Paper of the week: Does corruption have positive effects?


One of my objectives for 2016 is to summarise/comment an interesting paper per week here on the blog. Some will be related with procurement, some won't. The first paper is "Is Corruption Good for Your Health?" (Job Market Paper) by Guilherme Lichand, Marcos Lopes and Marcelo Medeiros. Available here.

That is pretty much the premiss under which the authors decided to look into how corruption affected outcomes in the Brazilian health sector. One would expect that a crackdown in corruption (via the use of random audit checks) would lead to better outcomes. That, however, depends on what metric success is being measured on.

Prima facie, introducing spot checks does reduce corruption by a significant amount, particularly when checks were done to any organisation within a 75km radius. Downstream, however, the effects are much different.

Using proxies such as hospital bed numbers per thousand inhabitants, immunisation coverage and access to piped water/sewer, Lichand, Lopes and Medeiros show that the Brazilian audit programme led to a marked reduction on those metrics. In procurement intensive processes/sectors, the audit programme led to less money being spent in the actual public goods that were supposed to be delivered. In fact, the reduction is so dramatic that the end result is a higher relative corruption per dollar spent than before the start of the programme.

The authors point out that perhaps without the incentive of corruption and corresponding rent extraction, public officials do not have the incentive to actually procure the public goods in the first place. If that is the case, then some corruption is indeed needed to ensure the final outcomes are as good as they can be. Furthermore, as correctly highlighted, since the taxes are collected centrally but the procurement/disbursement made locally there is limited oversight by tax payers (furthering the agent-principal issues).

There may be, however, a concurrent or alternative effect at play which the authors have not been able yet to set aside. By increasing the likelihood of discovery it may well be that the fear of being caught changes the attitude of even honest officials. Why? It is all about incentives and how complex procurement rules are.

If you are an honest civil servant and there is a significant downside when something goes wrong (being fired, as corruption is apparently the sole reason under which Brazilian public officials can be fired) and not significant upside when things go well, what do you do?

Well, you do not do anything that increases a risk of facing the consequences of an accusation of corruption.* As you cannot be fired for being a poor civil servant, you effectively allow the downstream outcomes to become worse as to avoid the risk of being charged with corruption accusations. In consequence, any discretionary spending will not be spent unless you are very comfortable in defending your decisions. Any excuse is good enough to put the brakes on a decision to procure.

Within a legal framework perceived as complex by officials, this attitude may lead as well to "gold plating" of procurement, ie using more complex procedures than strictly necessary "just in case". These tend to be longer and suck up more resources from the market and the contracting authority, thus contributing to the overall decrease in spending levels identified by by Lichand, Lopes and Monteiro.

I have interviewed Lichand for the Public Procurement Podcast, and the interview will be up in the coming weeks.

*Yes, being accused is different from being convicted. But that mud sticks and as we have seen in other settings, when there is a vested interest to find something wrong - particularly if procurement rules are complex to start with - people will find problems. When you have an anti-corruption unit conducting audits, its metrics and incentives are to find corruption.