Tag Archives: privatization

From the Permit Raj to the Billionaire Raj: Corruption, Liberalization, and Income Inequality in India

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For over a year, tens of thousands of Indian farmers camped on the highways of New Delhi in protest of three new agricultural laws heralded by Prime Minister Narendra Modi. Those laws proposed a national framework for liberalizing the country’s heavily-regulated agricultural markets, allowing farmers to sell their crop yields on the private market rather than selling at fixed prices in government-regulated wholesale markets. While Modi and other proponents of the laws argued that these regulated markets failed to improve farmers’ livelihoods and were rife with corruption, opponents feared that the laws would create an unregulated free market dominated by large, exploitative corporations. On September 5, the protests against the laws culminated in a mass rally of over half a million farmers. Two months later, Modi announced that he would be repealing the laws, a stunning public reversal that few had expected from the ordinarily unyielding Prime Minister. 

To put these most recent developments in a broader context, the dispute over the farm laws showcases a debate over liberalization and deregulation in India that has been raging for more than half a century. It is a story not only of competing visions for the country’s economy, but also of the deep interrelation between corruption and income inequality. As the agriculture fight demonstrates, liberalization has been offered as a mechanism to solve both problems. But a closer look at India’s experience with liberalization complicates this theory. Liberalization may have helped fuel the country’s precipitous economic rise, but it only further exacerbated income inequality while further entrenching the systems of corruption that favor the country’s wealthy elite. At best, unchecked liberalization in India has simply repackaged corruption in new forms; at worst, it has allowed corruption to flourish.

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Keep the Dogmatic Privatization Argument Out of Style

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It used to be trendy to talk about privatization as the solution for corruption. The World Bank, for example, declared back in 1997 that “any reform that increases the competitiveness of the economy will reduce incentives for corrupt behavior. Thus policies that lower controls on foreign trade, remove entry barriers to private industry, and privatize state firms in a way that ensures competition will all support the fight [against corruption].” (See also here, here, and here.) Although this theory declined rapidly after its peak in the 1990s, anticorruption policy ideas, like fashion, seem to be cyclical. Even as the privatization dogma has become démodé in Western anticorruption circles, it has gained new life elsewhere. As “privatization as a solution to corruption” debates reemerge in India and the Philippines, it’s worth reexamining the flaws in such policy proposals that made them fall out of favor twenty years ago.

The logic behind the idea that privatization inherently(or at least usually)decreases corruption is the notion that private shareholders are more interested than government bureaucrats in the efficient usage of whatever resources they control, and are therefore more likely to crack down on corruption. Relatedly, competition in the private market should favor those entities that can provide a service most efficiently—and if graft is inefficient, as many believe, market competition should drive corruption down. On top of this, private organizations also reduce corruption by offering more competitive wages, which means that employees aren’t forced to turn to corrupt means to supplement their incomes.

That’s the theory. The problem is that it isn’t supported by empirical evidence. Starting in the early 2000s and continuing well into the present, scholarship examining the aftermath of the privatization wave of the 1990s has repeatedly found that privatization has been largely unhelpful, and in some cases outright detrimental, to efforts to bring corruption under control (see here, here, here, here, here and here, to cite but a few sources). Why is this? Three main problems stand out:

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Lebanon Disaster Update: An Excellent and Disturbing OCCRP Report Sheds New Light on the Backstory of the Deadly Explosion

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A couple of weeks ago, I did a short post in reaction to the deadly warehouse explosion in Beirut, which killed at least 182 people, wounded thousands, and left hundreds of thousands homeless. My post wasn’t really about the Lebanon blast per se—especially because the causes of the explosion, and the role that corruption may have played, were unclear—but rather discussed more generally the direct and indirect ways that widespread corruption can increase the risk of deadly accidents. But I continue to wonder whether, with respect to the Beirut tragedy, it will turn out that corruption (rather than “mere” incompetence) will have been a contributing cause.

We still don’t have all the answers—particularly with respect to the decision-making process within Lebanon itself—but thanks to excellent investigative reporting by an international team of journalists with the Organized Crime and Corruption Reporting Project (OCCRP), we now have a great deal more information about the shadowy and highly suspicious backstory of the abandoned ship that brought the ammonium nitrate to Beirut in the first place. I don’t think I can do the report justice, but I highly recommend that everyone read it—it’s available here. And to give you a sense of what’s in it, I’ll just quote the main findings summarized at the beginning of the report: Continue reading →

Western Anticorruption Policy in Ukraine: Success or Failure?

