Economic Gangsters by Raymond Fisman and Edward Miguel

As Raymond Fisman and Edward Miguel explain at the beginning of their new book, Economic Gangsters: Corruption, Violence, and the Poverty of Nations, 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.

My favorite example: how do you measure the value of a corporation’s political ties? Find a dictator running a country with a stock market; find companies with close personal and political ties to the dictator; and see what happens to corporate stock prices when the dictator’s fortunes wax and wane, compared with the prices of non-connected company shares and general stock indices. Stocks of the company owned by the son of Suharto, the former Indonesian leader, tumbled when he had the sniffles, and the data Fisman and Miguel gather comparing prices over time with news reports on Suharto’s health is enlightening. They find similarly creative ways to measure smuggling between Hong Kong and mainland China and the “culture of corruption” in countries around the world. Further, they find we can understand these practices by understanding the underlying incentives—even those behind such things as witch killings.

The authors put forward a few suggestions of their own for ending—or at least ameliorating—poverty, the best of which is probably Rapid Conflict Prevention Support. Violent conflict in Africa becomes significantly more probable as rains (and crops) fail and poverty and hunger creep closer. Foreign aid could be distributed as a system of insurance where disbursements would begin based on meteorological data. This would eliminate incentives among farmers to work less (and receive insurance payments) and among national leaders to fake or even increase poverty (to get more aid).

But 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.