Fixing Corrupt Cities

This is the second installment in my series on corruption.

This week I’m taking a look at a book Richard Layman turned me onto. It’s called “Corrupt Cities: A Practical Guide to Cure and Prevention.” Written by Robert Klitgaard with assistance from former La Paz Mayor Rondal Maclean-Abaroa and H. Lindsey Parris, and published under the auspices of the World Bank, this book is a must-read on the topic of corruption even if, sadly, many of the recommendations are not directly applicable to the type of corruption many US cities experience today. It’s only 150 pages and highly readable.

The book talks about the nature of corruption and how and why it is often so resistant to efforts at reform. We can easily see this in the US, where, for example, despite former federal prosecutor Patrick Fitzgerald sending Illinois politicians in prison at a fearsome rate (including the previous two governors), the drumbeat of scandals in the state continues unabated.

The authors’ basic formula for corruption is simple: C = M + D – A. That is Corruption = Monopoly power + Discretion by officials – Accountability. Resultingly, as they put it:

A strategy against corruption, therefore, should not begin or end with fulmination about ethics or the need for a new set of attitudes. Instead, it should look cold-bloodedly at ways to reduce monopoly power, limit and clarify discretion, and increase transparency, all the while taking account of the costs, both direct and indirect, of these ways.

There is another crucial point in designing an anti-corruption strategy: Corruption is a crime of calculation, not of passion. People will tend to engage in corruption when the risks are low, the penalties mild, and the rewards great. This insight overlaps the formula just mentioned because the rewards will be greater as monopoly power increases. But it adds the idea that incentives at the margin are what determine the calculations of corrupt and potentially corrupt official and citizens. Change information and incentives, and you change corruption.

Much of the book consists of practical steps cities can take in this direction, using two principal case studies: La Paz, Bolivia, and Hong Kong. They also briefly discuss New York City’s successful efforts to root corruption out of a school construction program. Some of this gets quite detailed, such as their description of anti-corruption workshops the authors have run.

The book is also notable for being against what would appear to be one of the most popular responses to incidents of corruption, namely adding more rules. This often just makes it easier for corruption to flourish. As they put it, “Corruption loves multiple and complex regulations.” We also see in the US that more regulation increase the rent seeking returns to corruption and leads to regulatory capture, either by regulated industries or activists (or some combination of both).

They also say that corruption shouldn’t be looked at in isolation or as the sole aim, but rather that anti-corruption efforts should be seen as a tool for reinventing and improving the delivery of public services:

We do not recommend an approach to corruption that emphasizes more controls, more rules, and more bureaucracy. These can simply paralyze administration, and in some cases they can foster new and more deeply embedded varieties of corruption. Instead, especially in cases of systematic corruption, we advocate both restructuring city services and making institutional reforms that improve information and create new and more power incentives and disincentives. A major theme of this book is that fighting corruption in the right ways can become a lever to achieve much broader ends, not only financial survival but also remaking the relationship between the citizen and local government….Fighting corruption should not be considered an end in itself but an orienting principle for reforming urban administration. [emphasis in original]

Among their recommended approaches in the fight against corruption are having a point person with a high profile and public accountability for delivering results, creating an independent anti-corruption office (such as an inspector general type organization), starting by picking low-hanging fruit, eliminating the perception of impunity by “frying big fish” via prosecuting senior officials , working with and not against the bureaucracy, and many other things. They also spend time talking about the downsides of potential reforms.

As one example, they talk about how in some cases a single bidder taking over a contract can obtain so much proprietary information as a result of running a service that they de facto have a lock on future rebids since no one else has enough information to effective compete. Dual source contracting is one possible approach to maintaining long term competition, but has its own limitations such as potential added costs as well as incentives to collusion.

I’d be remiss if I didn’t highlight a few weaknesses. One is that because they used largely foreign examples, some of the solutions aren’t applicable to the US. For example, some countries have so-called “unjust enrichment” statutes by which public officials who appear to have wealth far beyond what their salary would enable them to have obtained legitimately have to prove that they obtained it legally. This doesn’t appear to be a big problem in the US, and that sort of “prove you are innocent” approach wouldn’t fly here in any case.