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A few weeks back, I came across an interesting point-counterpoint on the impact of Western-backed efforts to promote anticorruption reform in Ukraine. On one side we have an online piece in Foreign Affairs by Adrian Karatnycky (the Managing Partner of a consulting firm that “works with investors and corporations seeking entry into the complex but lucrative emerging markets of Ukraine and Eastern Europe”) and Alexander Motyl (Professor of Political Science at Rutgers University) entitled, “How Western Anticorruption Policy Is Failing Ukraine.” And then on the other side we have a response piece on the Atlantic Council blog from Daria Kaleniuk (Executive Director of the Anti-Corruption Action Centre in Kyiv) entitled “Actually, the West’s Anticorruption Policy Is Spot on.” I’m no Ukraine expert, and so I’m reluctant to take a strong position on which side has the better of the argument, but I found the debate interesting not only for its implications for Ukraine, but also because it raises a couple of more general issues that come up in many other contexts, issues that anticorruption advocates should pay attention to even if they have no particular interest in Ukraine. Those issues are, first, a question of messaging—what I’ll call the glass-half-full/glass-half-empty question—and, second, the relative importance of holding individual wrongdoers personally (and criminally) accountable for corrupt conduct.

Let me first try to give a flavor of the debate, and then say a bit about each of those two issues. Continue reading →

Guest Post: Living in a Kleptocracy–What to Expect Under President Trump

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Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:

The news regarding President Donald Trump appointments and nominations, and the increase in foreign governments’ business at Trump properties, has caused considerable concern regarding possible conflicts of interest, nepotism, insider trading, and other types of grand corruption. Many are worried about what this means—if President Trump’s tendencies toward crony capitalism, or quasi-kleptocracy, are as serious as his critics fear, what can we expect will happen over the next four or eight years?

While grand corruption among the political elite may be new for US citizens, this challenge is all too familiar in many other parts of the world. As a long-time resident of Mexico and corruption scholar, I have some insight regarding life in a relatively corrupt environment, which might be relevant to what the US is about to face: Continue reading →

How Prisons Corrupt – And What To Do About It

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In May 2014, Kelvin Melton orchestrated a kidnapping scheme. The perpetrators assaulted the victim with a stun gun, took him from his home, and sent texts to his family demanding ransom. Throughout this time, Melton continued to give instructions to the kidnappers via cell phone. Fortunately, law enforcement was able to thwart the plot and recuse the victim. These facts alone make for a gripping crime. But the story had an extra twist: Melton, the mastermind behind the kidnapping, was in a prison cell the entire time, serving a life sentence for assault with a deadly weapon with intent to kill; the target of the kidnapping scheme was the father of the prosecutor who put Melton behind bars. Melton was able to orchestrate the crime while behind bars because he had been able to obtain a contraband cell phone from a guard.

While the facts of this case are sensational, the phenomenon of inmates corrupting prison guards in order to obtain contraband is far from unusual. In the wake of Melton’s crime, the FBI launched a new program—Operation Ghost Guard—to root out corruption by correctional officers. The first major case out of the program came in 2016, when the FBI indicted nearly 50 former and current correctional officers for accepting bribes from inmates in exchange for contraband. Over the course of a two-year undercover investigation, federal officials learned how inmates and guards in Georgia formed their own crime syndicate. Guards would bring in liquor, tobacco, and cell phones in exchange for thousands in bribe money. Inmates, in turn, would use the cell phones to commit wire fraud, money laundering, and identity theft. Outside of the prison, guards were using their badges to facilitate drug deals. The United States Attorney for the Northern District of Georgia called the levels of corruption “staggering.” And Georgia is not alone; New York state prison officials are currently under investigation by the FBI as well.

The issue of prison corruption is not unique to the U.S. Prior posts on this blog have explored how Brazilian inmates were able to bribe guards in order to facilitate large-scale drug and weapons trading within the complex, and how incarcerated drug lords in the Philippines bought off guards in order to live in comparative luxury behind bars. In the United Kingdom, the widespread practice of bribes in exchange for drugs or cell phones led the penal system to be called “institutionally corrupt” by a report issued by the country’s own Metropolitan police. How do these acts of corruption come about in the first place? And what can we do about them? In her earlier post on prison corruption in the Philippines, Bea Paterno focused on the need for better monitoring and oversight. That’s surely part of the solution, but we also need to pay attention to other aspects of the prison environment, including the guards’ working conditions and the ways in which they interact with inmates. Continue reading →

Welcome (Back) to The Jungle: Why Privatization of Meat Inspections Will Increase Corruption and Threaten Food Safety

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Over a century ago, the tales of squalid meat production in Upton Sinclair’s famous novel The Jungle shocked the United States, contributing to a public outcry that ultimately led to regulations requiring a government inspector to examine every single meat carcass intended for human consumption. The U.S. Department of Agriculture’s FSIS (Food Safety Inspection Service) is responsible for the inspection regime. The established assessment program requires multiple FSIS inspectors to be on-site, performing a process of continual, carcass-by-carcass inspection during slaughter. The system is far from perfect and has never been a stranger to scandal (see here, here, and here). Yet it has been seen as vital to safeguarding public health from foodborne illnesses, including e.coli and salmonella outbreaks. It is also backed by a robust legal regime designed to insulate the inspectors from bribery and other forms of improper influence.

