Development Bank Research Bulletin

Russian “corruption market” estimated 3 billion USD/year

Russian thinktank INDEM Fund based on its annual survey estimates that the volume of Russia's “everyday corruption market” (i.e., sum of the bribes to be paid by citizens within one year) is 3 billion USD in year 2005, a slight increase from 2.8 billion USD in year 2004. The methodology of the study takes into two factors that determines the “market of corruption”: (1) corruption risk (authorizer’s corruption pressure onto citizens) (2) corruption demand (citizens’ readiness to bribe)

Several “services” occupy the top positions of “market share”:

(1) Higher education: to enter, transfer, exams, etc (583 million USD);
(2) Free medical service (401 million USD);
(3) Solving problems related to conscription procedure (354 million USD)
(4) Dwelling: to obtain and/or legalize a relevant proprietary interest ( 299 million USD)
(5) To obtain justice in law-court (210 million USD)
(6) to solve problems with road police authorities (obtaining driver’s license, technical examination, road traffic, etc.) (183 million USD) . Obtaining driver's license is quite a "business" in many developing countries; you may also want to read a World Bank report on corruption of obtaining driver’s license in India (hat tip: PSD blog)

The Russian corruption report by INDEM Fund can be found here.

Five billion is certainly surprisingly a small amount, compared to China’s 50-84 billion USD/year, which amouts to 3-5% of China's GDP (according to an global anti-corruption report by OECD, co-authored by among others Janos Bertok). The China and Russia numbers however are not quite comparable, because the Russian number only takes into account everyday bribes, while petty bribe is  actually a relatively smaller problem in China compared to embezzlement of public funds.

In China, according to the same OECD reports, two-third of the corruption fugitives were senior executives of state-owned enterprise. When they fleed(to favorite destination: California, New Jersey, Canada, where extradition treaties are not signed with China), they bring with them huge amount of money.

Liberalization of imports harms India?

Ashok Sharma in the Indian newspaper Financial Express argues that unilateral and unconditional lowering of tariff for sugar imports harm India

“... the institution of TRQ for sugar import is unilateral and unconditional. We have not in exchange negotiated for raising our low bound tariff rate of 45% on soyabean oil. The policy of unilateral and unconditional liberalisation of imports will weaken India’s negotiating position at WTO. It will endanger domestic production as had been the case with vegetable oil and oilseeds.”

If this were true, then why don’t India raise tariff to 1000% or close the economy completely from international trade then? This should be able to gain India formidable negotiating position at WTO, according to the theory of Mr. Sharma.

Sometimes, busting a myth requires just a little bit of counterfactual thought experiment.

How to subvert democracy: a user’s guide provided by former Peruvian secrete police chief Montesinos

Which of the democratic checks and balances—opposition parties, the judiciary, a free press—is the most forceful? Professors John McMillan and Pablo Zoido find the answer from an unusual place: the secret dossier of Vladimiro Montesinos.

In the 1990s, the Peruvian secret-police chief Montesinos systematically undermined all of these democratic checks and balances with  bribes. For record-keeping and to ensure future cooperation of the bribe-takers, he video-taped and kept detailed records of almost all of his dealings with more than 1,600 bribe-takers.

After the fall of President Fujimori and the arrest of Montesinos himself, these video-tapes and documents come under public scrutiny 

Professors McMillan and Zoido obtained some copies from journalist friends in Perue, and creatively quantify the values of these democratic checks and balances using the bribe prices.

They find that, Montesinos paid a television-channel owner about 100 times what he paid a judge or a politician. One single television channel’s bribe was five times larger than
the total of the opposition politicians’ bribes.  The cost of bribing the politicians to get a majority in Congress added up to less than US$300,000 per month. The total cost of bribing judges was US$250,000 per month. The total cost of bribing the television channels was more than US $ 3 million per month.

By revealed preference, the strongest check on the government’s power was the news media.

Montesinos is smart but everyone makes mistakes at some point. He bribed all television channels but one: Channel N. He thought Channel N was an expensive channel with limited viewership and was not worth bribing.

Just several months after Fujimori won 2000 election, one of Montesinos’s videotapes (which will come to be called the vladivideos) was broadcast on Channel N.

