The quantitative implications of corruption

Mr. Dumlao is the Associate Chairman of the Department of Economics at the Ateneo de Manila University. This article was published in the Yellow Pad column of BusinessWorld, March 21, 2005 edition, p. 21.

A surprising news item on corruption in the country came out recently.
This was the Political and Economic Risk Consultancy’s (PERC’s) report
that the Philippines ranked as the second most corrupt country in Asia.
It says India, China and Vietnam are “cleaner” than the Philippines;
only Indonesia is worse!

But these are only perceptions. There is no argument that individual
respondents for one reason or another have some degree of subjectivity.
But the overall result of 900 respondents is more objective. One must
remember that they are executives from the private sector that come
from different industries. Some are from shipping, some finance, some
high-tech, and the list goes on. They also come from different
countries, like the US, Australia, Japan, etc. Because of the
respondent’s diversity the negative subjectivity of one can easily be
offset by another’s positive subjectivity.

One might be stringent in defining what makes a country corrupt. But
this is as easily offset by another respondent being subjectively lax.
In the end, individual subjectivities offset each other to come up with
an objective average. This is the “law of large numbers.”

It is also possible that the result is biased against the Philippines
not because of specific individual bias but because of a general
condition. For example, Sergio R. Ortiz Luis, Jr. of the Philippine
Chamber of Commerce and Industry (PCCI) is correct in suggesting that
perception depends on media reports. We all know that the Philippine
press is one of the freest in the world. If it is indeed true that the
free press tends to highlight the negative more than the positive, it
follows that what respondents read, hear and see are biased against the
Philippines. Hence, the bias against is not specific to individual
respondents, but characteristic of all.

But this assumes that respondents do not know about the country’s free
press and its other characteristics. Consider yourself having to fill
these survey forms. Would you say that China is one of the cleanest
because you do not get official media reports regarding corruption in
China? Chances are, you’d know that China’s press is one of the most
restricted in the world and factor that into your response. The same
goes with the Philippines. It is common knowledge that Philippine media
are one of the freest in the world. Just because one often gets
negative (or positive) reports about its government does not mean that
one will be biased negatively (or positively).

The good news is that the report is not likely to affect investors’
perception of the country. Peter Lee U of the University of Asia and
the Pacific (UA&P) puts it best, saying that foreigners have
already taken into account the level of corruption before even
investing here. This is good news in the sense that the already bad
perception is only confirmed by the report; therefore the bad
perception will not worsen. The more pessimistic interpretation of this
is that there is a general perception of massive corruption and this
perception, that ought to improve, will not improve.

Corruption is bad in any way it affects the economy. On the micro
level, corruption slows the processing of business permits and
therefore decreases productivity. It makes rules inconsistent. This
adds uncertainty, then risk and thus affects the investors’ required
rate of return even before committing capital to the Philippines.
Corruption worsens the level playing field, encourages rent-seeking and
inefficiency, and so on. On the macro level, the result of the report
will not likely decrease the already low level of investment since
investment decisions already take into account the severity of the
problem. But because the report affirms the negative, it will keep the
already low level of investment low.
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A recent presentation of Jimmy Acevedo of the Ateneo de Manila cites an
IMF staff paper that conceptually and mathematically shows that
economies can fall into two steady states – multiple equilibria. In lay
terms, when corruption is minimal, an economy reaches a stable and very
good economic growth. But when corruption is massive, it reaches a
stable but not very good growth. If one applies the concept to the
Philippine context, the economy may reach stability and steady growth.
But it need not be that way. It can be better. It can still be stable
and have a higher steady growth. The solution points to decreasing the
amount of money that small-time corrupt officials have the discretion
to spend. It also points to decreasing the threshold of the amount of
money before big-time corrupt officials are exposed.

Unfortunately, PERC’s report is not descriptive enough in stating the
specific corruption that concerns investors. Felipe Medalla of the
University of the Philippines says that the report is simplistic and
does not reveal the true nature of corruption.

However the government is just as vague when measuring its success in
fighting corruption. For instance, the government intends to spend
P3.18 billion to fight corruption, for the next five years. But this
number is only a measure of how much to commit rather than the degree
of success. On the anniversary of People Power I, President Gloria
Macapagal Arroyo declared the use of the full force of the law, as she
has said several times before. Again, this just is a measure of what
will be done and not the degree of success. The continuous publicity of
lifestyle check is only a measure of publicity if it is not being
implemented. If implemented, it becomes a measure of what is being
done. It is still not a measure of success.

Whether government is committed or doing its best does not really
matter. The respondents of the PERC survey know this well. It does not
matter how hard they work for their respective companies. What matters
is the success they give their employers. “Show me the money!” is how
Cuba Gooding in the movie Jerry Maguire puts it. In the case of
corruption, the government has simply not shown the statistics of
success. For example, five years after the BW Resources scandal rocked
the Philippine stock market, nobody has been seriously convicted. There
are no numbers to show for.

As another example, one of the highest ranking officials of the Armed
Forces has been charged for corruption. But he was caught more by the
US immigration officials, rather than Philippine authorities. Alas, the
credit belongs to the US for now.

The anti-money laundering act has been passed but it is moot and
academic if nobody goes to jail for it. It has no data for success yet.

Two types of statistics that can be used to gauge the success on the
fight against corruption are quality and quantity of convictions. That
is: “quality” as measured by the amount of money involved, and
“quantity” as measured by the number of people convicted. These are
practical in the sense that they can be empirically obtained and used
to make a case for the degree of success. Economists call it “hard
data.” Conviction also involves the whole government. Before
conviction, there has to be a law to violate.

And so, legislators need to pass moral and practicable laws. To
convict, one must implement the law, literally pursue and charge
people. Hence the executive branch needs to implement. To convict, the
judicial system must do its job. Interestingly, most of the blame falls
on the executive branch if the data on this is unfavorable. But this
only eliminates the moral hazard, that is, that the executive branch is
not responsible for the corruption in the two other branches of
government. It is likely, though, that exposure of such statistics will
prompt the executive branch to proactively contain corruption in all
branches.

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