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Economic Gangsters: Corruption, Violence, and the Poverty of Nations

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Eight years ago, as I crossed the Uganda-Kenya border, I was sequestered in a shack, interrogated, threatened with prison, and ultimately required to pay a bribe by border guards. After that harrowing experience, I returned to my hotel and recounted the story to the first friendly face I saw: my sympathetic colleague Ted Miguel. Ted and his colleague Ray spent the succeeding years studying violence and corruption in poor countries; and this sweet book is the latest fruit of those labors.

What can economics tell us about corruption and violence around the world? More, perhaps, than you'd expect. Ray and Ted use surprise changes in a dictator's health to measure the value of political connections in Indonesia, rainfall to capture the effect of recessions on violence in Africa, and tricks in the trade data to reveal smuggling. (That's not to mention the parking tickets - Chapter Four.) They present their clever research in surprisingly clear English, and they draw on the related research of other economists as well. They really know how to tell a story: I was captivated by the opening recounting of Kenyan author Ngugi's woes and delighted by the creative policy making of Antanas Mockus, mayor of Bogota.

It's hard not to compare popular economics books today to Freakonomics: Gangsters has the advantages of Ted and Ray's witty, pleasant voice, more of a thematic focus, and none of the self-adulation that took away some Freakonomics' shine.

Despite the focus on corruption and violence, ultimately the book is presenting a miscellany of work that is related but isn't (and perhaps cannot be) circumscribed into a larger theory. Occasionally I found myself wishing a central theory like you find in Malcolm Gladwell's books. But then again, those theories usually aren't convincing for exactly the reason that Ted and Ray don't have one: they are careful and big, broad theories are not. I really enjoyed the clear policy recommendation of Rapid Conflict Prevention Support in Chapter 6, and I look forward to more clear recommendations in the next book. Again, Ted and Ray are careful and tend not to recommend policies that don't have clear evidence to stand on. Not all scholars are comfortable laying out strong recommendations on limited evidence; two books by scholars who are more comfortable are The Bottom Billion and The End of Poverty. (As I recall, that's also the self-definition given by an economic hit man!) The main policy recommendation, ultimately, is more evidence-based policy making, particularly randomized trials of development programs (but with a healthy view of the realistic scope for these kinds of trials).

This book won't just show you that economists can be clever (although it will show you that): It shows that economics, cleverly applied, can illuminate some of the most intractable development problems of our time. I strongly recommend it. And if you don't trust me, Publishers Weekly said that in this "surprisingly spry" read, "fascinating insights abound" [1]. Take it from both of us and learn something.

[1] Publishers Weekly, 6 October 2008.

A few years back, economists Ray Fisman (Columbia University) and Edward Miguel (University of California, Berkeley) caught the attention of the global media and the United Nations with their study of diplomats' unpaid parking tickets. At the time, diplomatic immunity allowed representatives to the international body to park in violation of city traffic codes, racking up fines. Fisman and Miguel looked at the list of traffic violations for UN plates over several years. They found that diplomats from some nations such as Canada and Ireland behaved themselves, parking lawfully and paying any tickets, while others such as Kuwait and Chad exploited their power, sometimes in ostentatious ways. Why? The ticket behavior, the economists suggested, is a proxy indicator for the intersection of culture and corruption.

Now, in their recently published book, Economic Gangsters: Corruption, Violence, and the Poverty of Nations, Fisman and Miguel extend their corruption lens to the problems of conflict and development. They look for economic causes of conflict such as water scarcity or food crises to help explain everything from civil wars to witch trials. They ask whether more money or better governance is the key to economic growth for Africa, concluding that--although corruption and economic abuse is a key challenge to development--it won't really be possible to answer the big questions of the field until there is better quality, more scientific evaluation of the results of aid projects.

Economic Gangsters is a pleasurable and fast read, written for a popular audience who may or may not know the context of the work. For development specialists familiar with the writings of Jeffrey Sachs, William Easterly, and Paul Collier, the broad contents of the book will be familiar. As other reviewers pointed out, there is also a certain sense in which discussions of warlords and blood diamonds brush up against diplomats' parking tickets or randomized sampling without connections between the topics ever being delineated. On the whole, however, Fisman and Miguel's presentation feels fresh and dynamic. Even seasoned development practitioners are likely finish with a few new ideas inspired by the book's creative approach to cross-pollinating approaches and examples.

The book is available in print and in Amazon's Kindle e-reader format. The digital version suffers from occasional print type errors (for instance, writing budget as bud-get), but the charts and tables thankfully appear crisp and clear on the Kindle screen. I read in Kindle format and would be pleased to do so again.

