In the late 19th century US, one Tammany Hall leader drew a distinction between honest corruption and dishonest corruption. If the government issued a contract to do something, an honest corrupt operator would overcharge horribly, load the operation with friends and relatives, lean on subcontractors and so on, but the thing would be built. Dishonest corruption produced nothing. I heard this story near the Municipal Building in lower Manhattan near City Hall and the Brooklyn Bridge. That building supposedly cost $100M back in the late 19th century, maybe five to ten times what it should have cost. The much taller fifty story Woolworth Building constructed in the same era cost $13.5M, and that cost was considered horribly inflated.
Corruption was a big thing back then with a system that passed money and favors up and down the chain. There were the big guys at the top with the politicians beholden to them and the ward heelers near the bottom paying off voters and dispensing patronage. US cities were full of immigrants, so joining the corrupt systems was a big part of becoming a proper American. As you noted though, that money stayed in the US. Some of it even got circulated as part of the patronage system.
But at the same time, the different kinds of corruption involved may be characterized as "dishonest" and "honest", depending on whether the stolen money circulates within one's own economy. Could this be a certain kind of honesty that also precedes wealth?
Personally, I would be willing to characterize corrupt activity that retains money within one's own economy as being more aligned with (even if not a demonstration of) commitment to one's people, so that such corruption may be referred to as being redeemed by sharing in a certain base level of honesty. And in that case, honesty would be a prerequisite to wealth--though not, of course, the only prerequisite.
Thank you for this informative and interesting analysis Yaw! I very much agree with the points you've raised. I wonder - do you see things like good governance restrictions or requirements on aid or development funding as being a potential hindrance to development in poor and corrupt countries, where the corruption is, as you note, a part of doing business? It seemed odd to me to hold poorer countries to a much higher standard than their current context might justify, since it seems unlikely that such insistences would lead to a meaningful reduction in corruption elsewhere in the economy.
I don't think developing aid should be restricted due to corruption. I am currently listening to something that could provide solutions to making business easier in developing countries. The podcast also discusses how to raise a poor countries weak "organizational capabilities" as well.
So far, from listening, it seems foolish for anyone hoping for "quick wins", and you should expect "anti-corruption" efforts to be thought in terms of decades.
Beautiful write-up. I love it. There is however something else at stake that makes corruption a big drag on development. The way I will describe that something else is by analogy......I don't know if you have read the book "A History of Parking Lots". When you look at parking lots in a places like Accra or Lagos, you see a very chaotic environment. In that environment, actors with certain values thrive and the parking lot probably will remain so for a long time until the distribution of such values shift in a way to support an orderly transformation of that parking lot. Where exceptions become the rule, is where corruption becomes damaging.
I am a developing country inhabitant (Indonesia) and this is an interesting point of view. On the other hand, there are still legitimate grievances on many things here such as infrastructures in the rural areas, much more outside Java or Sumatera Islands. Second, there are new issues like cyber security governance and ravages of online gambling.
Some very interesting points - it seems of the back of this, the most logical stance to take is: “Assuming for the moment that corruption is happening and will continue to happen regardless of what we do. How then can we best set things up so that insofar as corruption does occur, it does so with positive externalities.” That seems a far easier problem to solve than simply halting it altogether.
Another minor point on how you say the UK government enacts control - while your point on pet projects is to some extent accurate, I’m not clear what you mean on media campaigns, and in terms of campaign funds, while there may be the odd donation related to peerages or more rarely manifesto commitments, it doesn’t tend to have very much of an impact; in general, campaign spending just isn’t that large in the UK anyway and doesn’t usually play a significant role.
Campaign funding, it's yet another issues here - especially by big business, and often pointed out as an incentive for acts of corruption, such as during bids for public projects of all sorts, to repay the favor.
Another type of mimicking is individual rights. Western Europe was already an individualist society as shown by academics such as Joseph Heinrich. So an individualistic society created a legal system that respected individual rights. Sub Saharan African might have ended up with a more functional legal system if the government simply resolved disputes between clans as opposed to pretending that they could resolve disputes between individuals. Do you think Ghana will be better off with a clan based legal system instead of the current system? I know Magatte Wade said something similar in a podcast once but didn't elaborate.
I would have to do a deeper dive on african legal systems but many of them have a confusing architecture between tribal law, common law and in some cases Islamic law.
Ghana just needs to install more titles and deeds, which they are doing. This is reducing the land dispute problem.
