Democracy and Corruption

Increasing research on Democracy Corruption

Recent contribution: Michael T. Rock. Corruption and Democracy, JoDS, January 2009.

Authors defending opposite effects of regime corruption:

Ades and Di Tella (1999): If anything, the lack of political rights seems to be associated with less corruption. Goel and Nelson (2005): corruption declines with the degree of civil liberties associated with democracy

Most authors defending idea of a contradictory relationship (Harris-White and White (1996: 3) and Sung (2004: 179) Two approaches: qualitative (within-country) quantitative (across countries)

Lets have a closer look into some particular cases: qualitative studies Qualitative studies show that corruption frequently increases (and QoG decreases) in newly democratizing countries Developing countries after decolonization/democratization (e.g. Lemarchand 1972 on Africa, Scott 1972 on Southeast Asia, Wade 1985 on India, or Sayari 1977 on Turkey, Robinson and Hadiz 2004 on Indonesia, Case 2002 on Thailand) Post-communist countries after 1990 (e.g. Varese 1997, Ledeneva How Russia Really Works) Latin American countries after different waves of democratization (e.g. Weyland 1998)

Lets have a closer look into some particular cases: qualitative studies Mechanisms?

From centralized networks of corruption in authoritarian regimes corrosive and decentralization corruption free-for-alls
Historically, relatively young democratic countries suffered corruption problems:
Britain and the Great Corruption (mid 18th to mid-late 19th century) US and the corruption of the Jacksonian Democracy (from 1829 to early 20th century) The extension of suffrage led to increase in the levels of corruption

Lets have a broader look: quantitative studies Democracies are always better than Dictatorships: Olson 1993 (seminal theoretical work) Only Older Democracies are better: Keefer 2007 (cross-sectional analysis) [Keefer and Vlaicu (theoretical model)] Only Very Democratic Democracies are better: Bck and Hadenius 2008 Only Wealthy Democracies are better: Charron and Lapuente 2009

Olson 1993
Olson = great economist for political scientists, great political scientists for economists The Economist: had he lived McLean 2004: Olson = Condorcet Olson 1993 = modern classic in political theory (dont see much here)

Echoes of The Logic of Collective Action 1965 Individuals free ride

Developed further in Power and Prosperity 2000: Anarchy (roving bandit) < Tyranny (stationary bandit) < Democracy (majority government)

Olson 1993
All polities are built by means of force and coercion: no one has ever found a large society that obtained a peaceful order or other public goods through an agreement among the individuals in the society. Tradition in political philosophy: deductive logic to derive the ideal institutions from a state of nature Bottom-up theories of state building: individuals decide to delegate power to rulers
Hobbes, Locke, Roussseau Nozick, Rawls

Olsons top-down theory: even equal and well-informed individuals would suffer problems of collective action
More realistic, state of nature : one guy has the stick

From post-war Italy (and many other countries still nowadays)

Provocative starting: "Monarchy is the best kind of government because the King is then owner of the country. Like the owner of a house, when the wiring is wrong, he fixes it What did you like of article?

Stationary bandits vs. Roving bandits

Why should warlords, who were stationary

bandits continuously stealing from a given group of victims, be preferred, by those victims, to roving bandits who soon departed?

Rational monopoly of theft > uncoordinated competitive theft

"the first blessing of the invisible hand: the rational, self-interested leader of a band of roving bandits is led, as though by an invisible hand, to settle down, wear a crown, and replace anarchy with government. The gigantic increase in output that normally arises from the provision of a peaceful order and other public goods gives the stationary bandit a far larger take than he could obtain without providing government. Dictator # wolf who preys on the elk = rancher who takes care of the cattle

Problems with this view of autocrats?

Lots of counter-examples Long-tenured autocrats with long time horizons who become wolves > ranchers (e.g. Mobuto)

Those autocrats who most closely follow Olsons prediction, those most blessed by the invisible hand, actually hardly maximize the residual themselves South Korea, Singapore, Spain Very low taxes (lower than in democracy) Sporadic episodes of corruption (sometimes prosecuted or denounced in the media, even during the autocratic regime) Quite limited nepotism Qatar, Bahrein > Greece, Italy

Why Democratic rulers are better than Dictators?

