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October 10, 2008

Going After Economic Gangsters

79 , Anthony
Adjunct Professor
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What is an economic gangster?
There are crimes of passion and crimes of calculation. An economic gangster represents the calculating side to human vice — often in the form of corruption and violence. Our quintessential economic gangster in the text is Al Capone, the notorious Chicago mobster. He used violence when it served his purposes, which almost always came down to rational business. The man started out life as an accountant — he was clearly someone who thought about life as a sum of financial costs and benefits.

My wife and I are also working our way through Season 3 of HBO’s The Wire, and the Stringer Bell character is also a great example of what we have in mind: he’s a cold-blooded killer, the head of a notorious Baltimore drug organization, and he’s figuring out how to do this more effectively by applying what he learns through the economics classes he’s taking at a local community college!

What prompted you to pursue — academically speaking — these economic gangsters?
My coauthor, Edward Miguel, and I have dedicated our lives to thinking about poverty, violence and corruption, and it’s amazing how often these three things go together. I study corruption and Ted studies violence, but we are both ultimately engaged in trying to understand why poor countries are poor.

I believe there ’s a lot to be gained by taking economic analysis more seriously in approaching these matters. The book is, in part, about using the tools of economics to uncover these problems and to solve them.

It’s also about encouraging people to look beyond the superficial explanations for calamitous events. There is a chapter in the book on witch killings. The chapter provides an underlying economic explanation for what seems like a superstitious, supernatural phenomenon. It turns out that witch killings cluster in poor families at times when there isn’t enough food to go around. Someone’s got to go, and it’s even better if that person is a net consumer of household resources. That is, grandma. Most people can’t tell themselves that they are going to kill their aunt or grandmother because there’s not enough food to go around. There has to be a narrative surrounding it, and that’s where witchcraft comes in. When the crops fail, there are a lot more witches.

To draw a link to current events, there are clear implications for how we should run policy in Iraq, and I think that the United States government is actually headed in this direction. I’m in favor of troop withdrawals, but there has to be some sort of propping up of incomes if we want to prevent a return to greater civil unrest and the unraveling of the recent gains we’ve seen. I would not want to see the make-work programs organized through the Iraqi government rolled back. On the surface, the story is about jihadi movements and ethnic tensions, but the underlying causes are often about economics. When you cater to people’s fundamental economic needs, things get a lot more tranquil.

Why don’t we see the same kind of corruption happening on a large scale in the United States that we’ve seen in countries with developing economies?
We have rules and regulations that hinder this sort of behavior; even if people are not constrained by conscience, they can be constrained by law. In the United States, we have both greater social sanction against corruption and more laws that are enforced more effectively.

What are the best ways to curb corruption?
Basic economic common sense is a good place to start. Let’s take an example: Why do people take bribes? Perhaps because they’re poor and need to supplement their incomes in order to feed their families. An obvious solution is to raise salaries. Then they can indulge their consciences (hard to do when your kids are starving). Alternatively, perhaps a Kenyan policeman with a $20 monthly salary doesn’t care about losing his job, but given a $40 salary he’s less likely to take bribes if there’s some chance it results in his getting fired. Raising civil servants’ salaries is a very common policy prescription for rooting out corruption. That’s the theory. But ultimately we need to see what happens when economic theory meets the real world. So something we really push in the book — for dealing with both violence and corruption — is more policy experimentation, guided by theory, by the world’s governments.

Why hasn’t foreign aid been more successful in helping eradicate poverty?
There is a broad sense that a lot of money has simply been stolen or utterly wasted. This comes back to understanding the problem of corruption. We would also argue that, while some aid should be directed at longer-term investments, this has been too much the focus of aid in recent decades. Highways, power plants and hydro dams can be a big help. But not if they get destroyed or fall into disrepair because of political instability. So we need to allocate more aid to dampening economic ups and downs.

The growth trajectories of the big economic losers of the last half-century have a lot of ups and downs. If there is some possibility that a country every five years descends into economic chaos and civil war, investors aren’t going to write many checks for investment or aid in that country. We hope that by working to prevent economic collapses, long-term investment — courtesy of the private sector — will take care of itself. If we can create a stable business environment, the money will come.

What is the role of education in foreign aid to poor countries?
There has been tons of money poured into education around the world. Again, a lot of that money is stolen. We’re not advocating that there be no foreign-aid money directed at long-term programs, such as education. Education surely plays a large role in the long run. But we argue that this type of development assistance is not going to be useful unless we can also iron out economic ups and downs, lest these longer-term investments be destroyed by civil strife and economic collapse.

Raymond Fisman is the Lambert Family Professor of Social Enterprise, a Bernstein faculty leader at the Sanford C. Bernstein & Co. Center for Leadership and Ethics and research director of the Social Enterprise Program at Columbia Business School.