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Friday
Mar262010

Not All Corruption Is Created Equal

In the latest edition of Foreign Policy magazine, Ray Fisman, a professor at the Columbia Business School, has a short commentary with an unusual slant: Corruption that's predictable and stable is easy for investors to deal with and may not do that much harm to local economies.

He's not saying corruption is ever a good thing. Just that some corruption -- the knowable kind -- isn't as damaging as graft that surprises and spooks investors. His example of the latter: China's arrest and trial of four Rio Tinto employees.

"The Bad Kind of Corruption" can be found here. Here's the lead:

By the end of President Suharto's 30-year rule in 1998, Indonesia ranked as one of the half-dozen most corrupt economies on the planet, according to Transparency International (TI). Yet in those three decades, the country also experienced growth in per capita income of 6 percent per year, a rate almost unparalleled in recorded human history. The past 30 years have seen comparable economic progress in China: since the 1976 death of Mao Zedong, the Chinese economy has eclipsed even Suharto-level growth rates despite also holding position 79 in TI's latest ranking, tied with Burkina Faso.

We hit a similar note in the Wall Street Journal's Asia edition in 1998, saying:

An American executive working in Jakarta complained to me in 1992 that every time he tried to do anything, one of Mr. Suharto’s kids or cronies would show up and demand a piece of the action. He said it happened on everything, from a $100 million project to routine purchase orders. It was easy to do business in the Philippines during Marcos’s time, likewise in Iran during the Shah’s or Nicaragua during Somoza’s. Foreign investors cut through the red tape by working with one of the few wired local partners. Well-greased insider deals always look good at the time, but are usually too good to be true.

Ray Fisman is right. No corruption is good but it's not all created equal.

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