You are on page 1of 27

Economic shocks and corruption

:
Evidence from a natural experiment in Peru

Stanislao Maldonado
PhD Student,University
, y of California at
Berkeley
smaldonadoz@berkeley.edu
J
January, 15 2010
1
Motivation
y Corruption is a critical issue in the developing world.
world
y There is little empirical evidence about the causal
relationshipp between corruption
p and economic pperformance.
y Current literature is mainly based on subjective measures and
macro-level data, which suffer of omitted bias, measurement
error and reverse causality problems.
y Even recent studies based on micro-data do not have national
representativeness,
t ti affecting
ff ti external
t l validity.
lidit

2
Motivation

y This paper will aim to overcome the endogeneity and data
problems of the existing literature by taking advantage of two
features of the Peruvian case:
y A novel dataset on bribery-based
bribery based corruption: the Encuesta
Nacional de Hogares for period 2002-2006.
y A credible exogenous
g variation in the economic
conditions: a shock in the international prices of mineral
resources.
y Specifically, I will exploit an exogenous variation in the
economic conditions of a set of mineral-rich regional and
local governments in the country.
country
3
Motivation

y Rule of the fiscal system in Peru+boom:
y Canon Law: that forces the central government to allocate 50%
of the income taxes paid by mining companies to the rich-
mineral local and regional
g ggovernments
y Extraordinary rise of the international prices of these resources
(observed since 2003) has led to a large increase of their fiscal
revenues.
y Identification strategy:
y Exploit this exogenous variation in revenues across local
governments and over time (before and after the rise of prices)
for exploring the causal effect of economic shocks on bribery-
based corruption.
4
Literature Review
y Focus on empirical literature on corruption at a micro-level
Macro data:
y Corruption is associated with:
y Lack of political freedom (Treisman 2000, Graef and Mehlkop
2003)
y Lower growth (Mauro 1995)
y L
Lower f d off press (Brunetti
freedom (B tti andd Weder
W d 2003)
y More decentralization (Fisman and Gatti 2002)
y More ethno
ethno‐linguistic
linguistic fractionalization (Triesman 2000)
y Lower foreign competition (Ades and Di Tella 1999)

5
Literature
Review

Firm Data:
y Sevensson’s (2003): High ability to pay/low refusal power->
Larger bribes
y Gamboa-Cavazos
G b C et all (2007)
(2007): Larger
L bbribes
b paidd to
politicians with short or larger horizons
Individual Data:
y Olken and Barron (2007): Decrease in police check post->
Larger
g average g bribe ppaid
y Gorodnichenko and Sabirianova (2007): Bribes indirectly
measured by observed wage gap between private and public
employees(24% to 32%)
6
Literature
Review

y Bertrand et al (2007): Bribes directly paid to public officials.
Distortionary effects
y Banerjee et al (2004), Hunt (2007) and Abdallah et al (2009):
Richer patients more likely to bribe and pay more for health
services
y Hunt and Laszlo ((2005), ), Hunt (2007a),
( ), Hunt (2007b)
( ) and
Hunt and Laszlo (2007): Study of determinants and pay-off of
bribery, causlity of the results not included.

7
Theoretical Background and
Preliminary Hypotheses
y Theoretical models of corruption based in demand-supply
fframework:k
-Demand remains unchanged , hence we focus on supply side
of the market for corruption
p opportunities
pp .
-Single good provided monopolistically by public official.
-Labor market and income not affected by the rise of
internationall prices
y Economic Factors:
Becker and Stigler model: the decision of a public official to
become corrupt depends on her wage and the probability of
being audited.
audited
8
Theoretical
background

y Political factors:
Characteristics of political system determines likelihood of
permanency on office of public officials
-More
M Political
P liti l competition
titi leads
l d tto shorter
h t terms
t
-Medium to Longer terms -> less incentives to receive
bribes
-Shorter terms -> higher incentive to receive bribes

9
POTENTIAL CHANNELS

ECONOMIC FACTORS
Higher wages
Increase Lower corruption
in local More effective
revenues audit technologies

POLITICAL FACTORS

More political Shorter political Higher corruption
competition Horizons

10
Research design and Identification
f Strategy
S
y Exploit an interaction between a fiscal rule (Canon Law) and
a positive shock in international prices of the mineral
resources:
o Cross-sectional
Cross sectional variation:
Various minerals across districts (districts with and
without minerals/districts with different minerals). )
o Time variation:
Movement of international prices of different minerals
over time.
y Huge increase of transfers to “mining districts” starting 2004.

