Law - FCPA

The Foreign Corrupt Practices Act of 1977 makes it illegal for U.S. persons to bribe foreign government officials. 

Amended in 1998 to make it illegal for these practices to take place within the United States.

Cargill in Latin America

“We don’t do it.”

“Some companies get permits in 6 months. It takes us 2 years. But it is not worth it to us. We have been in business for over 100 years, and we plan on being in business for the next 1000. We will wait. If it looks like we will never get the permits, we will go somewhere else.”

-Mr. Sergio Rial, Senior Director for Latin America.