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Reinsberg Team Shows Shrinking Government Increases Corruption and Incompetence
Not every reader of this website reads the American Journal of Sociology all the time. But Samuel Cohn does. Every now and then AJS publishes a seemingly technical article that is actually of profound importance to the rest of the planet. This article is one of them.
Bernard Reinsberg from Cambridge University along with Alexander Kentikelenis, Thomas Stubbs and Lawrence King recently published “The World System and the Hollowing Out of State Capacity: How Structural Adjustment Programs Affect Bureaucratic Quality in Developing Countries.” American Journal of Sociology 124: 1222-1257. The article uses highly sophisticated time-series cross-section instrumental-variable-based estimating techniques. It is not an easy read. Their message is of deep significance.
They studied state integrity in 141 developing countries from 1985 to 2014. In a perfect world we would have objective data on government corruption, listing every bribe paid, and on incompetence, listing every boneheaded government error. But even in the absence of that kind of superhero omniscience, we do have statistical measures of the integrity of public servants that are actually pretty good. You can examine external rankings by expert outside observers about whether a government has the independence and the skills to govern effectively. The rankings they used are highly correlated with other independent measures of recruitment to government positions by merit, professionalism, impartiality, and bureaucratic quality. We also have data from firms concerning the number of times they have observed bribe-taking by government officials in the course of the firms doing business. Low amounts of reported bribe-taking correlate with all of the previous measures. This suggests that the measures available to the researchers are pretty good and capture fundamental differences between corrupt, incompetent governments on one hand and technocratic high-integrity governments on the other.
They then discuss what happened if the International Monetary Fund imposed government-shrinking government reforms on the nation. Many of the countries in the sample were indebted and owed money to international creditors. The International Monetary Fund was in charge of imposing conditions on debtor nations so they would be able to make their payments. The IMF had substantial power over countries’ ability to get further credit; so when the IMF imposed a constraint on a nation, that constraint generally stuck.
Many of these constraints were quite harmful, but a few turned out to do no damage. Among the relatively safe ones were the IMF limiting further borrowing, or insisting that the government run a balanced budget or requiring that the government control inflation.
Other IMF constraints turned out to severely reduce bureaucratic quality and increase corruption. Reducing public sector employment lowered government quality substantially. The econometric effects of this were strong, and were strong even with the inclusion of many, many control variables. (Including control variables tends to weaken statistical findings. Only the strongest findings can survive being flooded with competing variables. The adverse effect of lowering public sector employment survived the flood.)
Why did cutting government employment reduce bureaucratic quality and increase corruption? The Reinsberg team only showed the basic statistical correlation and could not test for underlying mechanisms. But it is not hard to make an informed guess about what might be going on. When government hiring would have stopped, government firing would have started, and pay would start to be frozen, the best government technicians would have started looking for opportunities elsewhere. Usually when conditions in an organization turn adverse, the most capable people with the best job opportunities elsewhere are the first to move – because they have the most alternatives. Thus, the shrinkage of government would have led to those functionaries who stayed being less qualified.
Secondly, government shrinkage produces technical demoralization. (See the essay on this website How to Corrupt an Idealistic Public Servant.) Technical demoralization is when public servants feel it is impossible to do their jobs given external constraints. Once professionalism seems relatively pointless, people become more open to taking other jobs, because frankly, if your job is a joke, why the hell not? If shrinkage makes technical staff feel like their job is un-doable, they will become open to overtures from all sorts of outside interests.
The Reinsberg team found two other forms of reforms that increased corruption and lowered bureaucratic quality: eliminating price controls and forcing the privatization of state enterprises. Both of these seemingly innocent sounding reforms actually open up rafts of opportunity for bribery. Prices are never “unregulated” all at once. They are unregulated over time, or only partially freed up or unregulated for this group but not that group. It is of enormous importance to business to have their own prices treated favorably while the prices of their rivals and suppliers are treated unfavorably. It is also of importance to speculators to know which price changes are going to come exactly when. This allows people with advance knowledge to strategically buy and sell assets in advance for purposes of arbitrage.
Privatization is an even greater motivation to pay bribes. Obtaining a former state corporation is a gigantic prize. Many of these companies were monopolies under the former state-run system. As such, they enter the newly privatized markets as behemoths with massive market power, purchasing power, name-brand recognition and assets to dispose of. Privatization represents a gigantic transfer of assets. Everyone wants favorable access to these advantages. And frankly, the government officials handling the privatization have a non-trivial interest in either acquiring the assets themselves or steering the access to individuals within their social networks. So even if there was no bribery, the privatization of public companies represents possibilities for huge one-off gains that directly affect the officials handling the sale. And, of course, who is going to say on a deal this big that there is not going to be any bribery in the matter?
So, the sad takeaway from all of this is that privatizing government and shrinking government give you worse government. It increases government incompetence. It increases bribery. Does this mean that no privatization ever ought to occur, and government should always grow and never shrink, and that no government-administered prices should ever be re-allocated to the market? That conclusion would be too strong.
But it does mean one should keep a watchful eye for what kinds of reforms induce qualified people to leave government, making government less capable. One also needs be aware of when one is creating opportunities for a corruption bonanza.
Once governments are corrupt, they are hard to uncorrupt.
Best not to corrupt them in the first place.