Chapter 13

1. Chapter 13 The Political Economy of Development in Asia

2. Introduction • Mainstream or orthodox economic theory likes to think of itself as “scientific”. • They take care to draw a clear distinction between positive and normative statements. • Other economists, however, acknowledge the interdependence between economics, psychology, ethics and politics.

3. Cooperation, Altruism and Ethics • What happens when we expand the view of economic agents to include behavior that is more than narrowself–interest? • How does one account for charity, altruism, cooperation and ethics? • How about heroism? Act of rescues at great personal risk?

4. Cooperation, Altruism and Ethics • This perspective allows us to explore other motivations for individual behavior, such as the interests of others and society. • Altruistic behavior can put the interests of others on an equal plane with our own self-interest.

5. How Do We Model Altruism? • Put altruism as a taste variable in the utility function. • Allow altruism to be modeled as cooperative behavior in “prisoner dilemma” situations (see Box 13.1). • Altruism as quid pro quo - regarded as reciprocal/conditional altruism - in return for a favour.

6. How Do We Model Altruism? • Altruism may be a genetically inherited trait using sociobiology arguments. • Altruism may be a moral duty ala Kant’s ”categorical imperative.”

7. Advantages of Altruistic/Cooperative Behavior • Can raise level of welfare if income and wealth are shared – redistribution effect. • May stimulate intergenerational transfers and increase educational expenditures for children. • May increase saving and investment – life cycle effect to have intergenerational transfers.

8. Advantages of Altruistic/Cooperative Behavior • Better family life with greater social responsibility and less concentration on narrow self interest. • Better care for elderly. • Financial support for extended family – serves to replace/augment social security. • Reduces the problem of moral hazard.

9. Advantages of Altruistic/Cooperative Behavior • Reduces problems of principle/agent and asymmetric information. • Reduces problem of crime and corruption. • Improves business ethics (Ford Pinto, Exxon, Enron, tobacco companies). • Taking positions on issues as informed citizens (environment, health care, sentencing of criminals). • Avoids free rider problem.

10. How Does Altruism/Ethics Alter Economic Analysis? • We can augment economic analysis by including altruistic or cooperative or communitarian values in the objective function of individuals. • We can also try and go beyond economic analysis and develop a synthesis with other disciplines such as sociology and philosophy/ethics.

11. Corruption and Bribery • Corruption and bribery are used to pursue self-interest outside the legal framework. • In the principal agent model, the one who is seeking to bribe is the principal and the official who is being bribed is the agent. • The contract is awarded openly but bribe is given privately.

12. Corruption and Bribery • Corruption is believed to be worse in the present era in the developing countries. • Corruption and bribery reduce economic efficiency, create rent seeking and reduce welfare. • They divert funds from worthwhile projects to large projects where bidders for contracts can be bribed.

13. Corruption and Bribery • Also they can reduce growth – Barro found a “rule of law” variable was an important determinant of the rate of growth in cross-country growth regressions. • The index specifically measures the attributes of government such as quality of bureaucracy, political corruption and risk of government expropriation.

14. Corruption and Bribery • Corruption can be analyzed dynamically using game theory or the theory of epidemics. • There may be multiple equilibria for the level of corruption – such as northern Italy and southern Italy – as the result of a shock to initial conditions.

15. Corruption and Bribery • Corruption may be an inverse function of economic development. • Little has been written on this topic. • However it has been found that higher incomes and more stringent penalties helps to reduce corruption and richer countries have both.

16. Corruption and Bribery • A surrogate measure of corruption is economic openness. The more open the economy, the greater the flow of information, and the less opportunities for corruption. • Openness and economic freedom seem to be highly correlated with economic development (see Tables 13.1 and 13.2).

17. Corruption and Bribery in Asia • Corruption/bribery in Asia is highly correlated with the level of income and rate of growth in income (Table 13.3). • Countries of East Asia are the least corrupt and South Asia the most corrupt based on reports of various international agencies.

18. How To Deal With Corruption • Impose stiff penalties on offenders. • Provide adequate financial rewards for government officers. • Keep better and more accurate records. • Appoint higher quality bureaucrats and judges. • Make promotion based on performance, not who you know.

19. How To Deal With Corruption • Reduce the discretion of any individual –rules based systems. • Cut down red tape/size of bureaucracy. • Start an anti-corruption agency. • Legalize corruption and sell/auction the right to collect taxes for a fixed sum of money?

20. Role of Education System and Parents • Have classes on ethics and cooperative behavior in schools. • Review and discuss such systems as they have evolved in Asia – PRC, Indonesia, Singapore, Philippines for examples. • Spend more time with children since time spent with children seems to increase the tendency for altruism to develop in both parent and child.