Is because, following Principal-Agent theory, we solve the adverse selection problem? Since we select them, are they better types?
Olson: democrat incumbents are not more benevolent Olson assumes democratic rulers = dictators Self-interested and revenue-maximizers Assumption: taxes distort incentives reduces income so much that tax collections fall Dictators establish a revenue-maximizing tax What is it?

Why Democratic rulers tax less than dictators, assuming they are also revenue-maximizers?
Democratic rulers tax less: the majority always has a higher stake at the growth of the national economy If the majority earns 1/3 of the national economy and every extra $1 of tax reduces national income by $3 Dictators revenue-maximizing tax = 1/3 (for every extra $1 of tax, he loses $1 in future tax) Democrats < 1/3 (because for every extra $1 of tax, they lose $1 in future tax and $1 in their own income) Underlying idea: the broadest the interests represented in government (majority > oligarchy > dictator), the more the government will take into account the social costs of redistributions

But, if you are unlucky, and have a dictator

Why dynastic Monarchies are better than appointed or self-appointed dictators or military juntas if the probability that the son/daughter of the King to be the most talented ruler is 0,0000000000001? Two mechanisms: Long time horizon Avoid succession crisis (failure of elected monarchies: Germanic tribes, early modern Poland or Hungary)

Why? Do you Agree? Counter-examples?

Shouldnt something similar happen in family-owned firms?

Why would democracies ever emerge according to Olson? Paradox: If autocrat rulers obtain more revenue than democratic ones why do not those rebel leaders who overthrow a ruler always establish another autocracy instead of a democracy?

Why would democracies ever emerge according to Olson?

1) When rebels face collective action problems (many and similar strength) 2) and they are geographically dispersed (if not, they become Satraps) Exceptions?

13 North American colonies 1776 Latin America 1812

Evaluating of 3,000 years of human history

Democracy is in theory better, but in 2,800/3,000 latest years, Olson admits that this has not been the case: Tacitus, Caesar (Imperium > Republica) defeated the more democratic/consensual Germanic tribes From about the time that Sargon's conquests created the empire of Akkad until, say, the time of Louis XVI and Voltaire, there was an impressive development of civilization that occurred in large part under stationary banditry And for the latest 200 years, still controversy

Why should nevertheless Olson inspire our theoretical work? 1) Clarity, simplicity of the theory 2) Impartiality of the researcher regarding the subject of study Since human nature is profoundly complex and individuals rarely act out of unmixed motives, the assumption of rational selfinterest that I have been using to develop this theory is obviously much too simple to do justice to reality But the caricature assumption that I have been using has () also introduced an element of impartiality: the same motivation was assumed in all regimes. The results are probably also robust enough to hold under richer and more realistic behavioral assumptions.

Keefer 2007
Best recent contributions to the debate (AJPS)

Should inspire our work Original (first systematic performance differences) Addressing a puzzle (many democracies fall short..) Several dimensions of Quality of Government: Corruption Provision of Private Goods Provision of Public Goods

Keefer 2007
Tackles one of the most intriguing puzzles in comparative politics with clarity & simplicity
Ranks high in the three ideal elements of a research 1) convincing theoretical explanation on why many democracies fall short of many autocracies in many indicators of good government
more in Vlaicu & Keefer 2007)

2) Encompassing rigorous quantitative empirical test showing systematic performance differences between Young and Old Democracies

3) Narratives (Ecuador, Dom Rep..) with real-world examples of the flesh-and-bones of the theory

Theory
In relation to Old Democracies, the Young ones underprovide non-targeted goods (e.g. education, PPRR) overprovide targeted goods (e.g. patronage) and are more corrupt Why? Young democracies: candidates are not credible

How to win elections?

Two options for new incumbents: Be Good: Invest resources to show they can provide public goods (costly) Be Bad: Rely on local patrons and deliver targeted goods to them and their clients (cheaper) Problems with this theory? with a theory based on something like credibility? 1) Determined by both: characteristics of rulers & the ruled
Yet he only looks at the former

2) Difficult to operationalize any psychological feature. How do you measure it? How he could have solved it?
Maybe looking at WVS in young democracies?

