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Economic Gangsters

Raymond Fisman and Edward Miguel, Princeton University Press, 2008, 250 pages, £14.95.

Analyses of crime and corruption tend, not surprisingly, to be long on description and short on empirical analysis. Statistics on amounts embezzled or number of people killed in a genocide lack precision, where they exist at all. This book sets out the clever use of the rare reliable statistics that are available to shed light on particular episodes of corruption or violence, and in particular on whether it is possible to design policies which change the incentives of those behaving in undesirable ways.

Some examples will help. One chapter focuses on the recurring cycles of poverty and violence in sub-Saharan Africa. Is it possible to break the cycle? To answer that, we need to understand the causality: is the root cause, say, ethnic division which leads to conflict and thus poverty because nobody plants crops or invests in education? Or is it poverty which leads to conflict, dressed up perhaps as ethnic rivalry? A hint that it is the latter comes from the fact that civil strife is rare in rich countries, whereas two thirds of African countries have been in conflict since 1980. But how to test this hypothesis?

The answer lies in using data on local rainfall, available dating back to the late 1970s. An armed civil conflict is much more likely in the year after a large drop in rainfall, leading to a subsequent drought – and this is true for democracies and dictatorships, tribal or homogenous countries. Poverty, stemming from the impact of adverse conditions on economies where most people rely on agriculture, increases the risk of violence by up to 50%. The authors point out that climate change is likely to intensify the vicious circle of crop failure, poverty and violence. But they suggest a partial solution: direct international emergency aid to the immediate relief of farming communities immediately after a drought (or other disaster affecting crops), to pre-empt conflict, as aid poured into a zone which is already suffering poverty-related violence will probably be diverted to buying guns or decorating a dictator’s overseas bank account.

Another example is the use of stock market indices to measure the extent of corruption in different countries. Unexpected events such as the illness of a dictator or a surprise election result will obviously affect share prices, but will affect the shares of companies with particular political connections more than the average. The authors report the results of this kind of event analysis for a number of countries. In Russia 87% of the value of the Moscow Stock Exchange lies in companies with close political contacts with the Kremlin. At the other extreme lies the UK, where share prices hardly respond at all to political contacts. More surprisingly, in the US companies do at different times benefit from being Democrat or Republican party donors – except for Halliburton. Its share price hardly responded to Vice-President Dick Cheney’s heart attack scares in 2000 and 2001, or his blood clots in 2005 and 2007, despite the speculation that Mr Cheney had delivered so many lucrative contracts to the company.

All in all, this is a very readable book which makes a fascinating contribution to the renaissance of careful empirical microeconomics applied to development.

Diane Coyle

Enlightenment Economics

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