Ghana doesn't have a tribal problem the same way other countries like Mali & Niger have with Tuaregs or Nigeria has between Northern Hausa-Fulanis and Southern Igbos.
Each african country will need to find their own solution on land because what will work in Somalia is very different than what will work in Nigeria. Those countries are so different that it really is Case by case.
You can look at the work of lant prichette. He made a model he calls rules based capitalism and deals based capitalism. Rules based capitalism creates stable long term growth. Deals based capitalism can sometimes you faster growth but it is often short lived and can often be followed by a long period of stagnation. A classic example would be Italy. He also makes a distinction between types of deals. One can be a deal with exporters and another being a deal with local elites controlling the local economy. There was a third model but I forgot what it was.
Another reason for corruption in developing countries is highly progressive taxation. By that I don't mean that rates are very high, I mean that a relatively small segment of the population pays any taxes at all. Hence public officials can be very wasteful with the money but the voters don't really care because most of them don't pay taxes. Moving to a broad based taxation system will naturally lead to lower levels of corruption or at least a small state. Last I checked the adoption of ICT in developing in the last decade you're seeing the cost of tax compliance going down which would enable more developing countries to move towards broad based systems.
Depends on the country but in some countries like Chad, Nigeria, Angola or even Congo a huge portion or even most of the governemnt revenue comes from resource exports.
Then some really poor countries like Niger or Burundi depend on aid for their government revenue.
The problem is poor people in developing countries don't want to be taxed since they can barely feed themselves. When Kenya raised taxes recently there were riots. I can give you many examples of deadly riots just because the country followed the IMF advice to install a VAT tax or increase the VAT.
Bro. I come from the lowest taxed country in the world. I understand the median income person doesn't want to pay tax. Then they shouldn't expect much from the government. In bangladesh most people go to budget private schools or non profit schools.
The resource rents and aid money is a huge distortion to normal politics and accountability. If you look at the history of many early Republics they were based on riots of a common slogan, "no taxation without representation".
I agree that broad based tax gives people "skin in the game" and resouce nationalism has distorted the social contracts. I am just saying that a leader would hesitate to tax subsistence farmers more because he would fear of a military coup.
I understand but that would also they also hesitate to expand the role of the state beyond its capacity and only choose to focus on high priority things.
I don't think public sector workers in developing countries are corrupt just because they're poor.
There was a famous experiment in Indonesia where the government was trying to solve the problem of teacher absenteeism in public schools. The government doubled the salaries of teachers to solve the problem but it showed no difference whatsoever in teacher absenteeism. The only difference was that teachers reported higher job satisfaction (wonder why).
So there is a similar phenomenon in India where public sector teachers are on average are paid 4-5x higher than similar private school teachers. However, private sector teachers actually show up to work and have obviously higher standards than public school teachers.
The idea that public sector workers in these countries are overcompensated is a unique insight. Kids from upper middle class families spend almost a decade of their life try to land a public sector. I doubt these people are motivated by a sense of public purpose.
The only governance reform that has worked in public schools in India and Indonesia was hiring teachers on contract, which was apparently unpopular amongst Indian citizens.
My point is poverty creates conditions for corruption and that corruption is easier to deal with when you are richer, not "they are corrupt because they are poor".
I would love to read that study.
I always appreciate your comments even though we may butt heads haha.
"Private sector teachers have higher standards in Indonesia"
I have to agree but IMHO, I have to put a disclosure of bias -> I was schooled within private entities all the time, from kindergarten to university, mostly Christian ones, especially with the fact I am one (Christian) myself.
A lot of the corruption in developing is because of isomorphic mimicking. Before America industrialised the public sector was much smaller and was involved in far fewer things. Early Americans were more concerned about creating a fair-ish court system and separation of powers. While in many developing countries after decolonisation they wanted to create a European style social welfare state. They expanded the role of government (which they copied from the social democratic trends in the post ww2 West) into a country with very weak state capacity.
I agree that corruption is lower than in higher income countries all else equal. But anti corruption might still be positive for growth.
For example, one can say to reduce poverty we need to build infrastructure but we need be less poor to afford to build infrastructure in the first place. Both statements can true.
A model you can have in your head is the following. You reduce corruption a bit you enable economic growth which stalls at some point, which promotes more anti corruption which enables more growth.
Great article but in the comparison of DRC and Indonesia, shouldn't we take into account first if the country was at peace or not? Not that I know much of the history of either, and Indonesia did have horrendous repressions against left-wing under Suharto, but I do think central Africa has suffered more conflicts.
