Lounsbury: Debt and Corruption

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October 07, 2004

Debt and Corruption

Having neglected serious commentary of late, let me get back in the game with a commentary on this Op Ed, which I rather liked, although not in its entirely. Then let me comment on a recent column from Wolf.

Africa Earned Its Debt
By ROBERT GUEST
Published: October 6, 2004
http://www.nytimes.com/2004/10/06/opinion/06guest.html?oref=login
Johannesburg

When the price of crude oil hit $50 a barrel last week, sending ripples of anxiety around the world, analysts blamed a young Nigerian man with a machine gun and a speedboat. He is Mujahid Dokubo-Asari, a militia boss who is threatening to start a civil war and shut down the Nigerian oil industry, which is the fifth-largest supplier of crude oil to the United States. He will do this, he says, unless his people, the Ijaw, who live on top of Nigeria's oil fields, are granted autonomy. By "autonomy," he means "control of the oil money." Nigerian officials dismiss Mr. Asari as a gangster. But if so, he is a gangster who has friends in the ruling party and is taken seriously enough that Nigeria's president, Olusegun Obasanjo, felt obliged to sit down and negotiate with him last week. Mr. Obasanjo is a well-meaning fellow, but his job is made more difficult because he is surrounded by crooks.

Emphasis added.

This is a fine point to begin reflecting on problems in both developing Africa (and I may add the Middle East and North Africa differ only by a matter of degree - indeed the under-performance of MENA is - taking into account the Med Basin advantages, the vast capital flows, a more or less unified cultural zone) and the remainder of the developing world, and doing business there.

On one hand, behind the facades of fine words and Wilsonian posturing, we have rather more pedestrian realities. Of course, I am sure that naive college students and their anti-globo confreres will spill no small amount of ink about the terrible exploitation of the Ijaw people by the evil global oil system, multinationals and as a second order, local government - while naively loinizing the "Resistance."

Now, that is not to say that the comportment of the oil majors in Nigeria is something to sing to the heavens of Free Markets about, although the reality is that Nigeria is a festering sore where it is close to impossible to do normal business (where else can you hear a colleague tell you about his supertanker being stolen right out of the port.... It does have its amusing aspect), and it is hardly the multinationals or hte oil majors that "made" Nigerian public culture so irredemiably corrupt, however gauche it is to highlight the reality of the local drivers of corruption, of which foreign money is merely a pretext and to an extent oil for the machine.

I note, in passing, that I do not deny nor minimize the negative influences of both colonial history and western support for corrupt regimes of utility. However, at this date, the reality is that the main drivers of corruption are not foreign influences - nor even really colonial history for all that I am well aware that the manners of colonial rule helped lay the ground work for the local bad habits, but note, helped not created whole cloth - but rather local rent seeking behaviour.

Or as our writer notes
Nigeria, like much of Africa, ought to be rich but is miserably poor. The main reason is that rather than striving to create an environment in which their people can freely seek prosperity and happiness, most African governments have chosen instead to rob them. This culture of criminality has spread throughout the ruling class, down to the Nigerian border guard who threatened to beat up my driver last month if I didn't give him a dollar, to the bribe-hungry Cameroonian police officers who stopped a truck I was riding in 47 times in 300 miles.

Rents. Little extractions that make almost all economic activity a death by a thousand cuts.

Now of course Central Africa beats all records - well not all records, but certainly as a region it gets the average in the top three.

This corruption makes it hard to do business in Africa. Manufacturers need smooth roads, reliable electricity and efficient ports. But too often in Africa, the roads are craterous because someone has looted the maintenance budget, the power fails because the state monopoly utility company is staffed with politicians' idiot cousins, and the customs officers hang onto your goods for weeks in the hope that you will bribe them to hurry up. In only two African countries - South Africa and Botswana - is it relatively easy to do business, a recent World Bank study found. For bright, energetic Africans, it is often easier to get rich by joining the government than by creating honest wealth.

The last is the most important. The diversion of talent and effort.

That is why the debt relief proposal debated over the weekend in Washington by officials from the World Bank, the International Monetary Fund and the Group of 7 nations would be not be a panacea for Africa. Faster debt relief is a good idea for countries with relatively clean, pragmatic governments that pursue sensible economic policies, like Mozambique and Uganda. But debt relief cannot help the worst-governed countries like Zimbabwe and Angola because their leaders are likely to squander the money it frees up. In those places, extra cash props up despots.

