The Consequences of Zero Tolerance

The chart above shows what happens when policy is based on a slogan. In this case “Zero Tolerance.” Procurement rules in both Peru and Colombia require that any public contract tainted by corruption be terminated immediately. As the Brazilian investigation into construction giant Odebrecht unfolded, it became clear that many projects to build highways, power plants, and other infrastructure projects in the two countries had been corruptly awarded.  Authorities in both countries then did what the law told them they must: cancel the contracts.

Most large infrastructure contracts in Peru and Colombia are in the form of Public-Private Partnerships (PPPs), and the immediate termination of a PPP can be enormously costly.  Not only to the firms that paid bribes to secure the contract, but to lenders, suppliers, and the hundreds of other contractors on the project who had no knowledge or involvement in the bribery scheme.  The greatest costs are likely be felt by the citizens of Colombia and Peru.  For as the chart shows, the consequence of zero tolerance is a halt to new spending for roads, power, and other essential facilities as investors and project developers shy away from the risk future contracts will be terminated for the tiniest of infractions by anyone associated with the project.   

Colombians and Peruvians may today be proud their governments are so tough on corruption neither one will tolerate a speck of it in any contract for infrastructure.  Tomorrow citizens of the two countries may have a different view: when power shortages mean the lights won’t come on and the failure to build new roads and maintain old ones produces horrendous traffic jams.  

Last week the World Bank hosted a presentation by Inter-American Development Bank staff where the issue of why “zero tolerance” is a good slogan but a bad policy was examined and means for addressing infrastructure corruption without producing the results shown in the chart was discussed.  A paper the IDB presenters recently published, the source of the figure above and the basis of their presentation, is here.   A video of the session here.  

The Guiding Principle for Anticorruption Policy Should Be Cost-Effectiveness, Not “Zero Tolerance”

In 2015, following indications that a few Canadian Senators had been using government money for disallowed personal expenses, the Canadian government launched a major investigation that cost approximately $23 million—but led to no convictions, and exposed corruption that cost the government less than $1 million. To many, me included, this seems like overkill, even if we acknowledge that corruption is a serious problem. Yet the “zero tolerance” ethos that motivated the Canadian Senate’s investigation is widely embraced. As previous posts have pointed out, zero tolerance policies fail to account for the fact that corruption might be expensive to root out, and that the extraordinary expenditures required to reduce corruption closer to zero might not, after a certain point, be justified.

This does not mean that corruption is good. But the efficient amount for the government to invest in corruption-reduction—which in turn determines the amount of corruption that will prevail—is that for which, as an economist would put it, marginal benefit equals marginal cost. Or to put this another way, “tolerance” of some corruption is efficient (and appropriate) once the costs of achieving further reductions in corruption are greater than the costs of the corruption that would be eliminated by those additional efforts.

The right amount of corruption, therefore, is probably not zero. Existing anticorruption policies neglect this point, leading to inefficient spending like that on the Canadian Senate probe. With that understanding, how can anticorruption policy be targeted to get the biggest bang for the buck?

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Chill Out: Fine-Tuning Anticorruption Initiatives to Decrease Their Chilling Effect

Who is “harmed” by aggressive anticorruption crackdowns? The most obvious answer is corrupt bureaucrats, shady contractors, and those who benefit from illicit flows of money. And while there are concerns about political bias and other forms of discrimination in the selection of targets, in general most of us rightly shed few tears for corrupt public officials and those who benefit from their illicit acts. But aggressive anticorruption crackdowns may have an important indirect cost: they may have a chilling effect on legitimate, socially beneficial behavior, such as public and private investment in economically productive activities. Although chilling effects are often discussed in other areas, such as with First Amendment rights in the United States, there is little discussion of it in the anticorruption context. That should change.