Corruption is almost just a residual compared to the main signal of war vs. peace no? If a country is at peace, whether in Africa or Asia, corrupt or not, it grows. If not, it doesn't. The rest is residuals... Or is that too simplistic?
1) For Indonesia, it's literal independence was deadly, once it was trying to free itself from the Dutch post WW2. It took 4 years for the Indonesians to get independence in 1949.
Indonesia had West Papua trying to leave since the 60s, and there was the communist massacres in the 1960s. Then in the 1970s was the Aceh rebellion.
For Congo, it's independence was hell in the 1960s - the Congo Crisis. But once the corrupt Mobutu came in, things were somewhat stable until the 90s during the Rwanda genocide, then shit really hit the fan.
The point is Congo was relatively more "stable" than Indonesia from 1966 until the 90s, then Congo stopped being stable on the Eastern flank once the Rwanda genocide occurred...
2) Way too simplistic, it's not even true. Corruption is more of a function of state capacity, trust in institutions, and power distribution, not war.
Good questions though!
I compared them because they are both huge artificially created countries that have been affected by Europeans since medieval times.
In the late 19th century US, one Tammany Hall leader drew a distinction between honest corruption and dishonest corruption. If the government issued a contract to do something, an honest corrupt operator would overcharge horribly, load the operation with friends and relatives, lean on subcontractors and so on, but the thing would be built. Dishonest corruption produced nothing. I heard this story near the Municipal Building in lower Manhattan near City Hall and the Brooklyn Bridge. That building supposedly cost $100M back in the late 19th century, maybe five to ten times what it should have cost. The much taller fifty story Woolworth Building constructed in the same era cost $13.5M, and that cost was considered horribly inflated.
Corruption was a big thing back then with a system that passed money and favors up and down the chain. There were the big guys at the top with the politicians beholden to them and the ward heelers near the bottom paying off voters and dispensing patronage. US cities were full of immigrants, so joining the corrupt systems was a big part of becoming a proper American. As you noted though, that money stayed in the US. Some of it even got circulated as part of the patronage system.
It is almost certainly correct that a wealthy state is a prerequisite to an honest one. Great article.
But at the same time, the different kinds of corruption involved may be characterized as "dishonest" and "honest", depending on whether the stolen money circulates within one's own economy. Could this be a certain kind of honesty that also precedes wealth?
Personally, I would be willing to characterize corrupt activity that retains money within one's own economy as being more aligned with (even if not a demonstration of) commitment to one's people, so that such corruption may be referred to as being redeemed by sharing in a certain base level of honesty. And in that case, honesty would be a prerequisite to wealth--though not, of course, the only prerequisite.
Interesting read, Yaw. Thanks!
Thank you for this informative and interesting analysis Yaw! I very much agree with the points you've raised. I wonder - do you see things like good governance restrictions or requirements on aid or development funding as being a potential hindrance to development in poor and corrupt countries, where the corruption is, as you note, a part of doing business? It seemed odd to me to hold poorer countries to a much higher standard than their current context might justify, since it seems unlikely that such insistences would lead to a meaningful reduction in corruption elsewhere in the economy.
I don't think developing aid should be restricted due to corruption. I am currently listening to something that could provide solutions to making business easier in developing countries. The podcast also discusses how to raise a poor countries weak "organizational capabilities" as well.
So far, from listening, it seems foolish for anyone hoping for "quick wins", and you should expect "anti-corruption" efforts to be thought in terms of decades.
Just like many of your writings, this was a very important one! Well done!
Beautiful write-up. I love it. There is however something else at stake that makes corruption a big drag on development. The way I will describe that something else is by analogy......I don't know if you have read the book "A History of Parking Lots". When you look at parking lots in a places like Accra or Lagos, you see a very chaotic environment. In that environment, actors with certain values thrive and the parking lot probably will remain so for a long time until the distribution of such values shift in a way to support an orderly transformation of that parking lot. Where exceptions become the rule, is where corruption becomes damaging.
I will read the rest over the weekend. Love it.
Yaw, I think per your analysis though
...African are the most corrupt at this juncture in history. We've taken over the baton from others🤣
I am a developing country inhabitant (Indonesia) and this is an interesting point of view. On the other hand, there are still legitimate grievances on many things here such as infrastructures in the rural areas, much more outside Java or Sumatera Islands. Second, there are new issues like cyber security governance and ravages of online gambling.