Economic Gangsters deserves to be widely read. The authors' tone is friendly and simple, approachable even. This is important, given the complexity and high stakes of the issues at hand. Indeed, the economics of conflict and corruption need to be more widely understood if donor countries' policy making is going to be improved. Yet, one finishes reading this book on the topics of war, poverty, suffering, crime, and interventionist failure feeling not overwhelmed, but rather empowered--equipped with intellectual tools for making the world better, little by little.

I started off thinking that maybe this book's title should be Gather Ye Data Where Ye May. It starts with a couple neat chapters where the authors try to measure various hidden variables -- how much one company's fortunes depend on connections to a dictator, say, or how much gets smuggled into a particular country. You can get a reasonable measure of smuggling by counting exports from one country and imports into another. The authorities only tax you on the way in, not on the way out, so you have every incentive to lie on the import forms and tell the truth about your exports. If 10,000 BMWs leave Hong Kong destined for China, and only 9,000 arrive in China having been shipped from Hong Kong, you can guess that about 1,000 BMWs were smuggled out of Hong Kong into China. Perhaps they were creatively relabeled `Hyundai,' thereby carrying a much smaller tariff burden.

The authors dig a bit deeper into the numbers and point out a loophole that nations ought to fill if they want to modernize their system of duties: give similar products similar tariffs. One example here is amusing: a "boring/milling machine -- numerically controlled" used to get a 10% tariff on its way into China, whereas a "boring/milling machine -- other" got a 20% tariff. People have every incentive to claim that their boring/milling machine -- other is actually a boring/milling machine -- numerically controlled. The closer the products are in appearance, the easier it is for importers to pass off the one as the other and evade the higher tariff. (The authors give us a thought experiment, wherein chickens and turkeys come in for different tariffs. I only wish this were real. It would make me smile.)

Next the authors ask: is there any way to measure how corrupt a nation is? They find a smirk-worthy means of measurement: look at how often diplomats pay their parking tickets. Diplomats, you'll remember from the Lethal Weapon movies, can wave diplomatic immunity around anything and magically get off scot-free. This includes parking violations. So find some place where a large number of diplomats congregate and see whether they pay their tickets even though they don't have to. As it happens, the UN fits the bill: New York City keeps detailed records about which ambassadors received citations, which nations they represent, how much they were fined, and whether they paid the bill. From this, Fisman and Miguel get a rough measure of corruption, which they can try to connect to other measures like the World Bank's.

Don't think for a moment that I take this particularly seriously, by the way. The "parking metric" is a rough measure, at best, of what you'd do if you knew no one was looking. What's vexing, then, is that the authors seem to take it quite seriously indeed. 40% further on in the book, we see Fisman and Miguel writing about Africa's history of extractive industries feeding nothing back to their people, "To the extent that stealing parking spots in New York City really is correlated with stealing government funds, Chad is in for trouble." This example just doesn't do much at all of the heavy lifting that they expect it to. The authors seem surprised that other researchers could have accomplished much without parking data: "Even without hearing of the wanton parking habits of Chad's diplomats, donor organizations were fully aware of the endemic corruption in Chad's government ...".

So maybe, goes the implication, nations remain poor because their people are fundamentally corrupt. Or maybe not: the next chapter considers the possibility that domestic instability -- civil wars, particularly -- result from drought. That is: the rain stops falling, and the only available work is in a gang. Not a terribly controversial idea. The authors' approach is novel: send in the peacekeepers when drought makes war look likely. Get a rapid-response team to stop wars before they start. There are unexpected curiosities here: during droughts, there's more witch-burning, and the witches tend to be old women. The authors speculate that this might be the survival instinct disguised as superstition: old women consume more resources, so they have to be the first to go. The policy response they propose here is old-age pensions: turn the women into village assets, rather than liabilities.

We might label the connection among all of these "discovering the economic gangster in all of us": under what circumstances would we become corrupt or join a militia or burn a "witch"? How bad would the world around us have to get? And how do we use this knowledge of human self-interest to prevent disaster? Economic Gangsters is a slight introduction to these questions, and didn't really feel solid enough to justify the time. I suspect there's a better book on the same topic out there.

