This research paper explores the nature, causes, and consequences of corruption as it pertains to entire regimes. Grand corruption is modeled as a type of unproductive rent-seeking at the highest levels of government.
The economic costs of corruption are assumed to increase in the decentralization (and relaxation) of its governance, increase convexly in the percentage extracted, and decreasing in the opportunities for productive rent-seeking.Combining these assumptions with the benefits of corruption yields the results that optimal corruption revenues are increasing in greed of the regime and in economic opportunities but that the economic costs of corruption may be highest in the least avaricious regime. The theory is illustrated with a stylized account of corruption in three Philippine administrations, from 1973-1998. Policy implications are discussed, including the role of the economist in making corruption less attractive.IntroductionCorruption, according to Rose-Ackerman (1996, p. 365), “occurs when officials use their positions of public trust for private gain.
” It is “an extralegal institution used by individuals or groups to gain influence over the bureaucracy” (Leff, 1964, p. 8). That is, corruption involves transactions, typically between private parties and public officials, designed to manipulate the machinery of government. It may be of the permission-seeking type (quotas, licenses, permits, passports, and visas), the enforcement avoiding type (tax evasion, illegal pollution) or the competition-harassing type.Corruption is closely associated with bribery that has been recognized since the 15 century B.C.
as “a gift that perverts judgment” (Noonan, 1984, p. 12). Most of the literature on corruption and bribery is implicitly applied to lower level public officers (e.g. Mocan, 2008).This essay explores the nature, causes, and consequences of corruption as it pertains to entire regimes – what Rose-Ackerman (1996, 1997) calls “grand corruption” or kleptocracy, including high level manipulation of policies and projects.
We shall see that grand corruption is similar to rent-seeking at the highest levels of government and may be usefully regarded as part of the same “third-best” theory of government (Dixit, 1996), also known as political economy.The purpose of the present paper is to extend the theory of corruption and imbed it in a more general political economy of public policy. To dramatize the theoretical points, I provide a stylized account of corruption in three Philippine administrations, from 1973-1998. Inasmuch as hard evidence about corruption at the highest levels of government is generally unavailable, these accounts should be regarded as perceptions and common allegations, not fact.Lessons from the Philippines: Marcos EraA stereotypical account of corruption in the Philippines may be used to clarify and extend Shleifer and Vishny’s (1993, hereafter referred to as S-V) theory of corruption.
In the Marcos regime, corruption was highly centralized. Imported goods, for example, were routinely seized and bribes paid to expedite their timely release and facilitate lower duties. Such operations had the tacit approval of higher authorities who were repaid with both bribe shares and political support.Not only did the centralization of corruption permit both higher bribe collection and lower excess burden (S-V, 1993), it permitted greater grand corruption as well. According to President Aquino’s Commission on Good Government, Transparency International, and the U.
N. Commission on Drugs and Crime, the Marcoses and their cronies were able to accumulate $10-15 billions in assets from various operations.But the styles of grand corruption were quite different even within the Marcos regime. Imelda Marcos allegedly extorted hefty percentages from many government contracts under her authority as Governor of Metro Manila and Minister of Human Settlements and expected wealthy business owners to contribute generously to her various public works projects.Legitimate CorruptionOne of the most ingenious of such schemes involved the Philippine coconut industry.
First a media campaign was launched to convince farmers and consumers of coconut products that they were being exploited by unscrupulous middlemen. Next an 18% tax was imposed on the gross sales of coconuts and copra. Farmers were told that this tax was in exchange for shares in the newly formed United Coconut Planters Bank (UCPB), headed by Marcos’ best crony.UCPB, however, had the status of a quasi-public corporation whose collections and disbursements were not fully revealed.
UCPB then acquired United Coconut Oil Mills (UNICOM), a holding company for coconut oil processing plants, which quickly monopolized the industry thru bureaucratic harassment of the competition. UNICOM’s monopoly position was further enhanced by banning exports of copra, thus leaving sale of whole coconuts to the very small domestic market as the only alternative outlet to the oil industry. These policies allowed UCPB/UNICOM to substantially increase the wedge between prices paid to farmers and charged to consumers.Illustrates.