In another case, La Paz actually implemented a property tax reform with a lot of superficial appeal: self-assessment. My old boss in Indy has long been an advocate for this. The idea is that you declare the value of your own property for tax purposes, but that value constitutes a binding offer to sell at a premium of 10-15%. I get the appeal of this, but it’s easy to see the problems it introduces. La Paz used the soft threat of the state acquiring the property, but never actually followed through, and the courts declared the scheme illegal in any case.

The more important problem is that the book focuses on traditional type corruption of the bureaucracy. It assumes that in fighting corruption there’s a senior leader such as a mayor or governor who is motivated to eliminate it, and their recommendations are pitched at that person. For example, the mayor of La Paz obviously had a passion for ending corruption in his city. The governor of Hong Kong was motivated to clean up corruption in the police department by unfavorable press causing embarrassment back in the UK.

In America today I’d argue that situation is inverted. Local level government employees are by and large honest – you can’t easily bribe your way out of a speeding ticket these days, for example – but the political leadership is corrupt. And the corruption is right out in the open and takes the form of transactions that aren’t illegal.

For example, a transaction to shove millions of dollars into the pockets of a crony is often done completely in the open. It’s championed by the political leadership and often the press as well. (Molotch showed how local newspapers and such were part of the growth machine, and in general these days daily papers often continue to give off the impression of being corrupt institutions themselves who are in cahoots with the politicians). It’s duly voted on by the city council. There was no quid pro quo transaction involved, only campaign contributions, hope for future employment, or various personal connections, thus nothing illegal was done. It’s the same with some (though certainly not all) privatization contracts, various laws and ordinances prompted by lobbyists, etc.

Francis Fukuyama describes this very phenomenon at the federal level in an article in the current issue of Foreign Affairs called “America In Decay:”

The trading of political influence for money has come in through the backdoor, in a form that is perfectly legal and much harder to eradicate. Criminalized bribery is narrowly defined in U.S. law as a transaction in which a politician and a private party explicitly agree on a specific quid pro quo. What is not covered by the law is what biologists call reciprocal altruism, or what an anthropologist might label a gift exchange. In a relationship of reciprocal altruism, one person confers a benefit on another with no explicit expectation that it will buy a return favor. Indeed, if one gives someone a gift and then immediately demands a gift in return, the recipient is likely to feel offended and refuse what is offered. In a gift exchange, the receiver incurs not a legal obligation to provide some specific good or service but rather a moral obligation to return the favor in some way later on. It is this sort of transaction that the U.S. lobbying industry is built around.
…
Reciprocal altruism, meanwhile, is rampant in Washington and is the primary channel through which interest groups have succeeded in corrupting government. As the legal scholar Lawrence Lessig points out, interest groups are able to influence members of Congress legally simply by making donations and waiting for unspecified return favors. And sometimes, the legislator is the one initiating the gift exchange, favoring an interest group in the expectation that he will get some sort of benefit from it after leaving office.
…
Rules blocking nepotism are still strong enough to prevent overt favoritism from being a common political feature in contemporary U.S. politics (although it is interesting to note how strong the urge to form political dynasties is, with all of the Kennedys, Bushes, Clintons, and the like). Politicians do not typically reward family members with jobs; what they do is engage in bad behavior on behalf of their families, taking money from interest groups and favors from lobbyists in order to make sure that their children are able to attend elite schools and colleges, for example.

We see the same at the local level. In fact, today you almost have to be an idiot to engage in old school bribery. (It’s a mystery to me why it seems to remain so popular in places like Illinois and Rhode Island). You simply write campaign checks and at the appropriate time taxpayer money will come your way. Or you’re a journalist carrying water for the power brokers (or a candidate) who expects to be taken care of later. Or you’re on the government side of a privatization deal and later on take a job with the contractor via the revolving door. Or you run a non-profit that collects bigtime government grants with the unstated expectation that you won’t cause trouble. (I know multiple personal examples of non-profits who had grants revoked or threatened to be revoked by governments in retaliation for having the temerity to tell the truth about some boondoggle). None of these are illegal. They are generally done right out in the open. And the top power brokers and politicians are generally involved and hence have zero interest in reform.

This produces a much more challenging environment for change to say the least. I won’t pretend I’ve cracked the code on it, but will post further thoughts next week on how I might approach the problem.