Can we think of alternative mechanisms for why young democracies have lower QoG?

Potential Omitted Variables or Spurious relationship?

From Bck & Hadenius or Evans & Rauch? Young democracies also have in general more crime than Older ones/Dictatorship (more civil liberties) Short-time-horizon incumbents in Young D vs. Longterm-horizon incumbents in Old D State capacity. Within similar context, transitions to democracy produced different evolutions of QoG
Asia: Korea Thailand Latin: Chile, Spain (70) Spain (30), many others..

Empirical analysis
His proxies for good government: Nontargeted policies benefiting all citizens: secondary school enrollment, bureaucratic quality, the rule of law, and government ownership of newspapers Targeted policies, benefiting discrete and identifiable groups of voters: public investment (where pork barrel projects reside) and the central government wage bill (which finances patronage jobs). Corruption: standard measure of corruption Do you agree with the proxies? Do you think the analysis supports his predictions?

Expected effects of control variables

(another example of clarity & scientific rigor by Keefer: how to present your hypothesis vis-a-vis alternative hypotheses)
Nontargeted Goods Targeted Goods Rent Seeking

More presidential More majoritarian Greater social cleavages More affected by conflict

Less citizen information

Expected effects of control variables

Nontargeted Goods Targeted Goods Rent Seeking

More presidential More majoritarian Greater social cleavages More affected by conflict Less citizen information

Less

Less

Less

Expected effects of control variables

Nontargeted Goods Targeted Goods Rent Seeking

More presidential More majoritarian Greater social cleavages More affected by conflict Less citizen information

Less Less

Less More

Less Less

Expected effects of control variables

Nontargeted Goods Targeted Goods Rent Seeking

More presidential More majoritarian Greater social cleavages More affected by conflict Less citizen information

Less Less Less

Less More Less

Less Less More

Expected effects of control variables

Nontargeted Goods Targeted Goods Rent Seeking

More presidential More majoritarian Greater social cleavages More affected by conflict Less citizen information

Less Less Less Less

Less More Less Less

Less Less More More

Expected effects of control variables

Nontargeted Goods Targeted Goods Rent Seeking

More presidential More majoritarian Greater social cleavages More affected by conflict Less citizen information

Less Less Less Less Less

Less More Less Less Less

Less Less More More More

Problems with this analysis Any omitted variables you would introduce? Does his variable (age) remain strong after the control variables are included?

Any other flaw?

Future research: intriguing results (majoritarian systems + education outcomes)

If you want more on Keefer 2007

Keefer and Vlaicu 2007 Formal theoretical model + historical examples Clague, Keefer, Knack, and Olson1996 Simple but powerful Olsons theory + World Bank economists empirical quantitative methods What matters for protection of PPRR is not Democracy vs. Dictatorship, but Short vs. Long Time Horizons Proxy for Time Horizons in Dictatorship/Democracy? Dictatorship: dictators years in government Democracy: years of the political regime

Bck and Hadenius 2008

Time-Series Cross-Sectional analysis (normally, only crosssectional) Dependent variable: states administrative capacity
Corruption (lack of) + Bureaucratic efficiency

Independent variable: continuous measure of Democracy

For some authors (Przeworski), it is a binary question (1/0) For others, there is a continuum of democracy: from extreme authoritarian regimes (no elections at all) to partially-free elections to totally-free elections

Bck and Hadenius 2008

Show a U-, or better, a J-shaped relationship between Democracy and QoG Mechanisms through which Democracy affects QoG in different ways depending on its level? Dictatorships have more from above control of Government (e.g. repressive capabilities, hierarchy) Democracies have more from below control of Government (e.g. press freedom) Any problem with these mechanisms? No micro-foundations: who exerts control, when and why? Interests of rulers/citizens? Not even anecdotal evidence (key in good research)

Level of Democracy and Quality of Government

(e.g. Montinola and Jackman 2002, Sung 2004, Bck and Hadenius 2008)