The government fell. Fujimori fled to Japan. Montesinos was arrested in Venezuela and sent back to Peru for trials.

Reference:
How to Subvert Democracy: Montesinos in Peru (PDF file)

A video showing Montesinos counting out US$1.5 million for Jose Francisco Crousillat, the VP of America Television, Channel 4

Bribe receipts. Left: a supreme court justice acknowledges being paid US$10,000. Right: a member of the National Electoral Board acknowledges being paid US$15,000

Hepatitis B: the reason why China has higher male-to-female ratio

In many Asian countries the ratio of male to female population is higher than in the West -- as high as 1.07 in China and India, and even higher in Pakistan. Most people blame the parental preference for boys in these countries and one-child policy in China for creating the gender imbalance. Chicago University professor Emily Oster has new explanation, that the sex ratio imbalance is caused by hepatitis B virus that are prevalent in these countries.

Existing medical literature indicates that carriers of the hepatitis B virus have offspring sex ratios as high as 1.55 boys for each girl. Hepatitis B is common in many Asian countries, especially China, where some 10 to 15% of the population is infected.

Professor Oster  finds that hepatitis B can explain about 45% of the “missing women”: around 75% in China, between 20% and 50% in Bangladesh, Egypt, and West Asia, and under 20% in India, Pakistan and Nepal.

For governments that are worrying about potential social unrest and threats created by tens of millions of bachelors, the solution is to vaccinate their people agaisnt Hepatitis B virus, which will naturally bring more girls into the "marriage market".

Hepatitis B and the Case of the Missing Women  (PDF file)
Published in the Journal of Political Economy
Abstract:  In many Asian countries the ratio of male to female population is higher than in the West -- as high as 1.07 in China and India, and even higher in Pakistan. A number of authors (most notably Sen, 1992) have suggested that this imbalance reflects excess female mortality and, as a result, have argued that as many as 100 million women are ``missing. This paper proposes an explanation for much of the observed over-representation of males: the hepatitis B virus. Evidence drawn from the existing medical literature as well as new studies of recent vaccination efforts indicate that carriers of the hepatitis B virus have offspring sex ratios as high as 1.55 boys for each girl. This is strongly supported by cross-country evidence on hepatitis B prevalence and sex ratios at birth. Hepatitis B is common in many Asian countries, especially China, where some 10 to 15% of the population is infected. Using data on viral prevalence by country as well as estimates of the effect of hepatitis on sex ratio drawn from a wide range of sources, I find that hepatitis B can explain about 45% of the missing women: around 75% in China, between 20% and 50% in Bangladesh, Egypt, and West Asia, and under 20% in India, Pakistan and Nepal.

Red states, blue states, and the welfare state: geography rules!

The divide of “Red states, blue states” exists not only in the UnitedStates, but almost everywhere in the democratic free world. It is also true in every country that liberal parties always concentrate their support in urban areas, even in countries where urban areas are in much richer than rural areas. Another stylized fact we always observe is that in countries that adopt plurality electoral rule as opposed to proportionate representation electoral rule, socialist candidates are less likely to take power.

Why is it so? Professor Jonathan Rodden (MIT) provides an explanation based on economic geography. By economic of scale and agglomeration economy, it is natural that manufacturing bases always cluster together and form what will be later called urban metropolitan areas. Workers, who reside in these urban areas are more likely to be mobilized around a redistribution agenda. This is why liberal parties have to rely on urban voters.

Business interests in some countries, when they extended franchise to workers more than 100 years ago, however build a safeguard in the electoral system to prevent socialists and communists from taking power. This safeguard is the so-called “plurality electoral rule” and “small single-member electoral district”.

Because workers are concentrated in urban areas, pro-redistribution candidates usually have a lot of surplus vote in urban area. Single-member districts however make it difficult for workers (who are usually concentrated in small number of urban districts) to translate votes into seats, because a victory with 30% margin or 5% margin is not different when it comes to allocation of seats.

Another geography law that goes against leftist parties is that, in single-member district system, for a party to win, the pivotal voter is the median voter in the median district (which happens to be suburban area), who are usually politically to the right of the national median voter. If the leftist party wants to win over this voter by moving their platform to the right, another more fundamentalist leftist party will enter from the far left to steal away lefties votes; If it doesn’t move to the right, however, it will never win a majority. This creates a dilemma and a mission impossible for leftist parties.