Indeed, indeed it does.

Of course the differences are matters of degree, and no situation is perfect. Nevertheless, a Uganda presents an opportunity, whereas Angola is and as long as it has oil will probably remain an utter mess.

The author notes that This is a more complex picture than many debt-relief campaigners will admit. It may be, as Oxfam complains, that Zambia cannot hire enough teachers because the monetary fund has told its government not to run too large a budget deficit. But that is not the whole story. The main reason Zambia is bankrupt is that it has been ruled with startling incompetence and venality; for example, its previous president, Frederick Chiluba, is facing multiple charges of embezzlement.

I may add that besides the debt relief campaigners there are the ignorant, simple minded anti globos like Naomi Klein (an article of whose was recently cited in comments, I should have a response if I can find the restraint to do so), who always place the responsibility for sin on the shoulders of the outsiders.

Removing all outside economic or political interaction would not change Nigeria nor Zambia.

Indeed, I agree wholly with the author:
Outsiders cannot fundamentally change the way Africa is governed. That is a task for Africans themselves, and some are rising to the challenge. In Nigeria, President Obasanjo has hired a team of technocrats to curb corruption by making the public accounts more transparent. They are doing their best, but one of them told me that probably no more than one powerful Nigerian in 20 supports the clean-up. That in a nutshell is why Africans are poor: their leaders keep them that way.

While perhaps moderately too strong as a statement, I think this largely correct. That is not to whitewash the past, nor claim this is solely the fault of the Africans (or the Middle East, whose problems resemble sub-Saharan Africa to too many extents), but rather recognize that the current core drivers for the problems are really truly local ones.

Now for Wolf.

Martin Wolf: Sweep away the barriers to growth
By Martin Wolf
Published: October 5 2004 19:54 | Last updated: October 5 2004 19:54

It takes 200 days to register a new business in Haiti and just two in Australia. This contrast perfectly encapsulates the gulf between one of the world's poorest countries and one of the richest. A sophisticated market economy is a uniquely powerful engine of prosperity. Yet, in far too many poor countries, the law's delays and the insolence of office prevent desperately needed improvements in economic performance.

I note that this is often one of the faces of corruption. Rules to "protect" consumers, workers etc. in these environments rather frequently (if not always) becomes means of extracting rents in corrupt environments, something the naive leftists of the anti-globo movement either do not understand or can not bring themselves to grasp.

That makes this year's "World Development Report" among the most important the World Bank has ever produced. It is about how to make market economies work. This grand theme is hidden in the less than racy phrase "investment climate".* The arguments and evidence are as wide-ranging as the theme. The report is based on two big research projects: surveys of the investment climate that now cover 26,000 businesses in 53 countries; and the "doing business" project, which identifies obstacles to business in 130 countries. The result is a fascinating document.

The argument starts with growth. As the report rightly notes: "With rising populations, economic growth is the only sustainable mechanism for increasing a society's standard of living." Happily, "investment climate improvements in China and India have driven the greatest reductions in poverty the world has ever seen." As the report shows, the benefits of reform have not been restricted to these two giants, important though their success is. In China and India, the share of private investment in gross domestic product doubled between 1990 and the end of the decade, as the impact of reforms spread, with dramatic effects on poverty levels (see charts). But the same was also true for Uganda.

A good climate not only raises private investment. It also provides a spur to productivity by inducing businesses to develop, adapt and adopt better ways of doing things. Moreover, the report stresses, the investment climate does not matter only - or even mainly - for foreign investors. On the contrary, domestic capital formation is far more important than foreign investment. Fortunately, the right environment for one is also the right environment for the other.

Well, while I largely agree with the comment, I do note that this does suggest the pure export oriented "off-shoring" schemes like those of Tunisia may be more problematic than I have considered in the past insofar as local capital development is not going to get the right incentives. It also highlights the error of setting up one stop shops and the like with a primarily FDI focus - I think I have shared the anectdote of a Jordanian businessman telling me how he found it easier being a "foreign investor" in his own country by domiciling in Dubai than operating directly out of his home country.