As Raymond Fisman and Edward Miguel explain at the beginning of their book, there are two main currents of thinking among those who opine on the wisdom of foreign aid: the "poverty trap" view, which holds that aid must be injected to end a vicious cycle in which inability to save leads to disaster in lean years, and the view that more such aid is simply sending good money after bad, straight into the hands of corrupt officials to be funneled away or otherwise wasted. Fisman and Miguel aim to look at corruption and violence in developing countries to determine how prevalent such evils are, how they are caused, and how they can be prevented--and, therefore, what the best way, non-ideologically-speaking, of raising up poor nations might be.

The funny thing about corruption is that it tends to exist out of sight--at least, out of sight of official statistics and public measurements. No one reports the bribes he takes on his income tax returns. So Fisman and Miguel have to come up with creative means of measuring corruption of various types, and this is the most fun part of their book. Economic Gangsters is completely accessible to the general reader, with virtually no economic jargon or concepts more difficult than "incentives matter," but it perfectly captures the exciting, puzzle-solving nature of this kind of academic research.

Fisman and Miguel's biggest, and most important, suggestion is the basic one that foreign aid and other solutions to developing-nation poverty be studied and implemented in an evidence-based manner. Without experimental data it's very difficult to determine whether a particular program is actually effective or not (or cost-effective or not). Randomized trials, like those carried out for developing medicines, are rare in the field of poverty reduction. But sometimes they are carried out. For example, local democratic control of public works projects is often touted as an antidote to corruption and skimming of funds. But in Indonesia a test was conducted to compare road building under local control, the thread of a federal audit, and no corruption prevention. Local control did little better than the control group, while those projects that were audited involved significantly less stolen money.

The authors adhere to their intention to remain non-ideological, and their interest is clearly in going where the evidence leads them. Unfortunately, large-scale economic experiments are often impossible and unethical, so some things can never be tested. But those interested in solutions that actually work should use what information they can. Economic Gangsters provides some of that information, and an interesting look at how to find it. It also tells some great stories about the incentives economic gangsters respond to, the strange circumstances that sometimes create these incentives, and how governments and other groups can play with them to aim for better outcomes.

The most intriguing aspect of this well written book by two academic development economists is their discussion of the methods and materials they and other economists used in studying such issues as all pervasive corruption in Indonesia during the Suharto regime in Indonesia; how large scale smuggling from Hong Kong to Mainland China (entire container loads of goods falsely identified as holding similar but less taxed items) is done and why Botswana is the one of the few countries in sub-Sahara Africa to successfully deal with periodic drought, keeping it from impoverishing the rural population and freeing them from the "poverty trap" that characterizes so much of the rest of Africa.

Many will argue with their conclusions--for example the authors have a very different view of the result of corruption in Indonesia than does Ha-Joon Chang. Due most likely to a difference in approach, Fishman and Miguel look at it as an example of crony capitalism, showing how connections to Suharto were the most important factor in how the stock market valued on of the companies tied to him and his family. Chang's view is equally pragmatic but less moralizing. He compares the economic progress of Indonesia, one of the most populous and crowded countries on earth but one with significant natural resources, especially oil, with Zaire, now the Democratic Republic of the Congo, which has untold mineral wealth.

Suharto and his family controlled important and lucrative contracts for emerging technologies, like wireless phones and cable TV, as well as licenses to drill for oil. But they kept the resulting profits within the country, essentially re-investing their corruption fueled profits back into the local economy. In Zaire, kleptocrat-in-chief Mobuto not only demanded huge payoffs for the right to do business in his country but then sent billions to overseas bank accounts, robbing his nation and his subjects of any return for their work and investment.

The authors are too easy on the activities of the World Bank--on of them was a staff economist there for several years, painting the supranational body as one committed to the best for its client nations in the developing world, an argument with which William Easterly (among others) might not agree. This book is a decent starting place for those interested in how development economics works, why it often fails and some of the pitfalls that are faced in implementing what should be beneficial programs.

These two authors have come together to provide the reader with a nuanced and complicated view of development. Mainly, because development is complicated. They provide specific stories, research, and ideas about how some problems can be solved. They start us on the path of finding a broader theory by figuring out piece by piece what works. Insightful, though provoking, and incomplete; which is exactly as it was designed.

Behavioural economists have been bringing us a lot of interesting books recently, and this book continues that trend. There are numerous reasons why poor countries are poor, and grand corruption is one of them. The authors see themselves as investigative economists, engaging in forensic analysis of statistical evidence to track economic gangsters.

The book explains how Tommy Suharto, the former Indonesian president's son, made his money, how lucrative smuggling between Hong Kong and China has been, how the mayor of Bogota used embarrassment as a tool against lawlessness, the relationship between a country's corruption and the failure of the country's diplomats to respect parking laws, the relationship between drought and war, economic contributing factors to violent crimes, and many other interesting puzzles.

