Christopher Lingle: Graft Goes Hand in Hand With Big Government

In the local arena, media brims with dreary news articles spotlighting on widespread and endemic corruption as the major deterrent to the Philippines economy. Yet, for all these self-righteous cavilers, it appears that the only known solution to the current predicament is an outright change of government (Quo Vadis?). In other words, self-styled messiahs preaching motherhood solutions, which practically reinforces corruption's vicious cycle. It is a case of having a 'cure that is worse than the disease'.

This propitious article from Christopher Lingle singles out Big Government as the main culprit to the systemic graft culture…

Graft Goes Hand in Hand With Big Government

By Christopher Lingle*
Bangkok Post

March 22, 2005

Some of the most corrupt governments in the world are in Asia, according to Transparency International. Bangladesh is second from the bottom with Indonesia, Pakistan, Vietnam, Papua New Guinea, India and the Philippines hovering near the abyss. An annual survey of executives by Hong Kong-based Political and Economic Risk Consultancy, or Perc, identifies the most corrupt Asian governments. While Indonesia tops the chart for the region, India is close behind, with oppressive bureaucracies demanding bribes at all levels of government that range from payment for admission to better schools to payment for installation of basic services.

While China is third on the Perc list, it falls in the middle of the Transparency International ranking. In all events, Beijing reports that there are record inflows of foreign direct investment despite costs of corruption estimated at 3-5% of gross domestic product. Official Chinese sources cite cases of more than 4,000 corrupt officials that absconded with a total of at least $600 million (23.2 billion baht). Managers of the Guangdong branch of the Bank of China stole over $483 million (18.6 billion baht) in 2001 before fleeing the country. Other senior managers, including the head of the Bank of China, authorised large loans to friends or family members that became non-performing.

This sort of corruption is also a structural and deep-rooted problem in many emerging market economies outside of Asia. In some countries, illicit payments had a benign beginning that was interpreted as an expression of generosity. This perception probably contributed to a general tolerance of low levels of corrupt and illegal actions. A wide agreement on corruption points to the abuse of authority and misuse of discretionary power in pursuit of personal interests. However, considerable confusion and disagreement exists over the impact of corruption.

One flawed perception of bribery is that it acts as a lubricant to facilitate the management of political affairs. This bizarre view suggests that bribing officials can be beneficial to economic activity and increases the efficiency of the bureaucratic system. But corruption tends to undermine political stability. Japanese prime ministers and other high officials have been forced from office and President Joseph Estrada of the Philippines was jailed for corruption. China executed two top officials for taking bribes, and South Korea has recorded many high-level bribery scandals.

Similarly, corruption pollutes society by lowering the authority of public officers. And it offends a sense of social justice, since a disproportionate burden of corruption falls upon lower income groups that are most vulnerable to rapacious public officials. What is perhaps worse is that corruption can reinforce the survival of dishonest officials or dictators by providing them with illicit funds. And allowing corruption can be a means for despots to control their citizens since those that engage in corrupt activities are less likely to object to abuse of power by rulers.

It is a mistake to characterise the economic effects of bribery as beneficial. This nonsense ignores large economic costs. For example, corruption reduces economic efficiency by destroying the notion of fair competition and by imposing costs on the private sector that include higher costs for international credit. According to officials with the Asian Development Bank, as much as one-third of public investment in some Asia-Pacific nations has been lost to corruption. A UN report estimated that eliminating corruption would boost India's economic growth by 1.5 percentage points a year.

The financial turmoil in Asian emerging markets in 1997-98 can be attributed to a reassessment of risk that resulted in a crisis of confidence and net outflows of capital. Governments unable to provide an environment to protect asset values or with domestic financial institutions seen as non-responsive to market signals were punished.

There is also confusion over how to end corruption. Many observers see corruption as a moral issue and blame greed. This moralistic perspective emphasises the increased moral standards of public servants or the imposition of severe punishment on violators to eliminate graft. But self-righteous pleas to end corrupt practices do not alter flawed incentive structures that arise from legal and cultural institutions. Even moral people may act improperly when facing warped incentive structures. Similarly, immoral and imperfect individuals tend to act more appropriately if the incentive structure rewards them for doing so.

Instead of expanding political power to eradicate corruptive practices, the opposite is needed. An essential problem with corruption is that it most often promotes excessive government power, so reducing political intervention in people's lives is the right direction. A distrust of the private sector and unfettered markets invites regulation by public officials that issue licences and permits. But these monopolistic powers meant to serve citizens create power imbalances that can impose harm on citizens that face incentives to protect themselves through bribery. Instead of moralising to prevent public graft, it is better to undertake legal reform of the institutional infrastructure. A fundamental change in political culture combined with a shift away from granting governments with extensive powers of intrusion can help root out corruption.

Corruption and other abuses of government are more likely to occur when individual rights and freedoms are sacrificed to promote collective goals or collective rights. For example, apartheid excluded blacks from political and economic participation by giving special rights to the South African white community. These abuses could not have occurred if individual rights were protected. Individuals wishing to live in a free and open society with less corruption should promote free and open economies with less government involvement in their lives. Competition in open markets involves legitimate actions and not unlawful means, so that corruption between consumers and suppliers is unlikely with both parties having equal power. When governments are constrained by the rule of law that protects individual rights, there will lead to less corruption and greater freedom of actions for all citizens.

About the Author: Christopher Lingle is global strategist for eConoLytics.