Unfortunately, throughout its history, FSIS has faced pressure to favor in-house inspectors over government inspectors in the name of creating a “flexible, more efficient” system. The most recent experiment with limiting the role of FSIS inspectors is HIMP (Hazard Analysis and Critical Control Point-Based Inspection Management Program), a program being piloted in a handful of pork plants and set to be proposed as a final regulation soon. (The related New Poultry Inspection System is being phased in now despite legal challenges.) HIMP uses in-house staff to conduct most of the inspections, particularly early on. A limited number of FSIS personnel do paperwork oversight and spot checks at particular points on the line.

However one chooses to balance competing calls for efficiency and safety, this is a short-sighted idea. Government inspectors and regulatory personnel are not perfect, but they are covered by anti-bribery laws and whistleblower protections that in-house inspectors are not, making them a safer bet for the safety of the meat supply. Filth and disease garner headlines, but civil society should continue to fight for an active role for government inspectors for another reason—public corruption is easier to fight than private influence. Even if one agrees that government inspectors are less efficient (a questionable proposition, despite how often it’s repeated), there are a number of laws and regulations in place designed to prevent (or expose) the corruption of these inspectors by the meat industry; there is no comparable regulatory regime in place to prevent equivalent corruption, or other forms of more subtle improper influence, from distorting the decisions of in-house private inspectors. Consider a few key areas of separation:

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Corruption and Liberalization: Two Paradoxes

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Some aspects of a comprehensive anticorruption strategy are specifically targeted at corruption itself. But sometimes it makes sense to consider how broader political or economic reforms might ameliorate or exacerbate the corruption problem. Indeed, fighting corruption is often invoked – perhaps sincerely, perhaps strategically – as a justification for more general political and economic liberalization. But the relationship between political and economic liberalization, on the one hand, and corruption, on the other, is complicated, and beset by two seeming paradoxes:

Here’s the first paradox: On the one hand, longstanding democracies seem to have lower levels of corruption than do non-democracies. However, the process of democratization – the introduction of democratic reforms, along with a general liberalization of the political system – often seems associated with a significant increase in corruption. Indeed, countries going through democratic transitions, or those that have been democratic for a shorter time, seem not only to have more corruption than established democracies, but also to have worse corruption problems, on average, than non-democracies.

The second paradox, on the economic side, is similar: Some research suggests that more open economies – with more market competition, fewer state-owned enterprises, and less central economic planning – have lower levels of corruption than more statist economies. (This should not be overstated: it’s not that more regulation always increases corruption, nor is there convincing evidence that “bigger” governments, measured by the size of the public sector relative to GNP, have more corruption. Still, the balance of the evidence suggests that more open, liberal economies have less severe corruption than more statist economies.) However, the process of economic liberalization—including privatization, deregulation, etc.—often appears associated with an increase, often a dramatic increase, in corruption.

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Klitgaard’s Misleading “Corruption Formula”

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I guess I’m engaging in the “ritual slaying of the elders” in which professors often indulge. Having gone after Paolo Mauro in an earlier post, here I want to take on (a small part) of Robert Klitgaard’s work.

Klitgaard, who is one of the giants of academic anticorruption research over the last half-century, once pithily (and influentially) summed up his perspective on the causes of corruption in a “corruption formula”: C = M + D – A, or (to put this back into words): “Corruption equals monopoly plus discretion minus accountability.”  (The formula originally appeared in Klitgaard’s 1975 1988 book, Controlling Corruption.  You can find a more recent version here.)  Much as I respect Klitgaard’s work, I think this anticorruption “formula” is not merely trite, but affirmatively misleading and therefore dangerous.

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Update from Mexico: PEMEX Reform, Private Investment, and the Government’s Anti-Corruption Gamble

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Two days before the Mexican government unveiled draft regulations for its ambitious opening of the state-run energy sector to private participation late last month, Oscar-winning director Alfonso Cuarón published a letter posing ten questions to Mexican President Enrique Peña Nieto.  “The reform will result in multimillion-dollar contracts” for private companies, wrote Cuarón. “In a country such as ours with a weak (and often nonexistent) rule of law, how can large-scale corruption be avoided?”  To the surprise of some, the President’s office issued a point-by-point response just a week later, naming a spectrum of anti-corruption measures adopted in the new regulations such as public bidding and agreements, disclosure of contractor expenses, a commissioner code of ethics, and institutional and procedural checks and balances unified under the oversight of the Secretary of Energy.  (Full text in Spanish here.)

The project to reform Mexico’s energy sector – particularly the state oil company PEMEX, which generates one-third of all government revenue and is bestowed of both a powerful workers union and tremendous symbolic importance in Mexican history – was always going to be controversial.  President Peña Nieto’s success in getting the law passed in December 2013 has been his signature achievement, lauded by the Washington Post as turning Mexico into “the Latin oil producer to watch — and a model of how democracy can serve a developing country.”

But both critics and many supporters of the reform recognize that corruption is an elephant in the room. Continue reading →