As the first chapter explains, there is no singular explanation for why poor countries are poor. That does not stop the authors from offering their own idea for tackling at least one aspect of poverty: Rapid Conflict Prevention Support, in which foreign aid provides a form of insurance to African farmers against a sudden drop in income attributable to drought or other adverse circumstances. This idea seems to have some merit, and the book is definitely entertaining to read.

I bought this as an intro to economic crimes and was quite disappointed. The author addresses the topic by examining a variety of cases from different nations. Unfortunately the level of analysis is very superficial and there is a fair amount of bias and unsupported statements scattered throughout. The problem of economic crimes is complex and interesting, however this book does little to contribute to a better understanding of the topic. Not worth it even as a primer.

I enjoyed this book and I think the research is compelling. Aside from a chapter in the middle of the book that veers inexplicably into Bush-bashing, Economic Gangsters is well written and very accessible. It is clearly written to introduce their ideas to readers who may have little or no experience with economics and there is little math or mathematical theory involved. I managed to breeze through it in about a week of before-bed reading.

[Originally published at my blog, [...]

I read this book recently. The authors (Ray Fisman and Ted Miguel) are development economists at big schools (Columbia and UC Berkeley; Ted's in the econ department, but I see him and his RAs all the time), and they've written this book to give laymen some insight into the research we (economists) do and how that research can be used to advance development around the world.

Ray and Ted have structured their book around academic papers that they and their colleagues have written, omitting the tedious math and econometrics and adding explanations, stories and context to the questions at hand.

Relative to an economic textbook, this book is much more accessible and intuitive; relative to other development books (Easterly's Elusive Quest for Growth, Scott's Seeing Like a State, and even Perkins' Confessions of an Economic Hitman), this book is, uh, boring and overly didactic.

Yeah, sorry.*

Perhaps I am a jaded reader -- I've read about 2/3rds of the papers behind the book, and I've been "doing" development economics for 5-15 years (depending on who you ask) -- but the book only grabbed my interest a few times, e.g., the mayor of Bogota who used mimes to shame those breaking traffic laws. Put differently, I can think of better ways to spend your time.**

For those of you interested in the contents, here's a preview, chapter by chapter:

1) Economic development is impeded by corruption.

2) You can measure a company's political importance by watching its stock price when the corrupt dictator (Suharto in Indonesia) gets sick.***

3) You can detect corruption in the discrepancy between figures of the exporting country and importing country (e.g., Hong Kong to China). Distorted tariff and trade rules encourage corruption.

4) Some cultures are more corrupt than others. Ray and Ted discuss their brilliant paper, which showed that diplomats to the UN in NYC obeyed parking laws in rough proportion to their corruption at home (and attitudes towards the US) -- despite having the same immunity from prosecution. (I'm guessing that this paper was their book proposal.)

5) No water, no peace -- conflict rises when water supplies fall.**** Global warming will make this worse. Ray and Ted overlook an important problem in this chapter. They claim that the Rich world will not do too bad with climate change, but they forgot the adverse impact of a sick environment on quality of life.

6) When people are starving, they look for ways to reduce the demand for food. One way to do this is by finding and killing "witches". One way to stop the massacre of old women and children accused of witchcraft is to provide insurance against such risks, i.e., drought relief.

7) Countries can recover from war pretty quickly, but it's harder to recover from civil war or when ex-militants are left in unemployed groups. Vietnam succeeded; Iraq is failing.

8) Randomized trials (one village gets a new program, another "control" village is left alone) are a good way to evaluate anti-poverty programs.*****

Bottom Line: Anyone REALLY interested in development economics (but who is not an economist) should read this book. Everyone else should keep reading and debating at economics blogs :)

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* And who am I, a lowly postdoc without a book to his name, to question the output of two superstar professors? Just me, folks...

** Listen to this great podcast [...], in which Richard Epstein discusses inequality and happiness.

*** Read this paper [...] to really understand how a developing country moves from the "Natural State" to the "Open Access Order."

**** Check out the updated Environment and Security Water Conflict Chronology" [...] from Peter Gleick's Pacific Institute for Studies in Development, Environment and Security (yes, that's the full name). It's pretty exhaustive, but it's also pretty inclusive (it includes incidents when one person is attacked, "perhaps" over water...)

***** I'm still amazed that a PhD student (Ben Olken) was given [...] to study corruption in Indonesian road building. Holy Cow! That's enough to fund 200 "normal" PhD research projects!