Economics

The Development Dilemma

Can parking tickets explain why poor countries are poor?

|

Economic Gangsters: Corruption, Violence, and the Poverty of Nations, by Raymond Fisman and Edward Miguel, Princeton: Princeton University Press, 240 pages, $24.95

Many economists think corruption is a rational response to irrational incentives. The World Bank's "Doing Business" database lists 40 countries, from Iraq to Ethiopia, in which legally acquiring the necessary permissions to export a single standard cargo container takes more than one month. The more difficult it is to do something legally, the larger the temptation to do it illegally. Small wonder that in developing countries, few people make more money than customs officials.

If perverse incentives create corruption, that suggests a simple solution to an age-old problem. Hence for the last decade or so the mantra of aid agencies has been "institutions matter"ā€”even if it is not clear what humanitarians are supposed to do with this insight.

There is a popular alternative view that says corrupt countries are corrupt not because the incentives are perverse but because they're stuffed full of crooks, born and bred. In this view, corruption is cultural, and poor countries are poor because their citizens are dishonest (or lazy, or fools).

Into this controversy strode two economists, Raymond Fisman of Columbia and Edward Miguel of Berkeley, with a 2006 research paper that was brilliant and trivial in roughly equal measure. Fisman and Miguel realized that to test the two theories about corruption, you would ideally need to pluck people from all over the world, place them into a community whose laws they could ignore with impunity, then see who cheated and who was honest.

Impossible? Not at all. The United Nations in Manhattan kindly provided guinea pigs for just such an experiment. Diplomatic immunity meant that parking tickets issued to diplomats could not be enforced. The decision to park legally or not, therefore, was a matter of each person's conscience.

Fisman and Miguel found that countries with endemic corruption at home, as measured by the anti-corruption organization Transparency International, were represented by habitual illegal parkers. Chad and Bangladesh, so often near the top of "perceptions of corruption" rankings, produced more than 2,500 violations between them from 1997 to 2005. Squeaky clean Scandinavians, on the other hand, committed only 12 unpaid parking violations, and most of those involved a single criminal mastermind from Finland. On the face of it, this evidence supports the view that poor countries are corrupt because they're full of corrupt people.

Yet incentives clearly matter, too. In 2002, after decades of playing cat and mouse with the United Nations, New York City won much greater power to punish deadbeat diplomats. (The former New York senator and new secretary of state, Hillary Clinton, gets some of the credit for this change. Let's hope the world's diplomats don't hold it against the State Department moving forward.) The city began to tow cars and the State Department deducted fines from the relevant foreign aid budgets. Almost overnight, unpaid violations fell dramatically.

This is sparkling stuff, and the story is enjoyably retold in Fisman and Miguel's slim new volume, Economic Gangsters: Corruption, Violence, and the Poverty of Nations. I recommend the book wholeheartedly; it is engaging and confidently written, and it describes research of genuine interest. Yet while the parking ticket study exemplifies the authors' ingenuity, it also illuminates their limitations. I cannot be the only person to have admired the original research paper, only to put it down, reflect for a moment, and furrow my brow. We learn something about diplomats, but have we really learned something about economic development? I am still trying to make up my mind.

The other chapters employ a similar approach, taking a clever research paper by Fisman, Miguel, or both, and writing it up with an emphasis on storytelling rather than academics. Economic Gangsters tackles two big "institutional" problems of development economicsā€”corruption and violenceā€”through a series of vignettes based on research studying the value of political connections, smuggling between China and Hong Kong, the links between rainfall and civil war, witch killings in Africa, and rebuilding Vietnam after "the American war."

The book is bracketed by introductory and concluding chapters that loosely tie the story together and argue that the big debates about foreign aid and economic development cannot be resolved without careful empirical detective work such as that offered in Economic Gangsters. Summarizing one development controversy, for example, they conclude "both views are reasonable, but for now they're just theories. What we really need are better real-world answers. That's where our research and this book comes in." Such a claim is slightly misleading: While it's true that careful empirical work is needed to resolve these debates, and while it's true that Fisman and Miguel have done careful empirical work, it is not the kind of work that is likely to resolve the big controversies.

The Princeton economist Alan Krueger recently highlighted what he calls "tectonic economics"ā€”research that studies seismic shifts in society. Steven Levitt and John Donahue's infamous research on abortion and crime is the canonical example. Levitt and Donahue concluded that the legalization of abortion had reduced crime rates almost two decades later, presumably by reducing the number of unwanted children. This shift is "tectonic" indeed: a sudden and wrenching legal change that seemed to produce significant consequences many years later.

According to Krueger, those who pursue tectonic economics do so "because of frustration that the randomized and natural experiments often give us a compelling answer but to a narrow question."
Fisman and Miguel, like all economists, try for both compelling answers and big questions. But when forced to choose between precision and scope, they choose precision every time.

That is not necessarily the wrong approach, but it is instructive to compare the young authors with two giants of the field, the charismatic Jeffrey Sachs (surely the world's most famous development economist) and Daron Acemoglu, winner of the rarer-than-the-Nobel John Bates Clark medal, given every other year to an outstanding economist under age 40. (The American Economic Association apparently has decided that the Clark medal is too scarce. In the future it will be awarded every year.) Sachs and Acemoglu approach the question of whether institutions matter in very different ways.

A decade ago, Sachs and two colleagues published research arguing that poor countries are poor in part because of their geographical disadvantages. Tropical climes encourage malaria; poor soil cannot be replenished without expensive fertilizer; potential markets are far away. And tropical, landlocked countries certainly do tend to be poor. Acemoglu took a different view, blaming institutions, not geography, for underdevelopment. The United States was once a developing country too, remote from potential markets. Now it is the market from which everyone else's isolation is measured. Remote Australia and New Zealand are prosperous too. Disease is not a geographical constant but something rich countries can fight; mortality rates in the disease-ridden American cities of the 19th century, for example, were appalling. Something happened to change that, and it clearly wasn't geography.