Typo - bear with me. I was slightly taken aback by the suggestion to bare with you.
Apologies. I am going to use a editor before publishing any article from now on.
Some very interesting points - it seems of the back of this, the most logical stance to take is: “Assuming for the moment that corruption is happening and will continue to happen regardless of what we do. How then can we best set things up so that insofar as corruption does occur, it does so with positive externalities.” That seems a far easier problem to solve than simply halting it altogether.
Another minor point on how you say the UK government enacts control - while your point on pet projects is to some extent accurate, I’m not clear what you mean on media campaigns, and in terms of campaign funds, while there may be the odd donation related to peerages or more rarely manifesto commitments, it doesn’t tend to have very much of an impact; in general, campaign spending just isn’t that large in the UK anyway and doesn’t usually play a significant role.
And yes, exactly , "how do we set up incentive structures so we can get positive externalities despite (or maybe even because of) corruption?"
Campaign funding, it's yet another issues here - especially by big business, and often pointed out as an incentive for acts of corruption, such as during bids for public projects of all sorts, to repay the favor.
You are 100% right that campaign spending doesn't really matter in the UK. My mistake. I'll edit that point.
Another type of mimicking is individual rights. Western Europe was already an individualist society as shown by academics such as Joseph Heinrich. So an individualistic society created a legal system that respected individual rights. Sub Saharan African might have ended up with a more functional legal system if the government simply resolved disputes between clans as opposed to pretending that they could resolve disputes between individuals. Do you think Ghana will be better off with a clan based legal system instead of the current system? I know Magatte Wade said something similar in a podcast once but didn't elaborate.
I would have to do a deeper dive on african legal systems but many of them have a confusing architecture between tribal law, common law and in some cases Islamic law.
Ghana just needs to install more titles and deeds, which they are doing. This is reducing the land dispute problem.
Ghana doesn't have a tribal problem the same way other countries like Mali & Niger have with Tuaregs or Nigeria has between Northern Hausa-Fulanis and Southern Igbos.
Each african country will need to find their own solution on land because what will work in Somalia is very different than what will work in Nigeria. Those countries are so different that it really is Case by case.
Of course. I just mean to say that a legal system that reflects the social reality is more important as opposed to copy pasting from the West.
You can look at the work of lant prichette. He made a model he calls rules based capitalism and deals based capitalism. Rules based capitalism creates stable long term growth. Deals based capitalism can sometimes you faster growth but it is often short lived and can often be followed by a long period of stagnation. A classic example would be Italy. He also makes a distinction between types of deals. One can be a deal with exporters and another being a deal with local elites controlling the local economy. There was a third model but I forgot what it was.
I'll take a look.
Another reason for corruption in developing countries is highly progressive taxation. By that I don't mean that rates are very high, I mean that a relatively small segment of the population pays any taxes at all. Hence public officials can be very wasteful with the money but the voters don't really care because most of them don't pay taxes. Moving to a broad based taxation system will naturally lead to lower levels of corruption or at least a small state. Last I checked the adoption of ICT in developing in the last decade you're seeing the cost of tax compliance going down which would enable more developing countries to move towards broad based systems.
Depends on the country but in some countries like Chad, Nigeria, Angola or even Congo a huge portion or even most of the governemnt revenue comes from resource exports.
Then some really poor countries like Niger or Burundi depend on aid for their government revenue.
The problem is poor people in developing countries don't want to be taxed since they can barely feed themselves. When Kenya raised taxes recently there were riots. I can give you many examples of deadly riots just because the country followed the IMF advice to install a VAT tax or increase the VAT.
Bro. I come from the lowest taxed country in the world. I understand the median income person doesn't want to pay tax. Then they shouldn't expect much from the government. In bangladesh most people go to budget private schools or non profit schools.
The resource rents and aid money is a huge distortion to normal politics and accountability. If you look at the history of many early Republics they were based on riots of a common slogan, "no taxation without representation".
I agree that broad based tax gives people "skin in the game" and resouce nationalism has distorted the social contracts. I am just saying that a leader would hesitate to tax subsistence farmers more because he would fear of a military coup.
I understand but that would also they also hesitate to expand the role of the state beyond its capacity and only choose to focus on high priority things.
I don't think public sector workers in developing countries are corrupt just because they're poor.