S-V (1993) characterize the Philippines under Marcos as effectively a monarchy. While the Republic of the Philippines nominally retained its democratic institutions under Marcos, the legislature, judiciary, as well as provincial and local government offices were increasingly centralized under his presidency and later combined presidency/prime-ministership.Nonetheless, Marcos’ power was also contingent on his ability to maintain the appearance of legitimacy. Once the government was no longer viewed as legitimate, due to the assassination of Benigno Aquino and other developments, popular and even military support waned, and the “People Power Revolution” was able to overthrow the regime.“Legitimate” Corruption of Philippine Coconut Policies Thus, unlike a kleptocracy modeled along the lines of Brennan and Buchanan’s (1977) Leviathan, Marcos was not free to directly pocket the proceeds from the 18% production tax. Further entrepreneurship was needed to develop schemes that transferred wealth of the quasi-public entity, UNICOM, into private hands.
One clever scheme involved using UCPB funds to purchase and plant an African hybrid variety on a plantation given to the head of UNICOM as “compensation” for a relatively small amount of land that he lost under the country’s land reform program. Moreover coconut farmers were mandated to replant their coconut farms to these same hybrids on the grounds that their higher yields would improve both farmers’ yields and the national economy.In summary, under the guise of what appeared to be legitimate public programs, a single private individual was given a monopsony on coconuts, a monopoly on coconut oil, and a monopoly on the one variety of coconut trees that farmers were required to buy. Moreover the oil and hybrid monopolist was not required to buy the industries but was but was largely gifted them thru the allocation of public funds.
Secrecy and StupidityLucrative as it was, however, the scheme was “too clever by half.” The coconut oil monopoly, popularly known in the Philippines as “COPEC,” tried to imitate OPEC and stockpiled coconut oil in order to raise the world price. The plot backfired when the oil went rancid and, when it was eventually sold, spoiled the reputation of Philippine oil. As the result of this 18% tax and the nuisance value of the replanting requirement, the Philippines irreversibly lost its position as the world’s leading exporter of coconut oil. Moreover, the government was not in a position to exploit its oil monopoly on the domestic market.
Cooking oil, like rice and gasoline is regarded as a basic commodity among urban consumers and the political repercussions of a rise in price can be severe. Finally, the African dwarf hybrid program was a bust. Farmers were unwilling to replant, even under the threat of law and a highly subsidized price, and the program became unenforceable.These errors suggest a corollary to the proposition that bribery is more distortionary than taxation. The necessity of secrecy leads government officials to discourage more transparent activities in order to stimulate the more “bribable” sectors (S-V, 1993), to say nothing of differences in revenue disposition.
While the coconut scheme described above was not entirely secret, neither was it the product of thorough public debate, which likely would have partially overcome the failure to foresee adverse consequences. That is, secrecy not only begets inefficiency in intersectoral resource allocation, it begets collective stupidity.Another famous scheme involved the construction of a nuclear reactor project on the Bataan peninsula. The Westinghouse power plant, “originally estimated at $500 million for two reactors, ended up costing $2.8 billion for a single reactor.
” Again the transfer to private hands was achieved through relatively sophisticated means, relative to Mrs. Marcos’s more blatant alleged tactic of simply demanding a share of government contracts. A number of specialized or dummy corporations were set up to obtain contracts for the construction of the power plant, to insure the plant (for $688 million), and to handle other aspects of the project. Both Marcos and his crony Herminio Desini had substantial interests in these companies. Desini was also apparently paid $80 million for consulting services largely for his role in helping Westinghouse win the contract.
The high level of corruption in the Marcos administration accords with Persson and Tabellini’s (2005) thesis that parliamentary governments tend to have a higher level of corruption than presidential ones. Marcos was able to establish himself as both President and Prime-Minister and to effectively limit checks and balances on his power.
