Economic Gangsters

PUBLISHED : Sunday, 19 October, 2008, 12:00am
UPDATED : Sunday, 19 October, 2008, 12:00am

Economic Gangsters

by Raymond Fisman and Edward Miguel

Princeton University Press, HK$200

In one of the most memorable exchanges with his long-suffering wife, Basil Fawlty remarks to Sybil: 'You should be on Mastermind. Subject: the Bleeding Obvious.'

The same comment can be made of this book, which carries the subtitle Corruption, Violence and the Poverty of Nations. It starts in interesting territory, trying to correlate corruption and influence peddling, for example, with share price movements, but then tapers off into banal, safe conclusions. Its premise is that eliminating or alleviating poverty will do much to eliminate corruption.

This is not an unusual concept. What is extraordinary is that the authors think they are pushing back the boundaries of economic thought with their many examples of and conclusions on poverty, corruption and economic gangsters.

One of their heroes is Jeffrey Sachs, who believes that foreign aid can reduce poverty. The economist's opponents believe, however, that well-meant but ineffective foreign aid often helps maintain the poverty trap. No one has won this particular argument.

In tackling poverty, the book asks, should we eliminate corruption first to clear the way for economic growth? Or will corruption be eliminated as economies prosper? Sometimes countries prosper, but corruption also thrives. Take, for example, Indonesia under dictator Suharto, where political connections were paramount and accusations of corruption flew. In 2004, Suharto topped the all-time corruption league table, according to fraud watchdog Transparency International in its Global Corruption Report.

Further, in 1997 shares in Tommy Suharto's Bimantara Citra fell 22 per cent, while those in his sister's company lost 17 per cent, following rumours that medical equipment had been delivered to the compound of their ailing father, who died this year. One of the most important elements to the success of the Suharto children's companies was the health and continued rule of their father.

Similar examples can be found in Italy, where in the 1970s news that Fiat conglomerate boss Giovanni Agnelli had been appointed a senator for life pushed Fiat group companies' share prices up more than three per cent. That, according to the authors, is confirmation that investors believed political connections would translate into government contracts and other benefits.

The authors also explore the growing sophistication of mafia-style corruption in Italy and draw an interesting comparison with Suharto-style corruption. 'Economic theory predicts that the level of extortion under a centralised and well-co-ordinated mafia system should be lower than would be the case with an unco-ordinated free-for-all, with local bosses simply looking out for themselves,' they write. 'Similarly, the companies paying tribute to Suharto Inc were probably paying smaller bribes in total than if they'd had to pay off officials from a bunch of unco-ordinated ministries (the labour ministry, environment ministry, and potentially a host of others).'

Interesting, but again that is not revolutionary; nor is the observation that violence and civil war largely visit countries with weakened or disintegrating economies. Ask any historian about the disintegration of the Weimar Republic and its descent into chaos.

Accounts of witch killings in Africa follow a similar path, being linked here to poverty and the fact that the victims tend to be elderly and marginalised. Historians have noted the same trend in Britain in times of social and economic upheaval, for example while evolving from feudalism.

More diverting, particularly for Hong Kong readers, is the chapter on the economic benefits of smuggling. One example notes that more chickens leave Hong Kong for China than arrive. On the way they transmute into turkeys, which attract lower tariffs. The authors conclude that lowering tariffs would also erode smugglers' margins and eventually put them out of business.

One of the most obvious points made is that in many cases corruption simply reflects poor economic policies. 'In some places, the necessities of daily existence turn ordinary folk into rule-breaking economic gangsters,' they write. Hence the custom of bribing Lagos policemen to look the other way on speeding infringements.

If the authors believe they are the first to identify the corruption-economic policy link they must be living in a parallel universe. Their solution here is simple: double the policemen's salary to US$130 a month and they might think twice about taking a bribe. 'Then, even if ethical concerns are dismissed, the upstanding officers will be loath to lose their relatively highly paid jobs.'

The book means well, but tells us more about the authors' naivety than about corruption and poverty. Seemingly they wanted to publish an economics book, such as Freakonomics, that reached a wide audience, but they have failed.

If they had read more social and economic history they would have realised that many of their hypotheses are yesterday's news. And they might not have written this book, which wouldn't be such a bad thing.