90

Quality of Government

80 70 60 50 40 30 20 10 0 Totally Authoritarian Not Free Elections Relatively Free Elections Totally Free Elections

Level of Democracy

Age of a Democracy and Quality of Government

(e.g. Keefer and Vlaicu 2007, Keefer 2007)

90

Quality of Government

80 70 60 50 40 30 20 10 0 Autocracies Young Middle Consolidated

Age of Democracy

The mysterious non-linear relationship Cross-country studies show a robust relationship between the level/age of democracy and QoG but it is non-linear (either U-, J-, or S-shaped) partial or young democracies perform worse than authoritarian regimes and much worse than full or older democracies

Charron and Lapuente 2009 deal with some open questions in the literature
No test if what matters is level or age of democracy

No test time-series and cross-sectional

No clear mechanisms why Democracy QoG in different ways depending on its level/age

In this paper, (they claim that) they offer

Theoretically, mechanisms that link Democracy QoG:

Institutionalist arguments: focus on the Supply-side of QoG + Culturalist arguments: focus on the Demand-side of QoG

Empirically, time-series and cross-sectional analyses

Institutionalists: focus on the Supply of QoG

Key actors are the ones who supply QoG: Rulers Preferences are fixed / Institutions change Rulers face different incentives under different institutional settings
e.g. Olson 1993

Culturalists: focus on the Demand of QoG (I)

Key actors are the ones who demand QoG: Citizens Preferences change / Institutions are fixed QoG = result of values prevalent in society No agreement on the values though Banfield (1958): immoral norms (tribal loyalty, amoral familism) vs. moral norms Welzel and Inglehart (2008): survival vs. self-expression values

Culturalists: focus on the Demand of QoG (II)

Welzel and Inglehart (2008) = modernization theory Economic Development Better Education Selfexpression Values > Survival Values Collective actions and Pressure on elites to provide QoG
Illuminates some outliers of Institutionalist Theories: young democracies that perform quite well e.g. East Germany, Czechoslovakia in early 1990s, Spain in 70s They had self-expression values. Any problem? Problem: scientific tractability of these values: operationalization, reverse causality. Counter-factuals: self-expression in late19th century US?

C &L: Alternative approach to the Demand of QoG

= culturalists theories, peoples values matter # culturalists theories, focus on a value which can travel across time and space Time preferences or subjective future discount rates: up to which extent actors prefer to consume now rather than later. Focus not on What people want to consume, but on How they want to consume

Future Discount Rates

Future discount rates may help explain different phenomena Children with lower fdr better school performance Societies with lower fdr more investments (Clark 2007) Mmmmm.This seems a weird psychological concept, dont you think? How we operationalize, measure it? What explains it? Why some people have higher/lower fdr? No fully rational account of why some people have higher/lower future discount rates, but strong correlations with age, education, income

Theoretical Assumptions on the Demand of QoG

1) A societys future discount rate = function of its economic development

Poor people tend to have a higher propensity to consume vis--vis invest for future consumption

Problems with this assumption:

Mechanisms through which income future discount rates ? Maybe it is not income, but education or modernization or sophistication of values what explains future discount rates

2) Building Quality of Government pays off at long term

Costly at short term: it takes time and resources to build a Weberian impartial administration e.g. pass and implement Civil Service Acts, APA

Prediction from the Demand of QoG

Lower income societies (high future discount rate or more impatient) will: over-value a State able to deliver goods of immediate consumption (e.g. patron-client exchanges, patronage jobs, direct cash through clientelistic networks) under-value State which undertake medium-to-long term investments in administrative capacity (e.g. develop a meritocratic recruitment system, start the legal steps for enacting and implementing rule of law)

Demand & Supply of QoG

Rulers in both Democracies and Autocracies = survive in power Democratic rulers are responsive to citizens demands: Lower income societies immediate consumption goods: patron-client networks, patronage-based jobs and contracts to supporters - QoG Higher income societies merit-based Weberian administrations, Civil Service systems of recruitment, detailed administrative procedures Acts + QoG And authoritarian rulers? what drives them to produce QoG?

