# Dear People Doing Quantitative Research on Corruption: Please, Please, Please Stop Using Clearly Invalid Instrumental Variables.

I will open this post with two apologies: First, this is going to be on a (seemingly) nerdy and technical subject (though one that non-technical folks who read statistical papers on corruption really need to understand). Second, this post is going to return to a subject that I wrote about two years ago, without adding much, except perhaps different examples and somewhat more intemperate language. But the issue is an important one, and one that I think needs more attention, both from the people who produce quantitative empirical studies on corruption and those who consume those studies.

The issue concerns a particular statistical technique sometimes deployed to figure out whether variable X (say, absence of corruption) causes variable Y (say, economic growth), when it’s possible that the correlation between X and Y might arise because Y causes X (or because some third factor, Z, causes both X and Y). The technique is to find an “instrumental variable” (an IV for short). To be valid, the IV must be sufficiently correlated with X, but could not conceivably have any affect on Y except through the IV’s casual effect on X. The actual estimation techniques used in most cases (usually something called “two-stage least squares”) involve some additional statistical gymnastics that I won’t get into here, but to get the intuition, it might help to think about it this way: If your instrumental variable (IV) correlates with your outcome variable (Y), and there’s no plausible way that your IV could possibly affect Y except by affecting your proposed explanatory variable (X), which then has an effect on Y, then you can be more confident that X causes Y. But for this to work, you have to be very sure that the IV couldn’t possibly affect Y except through X. This assumption cannot be tested statistically–it can only be evaluated through common sense and subject-area expertise.

OK, if you’ve slogged your way through that last paragraph, you may be wondering why this is important for corruption research, and why I’m so exercised about it. Here’s the problem: Continue reading

# Is China’s Anticorruption Campaign Hurting Its Economy? Some Skeptical Thoughts on Eye-Popping Estimates

I read a striking claim last week about the impact of China’s anticorruption crackdown. CNBC reported that Chi Lo, a senior economist at the bank BNP Paribas, claimed the anticorruption campaign “has knocked between 1 and 1.5 percent off the [China’s] gross domestic product (GDP) annually over the past two years[.]”

I realize that, despite the widespread belief that corruption is bad for the economy overall (a belief I share), there have been some serious and legitimate concerns raised about whether China’s aggressive approach might be going too far, deterring not only corruption but also legitimate investment projects. But Mr. Lo’s estimate (assuming CNBC reported it accurately) struck me as implausibly high, for two reasons: Continue reading

# When Should Corruption Be Tolerated? The Case of the Padma Bridge

In a recent post, Rick examined the Canadian Supreme Court case concerning a high-level corruption scheme implicating Bangladeshi government officials and executives at SNC Lavalin, a Canadian construction company, over a cancelled World Bank project in Bangladesh. The \$1.2 billion project underlying the case was the Padma Bridge, a massive infrastructure that some estimated would increase the Bangladeshi GDP 1.2% each year.

Upon discovering the corruption scheme in 2011, the World Bank—recognizing the importance of the infrastructure project for the Bangladeshi people—initially responded by attaching conditions to the continued funding of the bridge. Specifically, the Bank requested that the Bangladeshi government (i) place all public officials involved in the investigation on leave pending the completion of the investigation, (ii) appoint a special inquiry and prosecution team, and (iii) agree to provide full access to investigative information. However, on June 29, 2012, the World Bank cancelled its funding of the project, deeming the Bangladeshi government’s response “unsatisfactory.”

Although neither the World Bank nor SNC Lavalin are involved in the project anymore, the government of Bangladesh is nonetheless moving ahead with the Padma Bridge, and has awarded the construction contract to a Chinese firm. Since the World Bank withdrew its involvement, the estimated cost of the bridge has climbed by over US\$1 billion, and the expected completion date is being pushed back by two years to 2020. These climbing costs and greater delays suggest not only less efficiency, but also that even more money is being siphoned off by corrupt public officials, to the detriment of the Bangladeshi people.

Because of this, it may seem that the World Bank’s decision to disengage from the project, and allow the Bangladeshi government proceed on its own–without any Bank oversight–was a misguided policy. I understand this view, but on balance I do not agree. While the World Bank’s decision to terminate its involvement in the project may have increased costs and corruption in the short run, in this case the Bank made the right call. That does not mean that the Bank should have a “zero tolerance” policy that requires it to suspend any project where there is evidence of corruption of any kind. But in the particular circumstances of this case, withdrawal was the best of the Bank’s bad options.

# Guest Post: The Aims and Accomplishments of the OECD Report on Corruption at the Sector Level

Tina Søreide, Senior Researcher at the Christian Michelsen Institute and post-doctoral fellow at the University of Bergen Faculty of Law, contributes the following guest post:

Yesterday Rick posted a critique of the OECD’s recent Report, “Consequences of Corruption at the Sector Level and Implications for Economic Growth and Development.” He did not find much value in that report (and as anyone who read his post knows, that’s an understatement). I was heavily involved in the research and preparation of this report, and although criticism is always welcome, I think that many of his criticisms are unfair, and are based on a misapprehension of the report’s purposes. This rebuttal is an attempt to clarify the aims of the report and explain why, notwithstanding Rick’s criticisms, the report makes substantial progress toward achieving those aims. Continue reading

# There Is No “East Asian Paradox” of Corruption and Development

Imagine that you’re talking to a friend, and you mention that smoking shortens average life expectancy, and that smokers should therefore be encouraged to quit. Suppose your friend replies, “Well, but my uncle Fred smoked every day, and he lived into his 80s.” If your friend means this either (a) as a serious challenge to your empirical claim that smoking is bad for you, or (b) as a critique of your prescriptive argument that smokers should therefore be encouraged to quit, then you would probably find his response absurd on its face. And if your friend were to say that he has posed a serious conceptual conundrum—say he calls it the “Uncle Fred Paradox”—you would probably laugh at him. His argument might seem marginally less ridiculous if he pointed not to his Uncle Fred but to, say, France—which has relatively high smoking rates and relatively high life expectancy—but we probably still wouldn’t view this as a serious challenge to the view that smoking is bad for you, nor would we spend a lot of time wringing our hands worrying about the “France Paradox” in the smoking-health relationship.