Acemoglu (with his colleagues Simon Johnson and James Robinson) does not deny that virulent illnesses have made their mark on economic growth. His contention is that they did so centuries ago. Tropical diseases, especially malaria and yellow fever, were so deadly to colonial settlers that the British authorities, under the auspices of the Beauchamp Committee in 1795, decided that Gambia and Southwest Africa were too dangerous even as a dumping ground for convicts. (They were transported to Australia instead.) In a Scottish-led expedition across Africa in the early 19th century, every single European died. Overall, 40 percent to 50 percent of European settlers in Africa passed away within 12 months of arriving.

For locals, these diseases were less dangerous. Acemoglu observes that local troops serving in the British army in India suffered mortality rates similar to those of British troops serving in Britain. But for British troops in India, death rates were five to 10 times greater.

In short, Europeans preferred to settle in the safer climes of what would eventually become Australia, Canada, New Zealand, and the United States. The Pilgrim fathers, for example, planned to travel to Guyana, on the northern borders of Brazil, before deciding that New England would be a wiser choice.

With colonists giving up on tropical territory, European colonial powers decided instead to establish highly exploitative institutions there, calculated to bring as many precious metals, ivory tusks, and slaves as they could in the shortest time possible. The settler-based coloniesā€”New Zealand, Canada, the United States, Australiaā€”eventually became independent, with decent political institutions designed to respect private property and uphold the law. When the tropical economies became independent, their new political systems continued to suck out every cent of short-term gain and funnel it to the men in charge. Since political and economic systems are hard to change, the systems these former colonies have today bear a strong familial resemblance to the systems they had at independence. There are no prizes for guessing which institutions promote economic growth and which encourage corruption and violence.

The contrast between the Sachs/Acemoglu disagreement and the Fisman-Miguel approach is striking. Famous "tectonic" results, such as Levitt's findings on abortion and crime or Acemoglu's study of institutions and settler mortality, are fiercely contested by other researchers. That is not surprising: They are inherently open to challenge because of thescope of the question and the need for sophisticated statistical techniques and careful interpretation of raw data. Nobody is arguing about the statistical analysis performed in the parking ticket paper.

Instead, economists debate whether the behavior of diplomats tells us anything about what we really want to knowā€”that is, how to fight corruption. Fisman and Miguel have their own bottom line: The parking ticket paper shows that "corrupt behavior is deeply engrained in culture and no small matter to root out." That's plausible but surely not proven.

It would be unfair to suggest that Fisman and Miguel are bonsai economists, producing beautiful miniature studies and little else. Their grander ambitions are most obvious in Chapters 5 and 6, in which they lay out evidence that drought or excessive rainfall leads first to famine, then to civil war and to other, more surprising forms of violence, such as witch killings. They convincingly argue that collapses in rural incomes helped trigger violence in Darfur, Chad, and Rwanda.

They then lay out the case for Miguel's brainchild, "Rapid Conflict Prevention Support." RCPS is foreign aid targeted at employing young menā€”the most likely to take up arms in times of famineā€”and providing food to rural families, which are the most likely to kill off helpless old grandmothers and aunts when food is short. RCPS is humanitarian aid, but it aims at prevention rather than cure. Whenever rainfall patterns indicate that famine is ahead, donors send money to head off violence before it starts. And because rainfall cannot be controlled, dictators cannot manipulate it to win a larger flow of foreign aid. Fisman and Miguel believe that Botswana's long record of strong economic growth has been safeguarded by a domestic drought relief program. The idea may or may not be workable on an international scale, but it certainly does not lack ambition.

Overall, though, Fisman and Miguel's research shines a spotlight rather than a floodlight on development problems. Perhaps they're right to do so. Not everyone can be Daron Acemoglu or Steven Levitt, and it is surely better to answer a small question well than to answer a big question poorly.

Taking baby steps is not just a research strategy; it's a development strategy too. The aid skeptic William Easterly has complained that government bureaucracies would rather tackle a large nebulous problem than a small specific problem. Aid agencies' missions have thus crept from things that can be achieved and measured to things that cannot. Easterly dislikes the utopian rhetoric of Jeffrey Sachs and argues that development is better left to local, bottom-up, improvisational efforts that can be rigorously evaluated or (even better) subjected to a market test.

In their final chapter, Fisman and Miguel implicitly endorse Easterly's incrementalist view. They gently chide Sachs' hugely ambitious Millennium Village Projectā€”an effort that funds clinics, schools, new agricultural techniques, and other simultaneous investments in "model villages"ā€”because it has not been set up to allow random evaluations. They advocate the use of randomized trials for small aid projects all over the world. Though this last chapter wanders away from the questions of corruption with which the book started, it is worth reading.

Such evaluation efforts, like the book itself, are necessarily piecemeal. Because a randomized trial offers compelling evidence on what works but not why it works, the lessons from such evaluations tend to be hard to transport to a different context. It is all very frustrating for big-picture aid evangelists, and it isn't much better for those readers who prefer books that offer grand concepts. Economic Gangsters contains none. Whether looking at corruption, smuggling, or outright violence, it is a fractured vision of a fractured worldā€”and all the better for that.

Tim Harford (timharford.com) writes the Undercover Economist column in the Financial Times. His latest book, The Logic of Life: The Rational Economics of an Irrational World (Random House), has just been released in paperback.