Governmental failure is the most important obstacle business faces. Inadequate enforcement of contracts, inappropriate regulations, corruption, rampant crime and unreliable infrastructure can cost 25 per cent of sales (see chart). This is more than three times what businesses typically pay in taxes. Similarly, when asked to enumerate the obstacles they face, businesses list policy uncertainty, macroeconomic instability, taxes and corruption at the head of the list. What do these have in common? Incompetence and malfeasance by governments is again the answer.

I might put it as "one of the most important" but certainly inability to enforce contracts and corrupt regulating are key obstacles - and not in any way trivial.

What then is to be done? The report stresses, rightly, that a better investment climate is not necessarily the one business wants. Incumbents want neither taxes nor regulations but do desire barriers to new competitors. Yet taxes are needed to finance the activities of the state, while regulation is required to curb environmental or other damage. Moreover, competition is the engine of progress. What companies want is, in short, often the opposite of what the economy needs.

Now the above is I think a fine and moderate observation (although painful). Too often in these discussions we get some extreme libertarian assertion regarding the evil of the State rather a rather more pragmatic view. The real key is quality.

Of course, how to achieve quality is a key question. Regulation that actually does curb environmental damage and protect what we might, to remove the fuzzy wuzzy aspects, 'physical operating environment' is a good investment - may even be long term profitable. Regulation that becomes nothing but a sad excuse to extract rents is not.

In many developing countries, the requirement is not less government but more and better directed government. What does this involve? Four requirements are listed: a reduction in the "rent-seeking" that affects all countries but mars developing countries to an extreme extent; credibility in the making and execution of policy; the fostering of public trust and legitimacy; and the tailoring of policy responses to what works in local conditions.

Bingo.

One of the conclusions the report rightly draws from this list is that reform is not a one-off event but a process. What is involved is not just discrete and well-known policy changes (such as lower tariffs) but the fine-tuning of policy and the evolution of institutions. This is why, it suggests, the credibility of the government's journey, as in China, may be more important than the details of policy at each stage along the way.

In particular, the last phrase is important. The credibility of the journey rather than the precise changes, at some stage.

Turning these broad objectives into specific policy is a tricky business. The Bank describes its core recommendation as "delivering the basics". These are: stability and security, which includes protection of property (see chart), facilitating contract enforcement, curbing crime and compensating for expropriation; better regulation and taxation, which means focusing intervention where it is needed, broadening the tax base and lowering tax rates, and reducing barriers to trade; better finance and infrastructure, which requires both more competition and better regulation; and transforming labour market regulation, to foster skills, while avoiding the counterproductive interventions that so often destroy employment in the formal sector.

The last point is particularly important, for once again what generates the most frustration on my part is when I see the anti-globo crowd blithering on about 'fair trade' and proper protections, in utter ignorance of the reality of dual economies and the informal versus the formal. They make, in other words, the Perfect the enemy of the Good. Less than ideal conditions, rules, regulations, but ones genuinely sustainable across the economy (whichever one in question) are far preferable to ideal rights that only a few large marquee firms can sustain.

The report also examines the role of international institutions and donors. It points, rightly, to the enhancement of credibility that international agreements can bring. This is one of the big arguments for the World Trade Organisation and for agreement on a multilateral accord on investment. But there are also risks. Inappropriate harmonisation of standards is one. The world's wealthy countries can also help by lifting their many barriers to imports from developing countries and by targeting aid on improving the investment climate.

This report succeeds in describing what is the core agenda for development. That is why it is so important. But at its heart is a dilemma that the Bank cannot directly address. Brutal, corrupt or incompetent states prevent businesses from operating in the wider interest. Too often, governments not only fail to provide the services the economy needs but add arbitrary and counterproductive interference. Yet strong government is essential: without it, one has anarchy.

Governments then are both the disease and the cure. This is why development is so hard and so slow. The big advance is in the richness of our understanding of what makes an economy thrive. But that understanding also demonstrates the difficulties. The Bank's recognition of the nature of the disease is at least a first step towards the cure.

Well, I will close in saying I am not sure the last is the case, but one hopes it may be.

October 07, 2004

Debt and Corruption

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