There was a famous experiment in Indonesia where the government was trying to solve the problem of teacher absenteeism in public schools. The government doubled the salaries of teachers to solve the problem but it showed no difference whatsoever in teacher absenteeism. The only difference was that teachers reported higher job satisfaction (wonder why).
So there is a similar phenomenon in India where public sector teachers are on average are paid 4-5x higher than similar private school teachers. However, private sector teachers actually show up to work and have obviously higher standards than public school teachers.
The idea that public sector workers in these countries are overcompensated is a unique insight. Kids from upper middle class families spend almost a decade of their life try to land a public sector. I doubt these people are motivated by a sense of public purpose.
The only governance reform that has worked in public schools in India and Indonesia was hiring teachers on contract, which was apparently unpopular amongst Indian citizens.
My point is poverty creates conditions for corruption and that corruption is easier to deal with when you are richer, not "they are corrupt because they are poor".
I would love to read that study.
I always appreciate your comments even though we may butt heads haha.
I think this is the paper. This paper is mentioned a lot by Lant Prichette and other development economists.
https://www.jstor.org/stable/26864967
thank you
"Private sector teachers have higher standards in Indonesia"
I have to agree but IMHO, I have to put a disclosure of bias -> I was schooled within private entities all the time, from kindergarten to university, mostly Christian ones, especially with the fact I am one (Christian) myself.
To be fair Catholic schools are the best everywhere in the world.
"and protestants as well" (while in Indonesia, there are Islamic ones too who strive for such excellence, like (have to mention brand) Al Azhar)
Protestant schools can be hit or miss. Is the same with Islamic schools in Indonesia?
Also Protestant schools with excellent reputation in Indonesia tend to be managed or affiliated or heavily influenced by Chinese Indonesians
So they're just Chinese schools with Christians characteristics.
I am no muslim so, IDK.
I think you meant Suharto (not Sukarno) when you mentioned Sukarto (typo).
Thanks, I corrected for that now.
A lot of the corruption in developing is because of isomorphic mimicking. Before America industrialised the public sector was much smaller and was involved in far fewer things. Early Americans were more concerned about creating a fair-ish court system and separation of powers. While in many developing countries after decolonisation they wanted to create a European style social welfare state. They expanded the role of government (which they copied from the social democratic trends in the post ww2 West) into a country with very weak state capacity.
I agree that corruption is lower than in higher income countries all else equal. But anti corruption might still be positive for growth.
For example, one can say to reduce poverty we need to build infrastructure but we need be less poor to afford to build infrastructure in the first place. Both statements can true.
A model you can have in your head is the following. You reduce corruption a bit you enable economic growth which stalls at some point, which promotes more anti corruption which enables more growth.
I said reducing corruption can still be good. I am just saying that reducing corruption isn't causing higher growth directly.
Again it goes back to type of corruption and etc.
I think the worse form of corruption as I said before is when the money leaves the country like in my Congo vs Indonesia example.
Sukarto stole 7x more money than Mobutu but his people ended up 12x richer despite starting off poorer.
I agree. Mobutu was mostly extractive while Sukarto was more profit sharing (lol).
Great article but in the comparison of DRC and Indonesia, shouldn't we take into account first if the country was at peace or not? Not that I know much of the history of either, and Indonesia did have horrendous repressions against left-wing under Suharto, but I do think central Africa has suffered more conflicts.
Corruption is almost just a residual compared to the main signal of war vs. peace no? If a country is at peace, whether in Africa or Asia, corrupt or not, it grows. If not, it doesn't. The rest is residuals... Or is that too simplistic?
Thanks for sharing this good stuff.
1) For Indonesia, it's literal independence was deadly, once it was trying to free itself from the Dutch post WW2. It took 4 years for the Indonesians to get independence in 1949.
Indonesia had West Papua trying to leave since the 60s, and there was the communist massacres in the 1960s. Then in the 1970s was the Aceh rebellion.
For Congo, it's independence was hell in the 1960s - the Congo Crisis. But once the corrupt Mobutu came in, things were somewhat stable until the 90s during the Rwanda genocide, then shit really hit the fan.
The point is Congo was relatively more "stable" than Indonesia from 1966 until the 90s, then Congo stopped being stable on the Eastern flank once the Rwanda genocide occurred...
2) Way too simplistic, it's not even true. Corruption is more of a function of state capacity, trust in institutions, and power distribution, not war.
Good questions though!
I compared them because they are both huge artificially created countries that have been affected by Europeans since medieval times.