In many continental European countries, proportionate representation (PR) electoral rule combined with multi-member large electoral districts, however, help workers to pull together their votes. This is why in these countries, socialist pro-redistribution candidates are more likely to be elected. Professor Rodden predict that, in two otherwise identical countries, the one that uses single-member district plurality electoral rule will less likely to develop a redistribution welfare state.

As a matter of fact, in the UnitedStates, we can also observe the effects of the two different electoral systems. Electoral districts for the House of Senate are state-wide and combine rural, urban and suburban areas. Workers in urban states thus can effectively translate their numbers into seats, and pro-redistribution Senate candidates are more likely to be elected. This is why in U.S. Senate, although rural states by design are overrepresented, the political orientation is still biased to the left compared to the House of Congress where congressmen are elected from small single-member districts.

Reference:

Jonathan Rodden: Read states, blue states, and the welfare states (PDF file)

Edward Glaeser: Myths and Realities of American Political Geography (PDF file)

The political economy of hatred: What cause racism, anti-Semitism, and anti-Americanism

Harvard professor Edward Glaeser's  new study “the political economy of hatred” demonstrate to us how politicians – “the entrepreneurs of hate” –   spread hate-creating stories to discredit opponents whose policies benefit an out-group.

If you repeat a lie often enough, it becomes the truth. People who hear these stories think they might be true and will investigate those stories only if there are private benefits from learning the truth.

Anti-Semitism also occurs in places where there are no Jews and among people who have never met Jews. 34 percent of French but only 27 percent of the Vietnamese have an unfavorable opinion of the United Sates, although the latter had a bitter war with the U.S. only several decades ago.  According to the 2002 Gallup Poll of the Islamic World, 89% of Kuwaitis and 96% of Pakistanis do not believe that Arabs destroyed the World Trade Center.

The central prediction of Professor Glaeser’s model is that hatred will be spread against poor minorities by anti-redistribution candidates and spread against rich minorities by pro-redistribution candidates. It is always cheaper and more convenient to refute your opponents by spreading hatred. Hilter, in an attempt to discredit socialist, preferred to cite the high percentage of intellectuals of Jewish origin among social publicists as proof of its subversion.  Galeser attributes the tragedy of Jewish to the natural law that hatred is particularly likely to spread against groups that are politically relevant and socially isolated.

In his study, he uses a theoretically model and three examples to illusrate the idea. The tree examples are (1) racism in the United States (2) Anti-Semitism in 19th century Europe (3) Islamic hatred of Americans.  Very nice analysis.

The Political Economy of Hatred (PDF file)
Abstract: This paper develops a model of the interaction between the supply of hate-creating stories from politicians and the willingness of voters to listen to hatred. Hatred is fostered with stories of an out-group's crimes, but the impact of these stories comes from repetition not truth. Hate-creating stories are supplied by politicians when such actions help to discredit opponents whose policies benefit an out-group. Egalitarians foment hatred against rich minorities; opponents of redistribution build hatred against poor minorities. Hatred relies on people accepting, rather than investigating, hate-creating stories. Hatred declines when there is private incentive to learn the truth. Increased economic interactions with a minority group may provide that incentive. This framework is used to illuminate the evolution of anti-Black hatred in the United States South, episodes of anti-Semitism in Europe, and the recent surge of anti-Americanism in the Arab world.

Why are levels of welfare benefits lower in some states? Research shows that racism may be one of the reasons

Why are levels of welfare benefits higher in some American states and lower in others? Some may speculate that maybe residents in the former states are altruists and more moral than others.

Academic research however shows that the differences are the results of both financial self-interest and interpersonal preferences (well, we usually call it racism).

A study done by Harvard professor Erzo Luttmer and published in the Quarterly Journal of Economics shows that:
(1) Individuals decrease their support for welfare if there are more welfare recipients in their area
(2) Individuals increase their support for welfare spending if a larger fraction of welfare recipients in their area belongs to their racial group (Question: which  word with r as the initial do we usually use to describe such type of preference, thought, and behavior?)

