Corruption and Governance – How Are They Related? Case Studies of Four Countries

Introduction

Having worked in 45 countries, I have seen many of the forms that corruption and governance take. It is a fascinating and complex topic. I believe my review of four countries I know well (Argentina, China, Myanmar and the United States) will add understanding.

How do I define corruption? Doing something for pay that goes against the interests of your organization. For example, if you are the procurement officer in a major newspaper, buying second-quality paper for a kickback would qualify as corruption. If you are a politician, getting paid or “receiving favors” for some act that does not reflect the interests of the citizens you represent would qualify. Corruption is a worldwide vice. Like drinking, drugs, and sex, it happens everywhere.

What’s the difference between good and bad governance? Tricky. I am tempted to say that good governance means political decisions reflect the will of the people. But what if the people are poorly informed? Perhaps it means political decisions reflect the interests of the people. One thing I am sure of: the quality of governance does not depend on whether the country is a dictatorship or democracy. In fact, the conditions for democracy to work exist in very few countries. So I do not agree with Churchill’s famous quotation:  It has been said that democracy is the worst form of government except all the others that have been tried. It all depends.

Myanmar

What has happened in Myanmar is tragic. It is a country blessed with abundant natural resources, and at one time was a center of cultural and academic excellence. Rangoon University was the most prestigious university in Southest Asia in the 1940s and 1950s. But the country has lost a generation that will never be made up. What happened?

Since Myanmar won independence from the British in 1948, it has been governed by the military with a few brief episodes of democracy. In 1990, Aung San Sui Kyi was elected Prime Minister but the military government would not allow her to take her position. For most of the time since then, she has been other house arrest. There was no justification for what the government did aside from wanting to stay in power (the government would argue that a firm hand is needed because of the large number of conflicting minorities in northern part of the country).

It is troubling that in the ensuing 20 years, Aung San Sui Kyi (the daughter of Aung San who founded the Burmese Army and negotiated the country’s independence from England) and the military leaders could not find some way out of this mess. I had businesses in Myanmar in the 1995 – 2004 period and always believed the standoff would be resolved. After all, this was little more than a squabble between the elite military families of the country.

But instead, the government has done as much to hurt its citizens short of genocide (Cambodia, China, and Russia) as any government ever. Of course, the government aggressively suppresses its critics. But many countries do this. What makes Myanmar’s government unique are the steps it has taken to keep its citizens uneducated. This includes removing books from libraries and controlling the books and magazines allowed in the country. But more importantly, the government has stricter controls on Internet access than any country in the world. The result is the citizens of Myanmar are uninformed – at least a generation has been lost. Young people have become superficial, disoriented and lazy.

What has happened is somewhat reminiscent of Mao’s Cultural Revolution in China. But the Cultural Revolution only lasted 3 years!

The destructive standoff in Myanmar is now in its 21st year. It is hard to see how governance in Myanmar could be any worse. And China, wanting to draw on Myanmar’s natural resources, is enabling the standoff to continue.

Of course there is corruption in Myanmar. But it does not take the extreme form it has taken elsewhere, e.g., the Duvaliers’ use of the Régie du Tabac to rape Haiti. By now, the leaders have undoubtedly collected significant sums illegally, but they continue to live quite modest lives.

China

One historic point about China has to be understood: it has held together as a civilization for 2,000 years: that includes Tibet, Macau, Hong Kong, and Taiwan. Any attempt to remove any part of China from the country will be strongly resisted by the government and people.

China is quite different than Myanmar. There are some limits on how critical one can be of the government, but a dissident really has to “work on it” to get sent to jail. Starting in 1990, I had a Chinese partner, Dr. Zhu Jia-Ming. He left China in 1989 because his boss, a senior Chinese government official, was placed under house arrest (he had been too supportive of the Tiananmen students). In the early 90’s, we created Green China, a US NGO with the objecting of increasing the dialogue on the trade-offs between economic growth and environmental preservation in China. That gave me the opportunity to travel throughout China.

For a number of years, my partner was the leader of the international human rights movement for China. In the late 1990’s, he resigned, believing that China’s human rights issues would be resolved internally. He went to business school (Sloan at MIT), and shortly thereafter, we started a company with other Chinese partners.

Since Mao’s Cultural Revolution referenced above, the Chinese government has done everything it can to insure its citizens know what is happening in the world. Of course the government wants to stay in power, and allowing its citizens open access to information could at some point threaten its continued dominance. But the “genie is out of the bottle”, and there is no way the Party can block its citizens from knowing what is going on in the rest of the world.

What is the major difference between the leaders of China and Myanmar? In Myanmar, the government does not care what the people think; it will do everything it can to remain in power. In China, the Communist Party wants to remain in power, but knows this depends on doing things that makes its citizens better off.

Senior Chinese Government officials are for the most part very well-trained – the Central bank, Ministry of Finance, and the Environmental Protection Ministry, are all headed by professionals.

China is most certainly not a democracy – the Party rules. But the Party works to please its citizens. And because it is not a democracy, the Government can get things done in a hurry, like:

  • an interstate highway system for the entire country built in less than a decade;
  • a subway system for Shanghai in about 12 months, and
  • 42 high-speed rail lines recently opened; with average speeds of up to 215 miles per hour, it takes a little more than 3 hours to get from Guangzhou to Wuhan (664 miles).

India is a democracy, and this puts it at a significant competitive disadvantage to China.

In short, I give the Chinese Communist Party a high mark for governance.