21. Ethics and Economic Analysis • Economic theory tells us almost nothing about income distribution. • Must rely on ethics/justice to make these sorts of judgments. • Rawls says that justice is achieved by the society moving in a way to maximize the income of the poor.

22. Ethics and Economic Analysis • This is different from Pareto although it may be consistent with Pareto in some cases. • Rawls wants to make the poor better off without making others worse off. Pareto is more general. • There are many proposals made for how to improve income distribution (Table 13.4).

23. Application of Ethics, Justice and Income Distribution to Asia • Societies where income distribution was more equitable had higher rates of growth than societies where income was less equitably distributed – recall results in Chapter 9. • But it is difficult to make changes to income distribution quickly.

24. Application of Ethics, Justice and Income Distribution to Asia • Some argue that religion also has an impact – the Buddhist connection. But what about Myanmar? • Circle of influence where altruism plays the biggest role begins in the family. If we believe that these kinds of altruistic behavior are beneficial both economically and culturally, then these values should be cultivated throughout the society.

25. Corruption experience in Asia • Philippines – both petty corruption and grand corruption seem to be endemic. • Estimates range up to 30 percent of national budget lost to corruption. • Vote buying and illegal gambling are other aspects. • Immigration by those frustrated by lack of progress. • This may provide a safety valve.

26. Corruption experience in Asia • Social weather stations monitors corruption and attitudes toward corruption. • Business is fed up with corruption. • Ombudsman may get popular support along with other agencies (see Table 5.7 in Future Perspectives

27. Corruption experience in Asia • Thailand has a culture of patronage. • Gifts of good will are a tradition. • This has morphed into a culture of corruption. • Transparency International suggests corruption not as high as Indonesia and Philippines. • Local economists estimate 4 to 5 percent of government budget lost to corruption.

28. Corruption experience in Asia • Prostitution, drugs, guns, gambling – all illegal - also sap resources. • Public sector procurement may be inflated by as much as 40 percent – comparable to the level in the Philippines. • Recent efforts to curb corruption may be paying off. • Middle class and business are fed up.

29. Corruption experience in Asia • Korea has made a lot of progress in dealing with corruption with the growth of income and the middle class. • Many officials convicted and former president arrested. • Citizen’s coalitions have played a role. • Transparency International index has slowly improved. • Political contributions of Chaebol are still a worry.

30. Corruption experience in Asia • China has a tradition of gifts to elders and those in power (Guanxi). • Distribution of goods on two track system created opportunities for corruption. • Level of corruption has increased every since Transparency International began surveys in early 1980s. • As forces of capitalism have strengthened so has corruption

31. Corruption experience in Asia • SOEs are big offenders. • Worse than corruption of smaller private sector enterprises. • Prosecutions show embezzlement and bribery and misappropriation of funds accounted for 80 percent of criminal cases. • More high ranking officials involved over time.

32. Corruption experience in Asia. • Corruption in financial institutions which are state owned and without competition. • Bribery for infrastructure spending to expand into western provinces – railroads, power, education. • Illegal taxes on farmers. • Money allotted for resettlement misdirected.

33. Corruption experience in Asia. • Spread of market has resulted in more corruption. • SOEs bribe to get contracts to compete with private sector. • Devolution of power means that more bribes are required to get things done. • Outcomes of bribes are less certain in a decentralized system.

34. Corruption experience in Asia. • India has extensive history of corruption. • Large bureaucracy and lots of red tape is a fertile ground for corruption. • Transparency International in depth survey suggests the bribery is endemic. • 50 to 80 percent of 14,000 people interviewed had a direct experience of bribing someone in police, land tax dept, judiciary.

35. Policies in Asia for the future • Deregulate and liberalization of economy. • Reduce size of civil service. • Enhance business transparency. • Financial sector reforms to allocate resources through markets not the bureaucracy. • Stress efficiency in public sector. • Reduce nepotism

36. Policies in Asia for the future • Leave a paper trail and increase strength and clout of auditors. • Computerization wherever possible. • Reform political process, so that politicians don’ t require big contributions to get elected. • Freedom and corruption not necessarily related (see Table 5.11)

37. Policies in Asia for the future • This is sometimes attributed to the intellectual and political divide in poorer countries where middle class is small. • For the poor good politics revolves around personal dignity. • Estrada was loved by the poor – he treated them with respect and dignity. • Thaksin had his support in the countryside even though he was wealthy.

38. Policies in Asia for the future • Honesty divide a real possibility. • Taiwan, Korea, Hong Kong and Singapore are on one side of he divide. • All the rest are on the other. • Need to get them to the “right” side of the honesty divide.

39. Summary • Investigation of aspects of behavior of economic agents beyond usual analysis: altruism, cooperation and ethics. • Normative versus positive judgment. • Important policy issues such as corruption, bribery and income distribution for Asia.