Corruption, Violence, and Poverty: Which comes first?

by Charles Krakoff on April 9, 2009

in Crisis, Development, Economic Reform, Investment

It is rare, though in recent months it has become much more common, for a bit of economic data to make you weep, but here is one that may. In 1993, when I was in Madagascar to review progress on the privatization of state enterprises, I came across a report stating that if the current set of reforms (privatization, trade liberalization, public sector reform) worked as hoped the country by 2010 would get back to the same level of per capita GDP it had in 1970. In the event, that optimistic scenario failed to materialize. According to the World Bank, Madagascar’s per capita GDP in 1970 was $473. In 2007 it was $320. That’s 40 lost years, a period in which two generations have been born and grown to adulthood in a shrinking economy that offers them almost no hope.

Madagascar has plenty going for it. It has over a thousand miles of beaches, pristine tropical islands, and a profusion of unique animal and plant species. It is one of the world’s main sources of vanilla and pepper, and in the  early 1990s garment manufacturers on the nearby island state of Mauritius began to set up cut-and-sew operations in Madagascar, attracted by cheap and productive labor, preferential access to European and North American markets, and an economic and business environment that had begun to move in the right direction.

Many of those factories are still operating, but they have had minimal effect on the wider economy. Tragically, every time things start looking up the country is convulsed by some kind of political crisis, often accompanied by violence, and progress stops. This happened just last month, when angry mobs led by Antananarivo’s young mayor, a former disk-jockey turned wealthy businessman, toppled the democratically elected, though increasingly autocratic, President Marc Ravalomanana. Ravalomanana himself also came to power amidst violent unrest when he won the 2001 election and the sitting President refused to accept the results.

Sadly, Madagascar’s history is not unique. Guinea and Guinea Bissau, whose economies are dominated by drug trafficking, have undergone violent changes in government during the past several months. Liberia, Congo-Kinshasa, Ivory Coast, Somalia, Chad, Haiti, Nepal, and Afghanistan represent just a sample of the many poor countries that appear chronically unable to govern themselves effectively and to create a framework for sustained economic growth. The phenomenon has spread far beyond the poorest countries. Thailand, where popular protests pushed two Prime Ministers out of office, is now seeing street demonstrations demanding the resignation of the new Prime Minister, who has been in office for just a few months. In France, factory workers whose jobs are in jeopardy have taken to holding their bosses hostage. “Boss-napping” they now call it. In December violent street protests made Greece virtually ungovernable for over a week. The Icelanders in their civilized Nordic way forced the Prime Minister and Central Bank Governor to resign prematurely. People everywhere, angry, scared, and confused about the economic present and future, are expressing their rage in ways that can quickly turn violent.

Many people who pay attention to economic development matters identify corruption and political instability as two of the major impediments to growth, but the evidence suggests that the converse holds true: lack of economic growth causes corruption and political instability.

No country is free of corruption, but most wealthy countries have less of it than poorer ones. I haven’t done a rigorous analysis, but the data I have seen, and my own experience in a great many countries, tell me that corruption is far worse in stagnant economies than in growing ones. Corruption in turn is a major cause of political unrest. When people see that a few people dominate business and politics and turn it to their advantage while the rest of the population lives in misery, they often take to the streets, sometimes with placards and banners, sometimes with guns.

Slow or nonexistent economic growth is at the root of both of these phenomena. When an economy doesn’t grow the only way a person can increase his wellbeing is by taking away someone else’s. People fight over a shrinking pie, and the fight becomes more vicious as the pie grows smaller. If you can’t improve your standard of living through legitimate enterprise, theft, bribery, trafficking, and extortion are the only options left.  Ordinary people eventually get fed up with this and take to the streets.

It is no coincidence that three of Thailand’s Prime Ministers were forced to resign or were overthrown in the past dozen years (one, Thaksin Shinawatra, was forced out twice: the first time by a coup and the second time by his impending arrest on corruption charges). These ousters occurred in 1997, when the Asian financial crisis caused GDP growth to drop from 5% to 1.6%; in 2006, when growth fell from 6.1% to 4.5%; and in September, 2008, when the global crisis began and growth continued at a relatively anemic 4.5%. Now, in April 2009, when it has become apparent that no country can skate through this with minimal damage and the Thai economy is expected to contract by as much as 4%, the new Prime Minister, in power a scant seven months, may in turn be pushed out.

Corruption and civil unrest are bad things, of course, and all reasonable efforts should be made to prevent or stop them when they flare up. But those who insist that eliminating them is a necessary precondition to increased investment and growth have it backwards.

The critical thing in Europe, Japan, and North America as well as in emerging markets, is to get economic growth going. You don’t need good and stable governance for this to happen, though it doesn’t hurt. I was in Haiti last week and talked to several foreign garment manufacturers investing big amounts – though less than they might because there is almost no industrial land available – even though over the past 20 years or so Haiti has suffered more than most countries from corruption, political instability, and civil unrest. If economic growth does not revive, and if optimism disappears, corruption and civil unrest can only increase, in rich countries as in poor ones. The world leaders meeting last week at the London G20 summit did not pay much attention to this possibility. Let us hope they start to do so before a bunch of Army officers or a mass popular uprising somewhere force them to.

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