Transcript Corruption in Latin America

Corruption in Latin
America
The effects on growth and
decisions
Outline
I.
II.
III.
IV.
V.
VI.
VII.
What is Corruption and How is it Measured
Corruption in Latin America – some high
profile cases
The Economics of Corruption
Corruption Helps the Economy?
Foreign Direct Investment
Social Impact of Corruption
Conclusion and Questions
I. What is Corruption
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MW: Inducement to wrong by improper or
unlawful means
For our purposes, we will focus solely on
government corruption.
A.
B.
Powers granted beyond authorized by law.
Private benefit
Transparency International
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www.transparency.org
Corruption Perceptions Index
 Public sector
 Snapshot of perceptions
 Survey of surveys

of corruption
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 2009
 Chile
6.7
 Brazil 3.7
 Panama 3.4
 Mexico 3.3
 Argentina 2.9
 Venezuela 1.9
Chile – Augusto Pinochet
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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
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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
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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
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Demand Side of Corruption
Studies examining coincidence of corruption with
dozens of factors in 4 categories
 Wealth
 Education
 Government
 Population
NOT 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.
B.
C.
D.
Barrier to Entry
Inefficient Allocation of Resources
Suboptimal Outcomes for Government
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
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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
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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)
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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?
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Repressive Regimes and Terror:
The Dark Age
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Authoritarian regimes-policies designed to
eliminate or terrorize into compliance
National Security Doctrine
Anti-subversive War
 Secret
police, death squads, “disappearance” as
means
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Politics of Anti-Politics
 Politicians
became the threat to civilians
Chile: Leadership Under Pinochet
& Allende
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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
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Amnesty Law (1978):
Perpetrators of human rights
abuses could not be
prosecuted
Peru
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State of Emergency
Declaration
War between Shining
Path and counterinsurgency forces
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70,000 deaths overall
Sexual violence against
women usually claimed
as wartime violence
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Formations of
representative women’s
groups
Guatemala
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“If you are with us, we’ll feed you; if not, we’ll
kill you.” General Rios Montt (1982)
Estimated 333 children stolen between 19771989
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
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Argentina
Before 1930, Argentina nearly 70 years of
political stability
 Rapid
economic development
 1930-1983 significant political instability
throughout country
 Numerous military coups, 25 presidents, 22
years of military rule, 13 years of “Peronism”
The Dirty War: 1976-1983
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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/Disapp
earance
20,00030,000
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
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Divisions within societies is anything but
homogenous.
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Challenging to find the right design to
move forward from different histories and
their legacies
 Confession,
reconciliation, truth, justice
Human Rights Pressures
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“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, DLA, 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
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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.
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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.