Yet for some reason, in serious discussions about the relationship between corruption and economic development, people seem to make precisely this sort of specious argument, and the argument gets taken very seriously by people who should know better. The form the argument takes in this context goes something like this: “It may be true that high corruption seems to be correlated with lower levels of economic development on average. However, many countries in East and Southeast Asia—such as China, South Korea, Japan, Taiwan, Thailand, and Indonesia—either achieved or currently are achieving impressively rapid economic growth despite widespread corruption.” This is the so-called “East Asian Paradox” (a term coined, as far as I know, by Professor Andrew Wedeman — see also his recent book). The somewhat more sophisticated version of the argument, developed most prominently in an article by Professor Michael Rock and Heidi Bonnett, notes that although perceived corruption has a negative relationship with growth and investment in most countries (especially small developing countries), this relationship becomes positive in a subsample consisting of five large, newly-industrializing Asian countries (China, Indonesia, South Korea, Thailand, and Japan), using data drawn from the early 1980s through the mid-1990s.

One encounters more-or-less sophisticated versions of the “East Asian Paradox” argument all the time when talking about the adverse impact of corruption on development. When someone says something like, “Corruption is a major threat to economic development,” someone almost invariably responds with something like, “But what about China? It has achieved impressive economic growth despite widespread corruption.” As far as I’m concerned, this is equivalent to saying, “But what about my Uncle Fred, the lifelong smoker who lived into his 80s?” But in case this is not completely obvious, let me explain why I think the “East Asian Paradox” argument, at least in its usual crude form, is mostly bogus. Continue reading

# Mauro (1995) Does NOT Show That Corruption Slows Growth

One of the most influential and widely cited economics articles on corruption is Paolo Mauro’s 1995 paper, “Corruption and Growth,” published in the Quarterly Journal of Economics (Vol. 110, No. 3, pp. 681-712). It has become a standard citation for the proposition that corruption is lowers investment, and consequently lowers economic growth. The paper is important because it sparked close to 20 years (and counting) of increasingly sophisticated research on the economic effects of corruption. Furthermore, it leant critical academic support to the emerging anticorruption movement in both civil society and international organizations like the World Bank and IMF. And for those reasons alone, I think one could make a strong case that this paper has had a positive impact on the world.

# More on Corruption and Growth, and the Importance of Checking Linked Material

In my post last week, I went after a bunch of recent blog commentary that asserted there wasn’t much evidence that corruption mattered for development (and that also asserted the allegedly disproportionate focus on corruption was a “fetish” of self-satisfied Western countries). My emphasis in that post was on presenting the evidence that corruption is indeed a serious problem, one that citizens in developing countries care about. But I didn’t say much directly in response to the evidence that the targets of my screed (Christopher Blattman, Michael Dowdle, Jason Hickel) had offered for the claim that corruption’s not all it’s cracked up to be as a development problem. Of the posts I went after, Blattman’s made the most effort to ground the corruption’s-not-so-important claim in academic research. So I think his most detailed post on the subject deserves closer scrutiny than I gave it in my original polemic. (By the way, Blattman also included an interesting direct response to my post here; my reply is in his comments section.)

After reviewing Blattman’s post and the research he cites (and links to) in support of his argument that there’s little evidence that corruption matters very much for economic growth, my conclusions are largely unchanged.  Indeed, I think that the academic papers on which Blattman relies tend to undermine his point more than they support it.

# Yes, Corruption Is Bad for Development. No, Corruption Is Not a Western Obsession

Recently there has been a spate of commentary in the blogosphere that revives a set of tired old canards about corruption and development — the related claims (1) that the focus on corruption and governance in the development discourse is misplaced, because there isn’t a lot of evidence that corruption matters much for development, poverty reduction, etc.; and (2) that anticorruption is a fixation of wealthy, mostly Western countries, because it enables people in those countries congratulate themselves about their moral virtue and to look down on habits and practices in the poor, benighted South. Recent examples include Chris Blattman’s posts on his blog (here, here, and here), Michael Dowdle’s contributions to the Law & Development blog (here and here), and Jason Hickel’s post on Al Jazeera English, though there are others as well.

Sigh. Do we really need to go through this again? OK, look: Yes, there are still lots of unanswered questions about corruption’s causes and consequences, and its significance for various aspects of economic development. And yes, some anticorruption zealots have sometimes over-hyped the role of corruption relative to other factors. But the overwhelming weight of the evidence supports the claim that corruption is a big problem with significant adverse consequences for a range of development outcomes. And the evidence is also quite clear that the focus on corruption as a significant obstacle to development comes as much or more from poor people in poor countries as it does from wealthy Western/Northern elites.

A blog post is not the best format for delving into a very large academic literature on the adverse impacts of corruption. And so the posts to which I’m responding might be forgiven for generally failing to provide much evidence in support of their claims that corruption is relatively unimportant for development, and largely a Western obsession. But, let me at least take a stab at trying to move the conversation beyond unsubstantiated declarations to some assessment of the actual evidence, starting with the impact of corruption on development.