He derives the results from nation-wide surveys as well as voting behaviors in California’s Proposition 165 in 1992 primaries, in which governor Pete Wilson proposed both cuts in welfare generosity and changes in the state budget process.

Professor Luttmer concludes that the results also help to explain why welfare benefit levels are relatively low in racially heterogeneous states. Actually, the results also help to explain why European countries redistribute more than we do, as they are usually racially more homogenous.

Group Loyalty and the Taste for Redistribution (PDF file)
Abstract: Interpersonal preferences - preferences that depend on the characteristics of others - are typically hard to infer from observable individual behavior. As an alternative approach, this paper uses survey data to investigate interpersonal preferences. The General Social Survey contains self-reported preferences for welfare spending, which I validate with voting behavior on cuts in welfare benefits. Using this preference measure, I show that preferences for income redistribution are not only determined by financial self-interest but also by interpersonal preferences. These interpersonal preferences are characterized by a negative exposure effect - individuals decrease their support for welfare if there are more welfare recipients in their area - and racial group loyalty - individuals increase their support for welfare spending if a larger fraction of welfare recipients in their area belongs to their racial group. My results hold when areas are defined as states, metropolitan areas or census tracts and are robust to various specification checks. Direct evidence that individuals' preferences for redistribution are partly determined by the effects of redistribution on the utility or lifestyle of others in their community is valuable for the development of more accurate theoretical models and for the design of redistributive policies. The results also help to explain why welfare benefit levels are relatively low in racially heterogeneous states.

Don't say “they steal our manufacturing jobs” before your children!

In last commentary "culture is your destiny", I mentioned that our own children will be influenced by our own culture, and it is our responsibility to teach them the good virtues and good work ethics for them to be able to compete with others when the grow up.

There is empirical evidence that even if we don’t teach them, they will learn from us. Professors Raquel Fernandez and Alessandra Fogli study the work and fertility behavior of women 30-40 years old, born in the U.S., but whose parents were born elsewhere, and find that past female labor force participation and total fertility rates from the country of ancestry have strong explanatory power on the work and fertility outcome of these second-generation immigrants.

So, please behave yourself before your children! If you always talk before them about “they steal our manufacturing jobs”, they will start thinking that “other people steal my high school graduate certificate” or lying about "The dog eats my college degree" when they don’t study hard and fail the tests.

Culture: an empirical investigation of beliefs, work, and fertility (PDF file)
Abstract: We study the effect of culture on important economic outcomes by using the 1970 census to examine the work and fertility behavior of women born in the U.S. but whose parents were born elsewhere. We use past female labor force participation and total fertility rates from the country of ancestry as our cultural proxies. These variables should capture, in addition to past economic and institutional conditions, the beliefs commonly held about the role of women in society (i.e., culture). Given the different time and place, only the beliefs embodied in the cultural proxies should be potentially relevant. We show that these cultural proxies have positive and significant explanatory power for individual work and fertility outcomes, even after controlling for possible indirect effects of culture. We examine alternative hypotheses for these positive correlations and show that neither unobserved human capital nor networks are likely to be responsible.

Does the new labor law really harm French youth? Who actually take to Paris streets? The truth is...

French are  taking to streets protesting. Why? They say they are protesting against a newly passed law that gives employers the right to fire workers under the age of 26 during their first two years on the job. They are outraged as it sounds that it gives the right to employers to fire people at their will. For them, it is like “What? You passed a law giving capitalists the right to kill people.....”

What does the law really do?

If I am an employer, and I am (under the old law) not given the right to fire a worker once I hire him; What will I do when making hiring decisions?  First, I am very reluctant to hire any one, as I fear that I may be burdened by him in case the demand for my products turns out lower than expected. Second, I will prefer hire an elder and more experienced worker, as I can know his quality from his previous career. As a result, under previous French labor law that making firing very difficult, unemployment is high and in particular for young people without any working experiences.