11
Research design

Increase of the
Increase Increase
Shock fiscal revenues
of value of of income
pprices of rich-mineral
exports tax
governments

y Identification:
Compare the bribery behavior of public servants from
mineral-rich and non mineral-rich local governments, before
and after the rise of transfers.

12
Research design

Commodity prices as a source of exogeneity
Evolution of international prices of mineral resources: Cupper
300
vs US$/lb)
200
2
e of Cupper (ctv
100
Price
0

1996 1998 2000 2002 2004 2006 2008
Year
13
Research design
Commodity prices as a source of exogeneity

Evolution of international prices of mineral resources: Zinc
140 120
Price of Zinc (cttvs US$/lb)
80 100
1
P
60
40

1996 1998 2000 2002 2004 2006 2008
Year

14
Research design
Commodity prices as a source of exogeneity

Evolution of international prices of mineral resources: Lead
120 100
Price of Lead (ctvs US$/lb)
60 80
P
40
20

1996 1998 2000 2002 2004 2006 2008
Year

15
Research design
Commodity prices as a source of exogeneity

Evolution of total exports and exports of mineral resources
3000020000
s of US$
Millions
10000 0

1996 1998 2000 2002 2004 2006 2008
Year

Total exports Mineral exports

16
Research design
Commodity prices as a source of exogeneity

Evolution of fiscal revenues of rich-mineral regional and local governments
4000
s)
s of Nuevos Soles (1996 prices
00 2000 3000
Millions
100 0

1997 1999 2001 2003 2005 2007
Year

17
Pjt

Research design
Empirical strategy and econometric
specification
y The empirical specification:

Rijt = α j + λt + bPijt + X γ + vijt
'
ijt

where:
Rijt : revenues allocated to the district j in period t
Pijt : index of international commodity prices for district j
in the pperiod t
X ijt' γ : individual and district level characteristics.
vijt : error term

18
Research design
Empirical strategy and econometric specification

y I will use commodity prices as an instrument for fiscal
revenues.
y The exclusion restriction merits more discussion.
y It is
i arguably
bl that
th t the
th exclusion
l i restriction
t i ti hholds
ld in
i this
thi context,
t t
since the international price of minerals only affect the corruption
measure through its effect on fiscal revenues.
y The change of prices affected basically fiscal revenues and not
production levels.
y Mining lacks of linkages with other sectors of the economy and
only employs 1% of the labor force.

19
Research design
Empirical strategy and econometric specification

Evolution of volume and prices of mineral exports

20
Research design
Empirical strategy and econometric specification

y The second stage of my IV approach estimates the impact of
revenues on corruption.
ti Th The bbasic
i specification
ifi ti iis as ffollows:
ll
y ijt = α mβ + X ' δ + ε
+ λt + R
j ijt ijt ijt
where:
y i j t : outcome of interest for individual/household i in district j.
α j : district fixed-effects.
λ t : time fixed-effects.
X ijt' δ
: individual/household and district level characteristics in
period
i d t.
β : causal effect of economic shocks on corruption
ε ijt : error term

21
Research design

I t
Internal
l validity
lidit issues
i
y There are several alternative causal pathways that can
explain any expected sign of the causal relationship.
y This is mainly due to the fact that the exogenous increase
off revenues can affect
ff bribery-based
b b b d corruption in
different ways.
y My
M identification
id tifi ti strategy
t t will ill nott allow
ll me tto iisolate
lt
the role played by any specific factor.
y To explore the role of different causal channels
channels, I will use
the RENAMU dataset, but I will not be able of
completing
p g rule out alternative explanations
p for myy
results.
22
Data
y Annual repeated cross-section of household survey (The
Encuesta Nacional de Hogares -ENAHO): 2002-2006.
o Includes a detailed module on payment of bribes by households.
o No serious concerns about under-reporting or non-response
(Herrera 2005).
y Annual data about transfers from central to local
governments (Ministry of Finance): 2001-2006 .
o Transfers from Canon Law: 50% of taxes paid by mining
companies are allocated to local and regional governments where
the resources are extracted.
o 242 “mining districts” out of 1831.

23
y Panel data of local governments’ characteristics (The
Registro Nacional de Municipalidades-RENAMU): 2004-
2008.

24
The ENAHO’s Governance Module

25
Progress report
y Building the dataset
y Exploring potential causal channels doing some fieldwork in
rich-mineral areas

26
Mil gracias!!

27