Corruption in China is interesting. The overriding feeling among Chinese businessmen is pragmatism: we want to make money, and everyone who helps us is our partner. As is the case in most developing countries, government officials are poorly paid. So it is common in China for them to be “consulted” on projects, either by state enterprises or private firms. And if they help out and the project makes money, they receive compensation.

Does corruption sometimes screw things up? Of course: the Shanghai Airport is a good example.

To summarize: The leaders of the Communist Party worry a lot about what the citizens think. The corruption is managed well in the sense that things get done to benefit the country.

Argentina

I have been going to Argentina the last four years. During the last two, I taught in Buenos Aires in the Graduate School of Business at the University of Palermo.

A pretty complete summary of governance in Argentina is presented in a recent Economist article. There are all sorts of inappropriate government business deals to enrich the people in power and their allies. Various forms of intimidation are used to keep individuals and institutions “in line”. And many senior government jobs are given to Kirchner friends. As I indicated in a recent interview, there are many well-trained economists in Argentina. But in contrast to China (and Chile in Latin America), I do not sense that qualified professional are running the important government ministries. Instead, policy seems to proceed as a series of uncoordinated moves in different directions. There are several powerful groups in Argentina: the military, business, and the unions. The Kirchners have chosen to ally themselves with the union block.

Has governance suffered? Everyone living in Buenos Aires thinks so because on or another union strikes all the time. But the large business firms have continued to operate and the country is recovering from the global recession. The worrying thing is that the politicians do not appear to fear or care what the people want. Instead, they believe they can run the country in an alliance with one block or another. The situation is unstable and so long as it exists, policies will favor one group or another without regard for the whole.

International Rankings

Before getting to the United States, consider the following rankings on corruption and democracy. Myanmar is near the bottom on each criterion: 178th out of 180 on corruption (only Afghanistan and Somalia are lower) and 163rd out of 167 on democracy.

International Rankings: Corruption and Democracy

Country

Corruption

Democracy

United States

19

18

Argentina

106

56

China

79

136

Myanmar

178

163

Sources: Corruption – http://www.transparency.org/; Democracy – http://www.economist.com/markets/.

The ranking are pretty much as one would expect. However, while Argentina ranks better than China on democracy, I believe China is currently better governed than Argentina. And by that I mean key policy decisions are being made with the interests of all the people in mind, and not just a single power faction.

United States

I lived in Washington for 20 years. And during that period, I came to understand how it is run. While the US is definitely a democracy in the sense that it holds fair elections, decisions are influenced at all levels of government by special interest groups. That is, while the people elect people to public office, they end up working with groups or individuals that have very specific interests in how particular pieces of legislation are written and how regulations are implemented. Once politicians have been elected “to represent the people”, most become controlled by one or another special interest group. The result is that nobody in Washington represents the people.

I offer two concrete examples of how this works:

  • US tax laws. There is rarely any serious consideration given to overhauling the tax laws. But every year, special amendments are made in the tax laws to favor one group or another. The officials that oversee this in the US Treasury are very aware of what is happening. But they are not in a position to block amendments that have strong Congressional support. In the 1970s, I created a US NGO with a frustrated former Treasury official – Taxation with Representation – to oppose the special tax interests by bringing tax academics to Washington to testify against special interest legislation. We gave up in frustration. The lobbyists were too powerful.
  •  US policy in the Middle East – Most people living in the Middle East hate the US. The result is global terror and the inconvenience of long airport lines to insure no weapon is brought on board to “get Americans”. What is the reason for this hatred? The American Jewish lobby that has so influenced US policy in favor of Israel that the rest of the Middle East hates the US. This is well-documented in the article written by two tenured professors, one at the University of Chicago and the other at Harvard – http://www.lrb.co.uk/v28/n06/john-mearsheimer/the-israel-lobby.

The Washington lobbies are getting bigger and stronger. The Open Secrets NGO estimates that lobbying outlays in Washington have increased from $1.4 billion in 1998 to $3.5 billion in 2009. And note these are lobbying expenses only: they do not include campaign contributions to elected officials. In 2009, Open Secrets’ data show there were 13,739 lobbyists registered in Washington.

The US just passed a bill to move the country towards universal health care. The bill is complex and full of very imperfect plans. That should be no surprise. Open Secrets reports that in 2009, insurance companies, pharmaceutical companies, hospitals, doctors, nurses, in short, the health industry spent $539 million to convince legislators to add something special for each of them.

In late 2008, the American banking system collapsed, throwing the world into a global recession. Washington responded by setting up a $787 billion fund (TARP) to bail out the banks. I have long argued such a fund was unnecessary. Through various channels, AIG alone received $180 billion of government support. Part of that money was spent to pay back Goldman Sachs (more than $12 billion) and other clients at 100% on the dollar. This favoritism to Goldman via AIG: might it have had something to do with Paulson’s link to Goldman and perhaps the $6.2 million Goldman has spent lobbying in Washington in the 2008-09 period?

The next major piece of legislation affecting the banking industry will be regulatory reform. Will my sensible reform proposal even be considered – no FDIC insurance to banks that make money from trading and/or sell off their loans? No, not a chance. Why not? The big banks want to keep trading and selling off their loans. And the financial industry is not skimping on lobby expenses. Open Secrets estimated that in 2009, the finance, insurance, and real estate industries spent $463 million lobbying in Washington.

Conclusion

Democracy is no panacea because special interests will always outbid the general interest. An informed public is a partial antidote. And do keep in mind what has happened in Myanmar….

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
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