The new law is addressing exactly this problem. They give the right to employers to fire young workers under the age of 26 during their first two years on the job. Now I am more comfortable in hiring new and young workers. First, I can hire him when sales are rising and fire him when demands are low. (Note that previous I won’t hire this person in the first place); Second, I am willing to try out a young worker, because compared to an elder worker, it is easier for me to fire him if he turns out to be of low quality.  Thus the law will give many people the change of a first job. This is why the law is known as First Job Contract (The Contrat Premiere Embauche, or CPE)

Many workers are outraged by the word “fire”. But think about it: you can only be fired if you are hired in the first place. If you are unemployed, a law that protects you from being fired is meaningless.  Let me ask you: would it be a great thing if we pass a law permitting people to get anything from grocery stores for free? Isn’t it great? But in that case grocery shops will be empty and shopkeepers will move away and you would starve and cry outside the shops, and the law is meaningless for you. I don’t think I need to elaborate on another example such as passing a law exempting everyone from paying back credit card debts. Does it mean that then you will get unlimited credits from banks?

Why do they take to streets and who are they?!

Now you understand that the law actually helps unemployed young people? But why do they take to streets? French are smart people and they should have already figured out what I say. Yes, they do! And that’s exactly why they don’t take to streets. Ironically, It is another group of people that are protesting, those who are over 26, educated , or unionized. Hey, the “victims” are staying home, why are you instead in such a  hurry?!

As rightly pointed out by a BusinessWeek article,

“The students involved in the most recent demonstrations against the CPE are the ones least likely to be affected by it. That's because university students in France are often nearly 26 by the time they complete their studies. Relatively few would thus fall under the law's purview. Similarly, many of the trade unionists and civil servants protesting the CPE are also unlikely to ever be affected by it because they already have extremely strong job protection. Indeed, the French youth who might benefit the most from the CPE, the immigrant and first-generation youth that burned the suburbs of Paris last year, are rarely seen or heard from in the fevered demonstrations about CPE. "To a certain extent," notes Six, "It's the wrong kids marching in the street."

Now their motive is clear:  it is not about protecting the relatively unskilled young people, it is about protecting their own turf. Under the new law, unskilled young people will be given more chances by employers in trying their first jobs, threatening the job positions of elite college students and trade unionists. When the old law made firing workers very difficult, employers usually prefer experienced workers (who are already unionized) or college graduaes who demonstate their quality by being admitted into colleges and having managed through graduation. Under the new law, everyone is equal, and employers can check out who are of higher quality. Elite college students and unionists do not like this. It's that simple.

It is perfectly understandable that people protest against legislative changes that negatively affect their own interest. But by cheating? By claiming that you are protesting on behalf of those who you actually want to get rid of? Give me a break.

Globalization and taste convergence: The cases of wine and beer

We’ve heard too much discontents of globalization. Globalization however is unstoppably changing every aspects of our life. Take alcohol consumption as an example.  Joshua Aizenman and Eileen L. Brooks at the University of California (“wine country” campus?) examine historic data in 38 countries around the world and discover that there is clear convergence in the consumption of wine relative to beer between 1963 and 2000 . Relative consumption of wine can be explained well in 1963 by grape production and latitude, but these variables are much less significant in 2000. Now you don’t need to live in wine country to be able to enjoy great wines!

Tip for our readers: In another paper "Products and Prejudice: Measuring Country-of-Origin Bias in U.S. Wine Imports" , Professor Brooks discovers a secret that a “Product of Italy” label can raise the price of a bottle of wine by more than 50% without raising the quality, which means that:  if you see two bottles of wine with same price, one is “Product of Italy” and the other from Argentina, don’t buy the Italian one! Curious why folks beleive that Italian wine should sell at higher prices? because they are better economists?

Globalization and taste convergence: The cases of wine and beer
Abstract: This paper investigates changes in cultural consumption patterns for a low concentration industry: wine and beer. Using data on 38 countries from 1963-2000, there is clear convergence in the consumption of wine relative to beer between 1963 and 2000. Convergence occurs even more quickly within groups of countries that have a higher degree of integration. A key prediction of international trade is confirmed in the data: greater trade integration weakens the association between production and consumption patterns – although the relative consumption of wine can be explained well in 1963 by grape production and latitude, these variables are much less significant in 2000. Despite these “scientific” explanations for the consumption of wine, there is also a cultural angle to wine consumption. While the relative wine consumption of France and Germany is converging, several Latin American countries fail to converge. The patterns of convergence are consistent with dynamics of adjustment in an overlapping generation habit formation model.