Why do some countries develop economically, while others stagnate? Both the World Bank Institute and economist Alvaro Vargas Llosa point to the problem of corruption as one of the major culprits. They say that the most important “natural resources” for economic development are not raw materials like oil or coal, but moral qualities like the even-handed enforcement of law, and the transparency of government.
The World Bank Institute reports that in poor places like India, people pay bribes when their children are born, when they collect loved ones' bodies from mortuaries, and for everything in between: garbage collection, clean water, medicines, admission to public schools and even police protection. A recent San Diego Union Tribune story, based on the World Bank report, told of the petty bribery families face if their babies are born in a hospital. “Before the mother even glimpsed her baby, a nurse whisked the infant away and an attendant demanded a bribe. If you want to see your child, families are told, the price is $12 for a boy and $7 for a girl, a lot of money for slum dwellers scraping by on a dollar a day.”
Multiply this little event by dozens over the course of a person's lifetime, and you can imagine how much individual families are burdened by graft. This amount of extortion makes it almost impossible for people to get by, much less to accumulate any wealth. Multiply that experience by the millions of families in a country like India, and you see that the poor are losing a staggering amount to low-level, semi-legal pick-pocketing.
Public authorities in many poor countries completely ignore experiences like these. The government, officials and even police consider bribery just “business as usual.” In fact, when low-level officials pick the pockets of the poor, it is a good bet that even more corruption is going on higher up the bureaucratic and political hierarchy. When local health managers pay bribes to senior officials to get good jobs, these same health managers turn around and exact payments from workers lower down on the corruption food chain, including ultimately, the patients themselves.
Economist Alvara Vargas Llosa believes that corruption is one of the key causes of people being desperately poor in the first place. In his new book, Liberty for Latin America: How to undo Five Hundred Years of State Oppression, he shows that corruption is far more destructive than simply transferring money from the pockets of the wretched to the pockets of well-placed government officials. Corruption inhibits capital formation and job development.
Opening a new business in many Latin American countries requires compliance with an astonishing number of rules and regulations. Llosa, a native of Peru who is now a fellow at the Independent Institute in Oakland Calif., cites a Harvard Institute of Economic Research report showing the startling differences in the time required to start businesses legally in different countries.
I recently had the opportunity to address a group of Catholic bishops from Mexico. One of them related a story that substantiated Llosa's argument. One bishop told of a relative of his who wanted to open a gas station. It took him four months to comply with all the regulations for operating a legal business. Those four months are almost exactly the 112 days reported by the Harvard Institute of Economic Research. This contrasts with the mere two days required to legally open a Canadian business. And when I started my own business in Vista Calif., I thought myself ill-used because I had to spend a morning getting my sales tax license, my city business license and a zoning occupancy permit to operate out of my own home.
The excessive regulation in poor countries encourages corruption. Low-level governmental officials responsible for enforcing these ordinances expect to be paid off. Obtaining the permits to operate a business legally almost requires people to pay bribes.
These regulations also threaten the “informal economy.” Many people take the calculated risk of ignoring the legal requirements and just starting up their small businesses. These illegal enterprises, which make up about 30 percent of the Mexican economy, are always vulnerable to being shut down by otherwise insignificant officials. Businesses operating outside the law must pay whatever protection money is demanded of them.
Finally, informally-operating businesses and community associations have limited access to credit. According to the Economist magazine, only one in ten Africans works in a legally recognized enterprise, or lives in a house that has legally recognized property rights. A business operating outside the law will have a difficult time getting a bank loan because people cannot use that property as collateral for a loan. The economist Llosa observes that regularizing the ownership of informally-owned buildings and businesses, would allow people to access credit which would in turn, allow the business to expand.
Foreign investment by itself, cannot jump-start a country's economic development. Capital equipment, important as it is, can't do the job on its own either. A country's “moral resources,” like the transparency of government, a lack of corruption and the rule of law make the difference between an impoverished economy and a thriving one. Without a legal system that protects investments from theft, few people will take the risk of investing. Within a system that protects those who take bribes, those who produce jobs are at a serious disadvantage. Reforming the legal system in underdeveloped countries is a necessary part of any strategy for economic advancement.
Put another way, sin is not cost-effective.