For example, in Indonesia, recent efforts to crack down on corruption appear to have stunted simultaneous measures to grow the economy through fiscal stimulus. As this Reuters article relates, “Indonesian bureaucrats are holding off spending billions of dollars on everything from schools and clinics to garbage trucks and parking meters, fearful that any major expenditure could come under the scanner of fervent anti-corruption fighters.” Nor is Indonesia the only example. In April 2014, Bank of America estimated that China’s corruption crackdown would cost the Chinese economy approximately $100 billion that year. One can challenge that estimate (as Matthew has discussed with respect to other figures used in reports on the cost of China’s anticorruption drive), but the more general notion that aggressive anticorruption enforcement can have a chilling effect on both public and private investment, which in turn can have negative macroeconomic impacts, is harder to rebut.

Taking this chilling effect seriously does not imply the view that corruption is an “efficient grease” or otherwise economically beneficial. The point, rather, is that although corruption is bad, aggressive measures to punish corruption may deter not only corrupt activities (which we want to deter) but also legitimate activities that might entail corruption risks, or be misconstrued as corruption. So, if we think that corruption is bad but that anticorruption enforcement might have an undesirable chilling effect, what should we do? Continue reading

Violence Is Not the Answer: The Case Against Rodrigo Duterte

The life of Rodrigo Duterte, mayor of Davao City in the southern Philippines, reads more like that of a mob boss than a mayor. The National Bureau of Investigation (NBI) has investigated Duterte for his alleged links to a vigilante group called the Davao Death Squad (ties he later admitted), as well as threats made to kill village chiefs who did not support his government programs. He has expressed his support for extrajudicial killings as a means to fight corruption and crime. And in case you don’t think he’s serious, suspects have turned up dead after Duterte issued an ultimatum to all drug dealers to either leave his city within 48 hours or be killed. The man is rumored to have pushed a drug dealer out of a moving helicopter, and has openly stated that he would like to kill all criminals himself and throw them into Manila Bay. The most terrifying thing about him? He’s running for President, and he’s winning.

Duterte’s success can be explained by a number of factors, but one of the most troubling reasons for his popularity is that Filipinos have become so disillusioned by corruption in politics that they’ve become attracted to dangerous, zero tolerance policies. Duterte has stated that he would like to bring back the death penalty for the crime of plunder, and while he back-pedaled on his support for extrajudicial killings in the last presidential debate, Duterte still admits to having killed in the past, with a new ominous and unclear caveat: “It’s always bloody, but I never said extrajudicial.”

The popularity of these extreme policies reflects how frustrated citizens are with corruption in the Philippines. Corruption is incredibly widespread, and plagues the country’s politics, courts, and police forces at the local and national levels. Many voters view Duterte’s approach as necessary to combat this immense problem, which persists despite years of promises from many so-called anticorruption candidates.

While I understand this frustration with Philippine corruption, Duterte’s zero-tolerance approach is short-sighted, misguided, and incredibly dangerous. As voters prepare for the election next month, they should consider the troubling implications of Duterte’s violent approach to the fight against corruption.

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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.

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What Does “Zero Tolerance” of Corruption Mean? A Comment on Labelle

Rick’s last couple of posts (here and here) critiqued Bill Gates’ claim that, because corruption in development aid projects as relatively small-scale (allegedly around 2%), it’s therefore a manageable “tax” on aid. Rick asserted (correctly, in my view) that the corruption problem is much bigger, and that the 2% figure is essentially a made-up number. Over at the Huffington Post, Huguette Labelle, the Chair of Transparency International, also responds to Gates. Most of what she says is pretty standard (which doesn’t mean it’s not right). But near the end of her post, she takes a striking position that’s worth thinking about a bit more critically: She argues forcefully against “[a]ccepting low levels of corruption as a pragmatic fact of life,” and instead advocates “[z]ero-tolerance for corruption.” This is quite different from Rick’s argument; Rick pointed out that corruption in development aid projects is not in fact low-level. But Ms. Labelle’s “zero tolerance” stance implies that even if Bill Gates were right about the facts, he would still be wrong in his conclusions. “Zero tolerance” of corruption certainly sounds good. But what exactly does it mean? Continue reading