Demand & Supply of QoG

Authoritarian rulers follow different strategies: Sometimes, survival depends on the capacity or others to produce economically (Olson 1993, Bates 2001). QoG achieved because of the lack of responsiveness: autocrats isolated from distributional pressures and able to undertake long-term investments Sometimes, not: survival entirely depends on the distribution of immediate consumption goods among core supporters (e.g. Kleptocrats) C&L: No clear link countrys income <---> autocrats strategy Bueno de Mesquita, Smith, Siverson and Morrow 2003. The logic of political survival

Figure 1. Predicted levels of Quality of Government High Democratic States Authoritarian States

Expected Level of QoG

(Suppliers of QoG)

Low Low Economic Development (Demand for QoG) High

Empirical test
Dependent variable = state capacity (Bck & Hadenius 2008) ICRG data: bureaucratic quality + lack of corruption 140 states from 1984-2002 Independent variables: (Supply-side) Democracy: combination of Freedom House + Polity Database scores (Demand-side) GDP/cap (Control for Bck & Hadenius 2008 U-Shaped effect) Democracy (Control for Keefers 2007 time effect) Democratic Experience (+ Standard control variables) Lagged dependent variable, trade openness, British colony

Time Series Cross Sectional

Fixed Effects Random Effects

qq

Bck & Hadenius

Full Model

Democracy Democracy GDP per cap. Dem X GDP Trade UK Colony Year Count Democratic Experience Lag Dep. Var.

-.055** .007*** . 039** -.020 .072***

-.043** .0023 .008 .005** .049** .062*** -.021*** .0002

-.024 .065 .0018 .005*** .171**

-.042** .009 .0024 .005*** .051* .062***

-.033*** .0014* .882***

-.021*** .0002 .922***

.927***

.923***

Margnial Effect of Democracy on QoG

.05 -.1 -.05 0

4 6 8 Economic Development (logGDP)

10 upper 95% C.I.

Marginal Effect of Democracy lower 95% C.I.

Cross Sectional Analysis

Dependent variable: ICRG data: bureaucratic quality + lack of corruption + rule of law and order Independent variables: + press freedom (Brunetti and Weber 2003 Adsera, Boix & Payne 2003) + newspapers circulation (Treisman 2000) + level of education (Barro & Lee 2000) + ethnic fractionalization (La Porta et al 1999 Alesina et al 2003, Charron 2007). + veto players (Andrews and Montinola 2004)

Summary of the findings

Democracy or Income do not matter on their own The U- or J-shaped relationship disappears (# institutionalists) GDP becomes insignificant (# culturalists) Interaction Democracy*Income matters Poor countries have higher QoG under authoritarian rule Rich countries have higher QoG under democratic rule

Conclusions
Problems of endogeneity between QoG and Income? Yes QoG also Income We dont offer a solution, but, unlike most literature, use one-year lags of all explanatory variables (including the lagged dependent variable)

Which are, if any, the normative implications of the paper? Results similar to Lipset (1960) and the modernization theory: a democracy needs as a prerequisite some level of economic development Should we conclude that If you are poor, get a dictator?...

Some issues for discussion Political Economists or Institutionalists criticize the methodological inconsistency of assuming selfinterested individuals in the market and benevolent dictators (Clague at al. 1996: 244) But they are also methodologically inconsistent when assuming different time horizons for rulers and the same time horizons for citizens Rulers are not benevolent; Citizens are not either

Guidles for research QoG

QoG, a field in the making, but increasingly relevant A tthe EU summit on December 2009 Prime Minister Papandreou admitted that corruption was the main reason for Greeces serious economic problems (The Economist December 17th 2009). Many issues unexplored (still dont have button we can click) Some dialogue between the two main (and so far quite opposed) approaches to the study of QoG is required

Modern Quantitativist or CSI Researcher Methodological training defines them Deductive, rigorous, parsimonious, testable theories Not satisfied with incremental accumulation of knowledge Want to make a breakthrough...

Traditional Qualitativist or Veteran Police Researcher Long experience with the object of study defines them Inductive, narrative, storytelling, bla-bla theories Low degree of generalization of theories (if any) Want to solve daily, mundane problems (e.g. consultants of IO, developing countries, media)