Thursday, November 04, 2010

Stiglitz and TJN on corruption and queuing

We have, for some time, been pushing people to consider corruption not so much as a personal issue, as a systemic issue. Transparency International's definition of corruption as "the abuse of entrusted power for private gain" or, even worse, the World Bank's "the abuse of public office for private gain," are examples of the personal definition, which is good when you want to indulge in finger-pointing, but not nearly so good when you want to understand what is going on.

Corruption is a systemic issue. Think of a queue of people, standing in line for something. If you disrupt this queue with a fire hose, say, the queue may well re-form, after a bit of barging and spluttering. People's faith in the queue is intact. There is a far more dangerous way to disrupt this queue, however: if people start pushing in at the front. When enough people do that, people's faith in the queue collapses, and there is no easy way to restore it. The first queue has been disrupted. The second queue has been corrupted. This is how we like to think of corruption: as a systemic issue, involving a loss of faith in the system. (This queue analogy is drawn from today's blogger's own book about oil and politics in Africa.)

So we are interested to see what Joseph Stiglitz had to say recently on the Daily Finance, about the financial and mortgage mess in the United States.
Among the casualties of this whole mess, according to Stiglitz? Faith in the legal system itself. "The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work," he said. "If the legal system is seen as exploitative, then confidence in our whole system starts eroding.

When you say the Pledge of Allegiance, you say, with 'justice for all," Stiglitz said. "People aren't sure that we have justice for all.
What he is talking about is what we see as corruption. In this particular case, the uncontrolled operations of markets has undermined the rules, systems and institutions that promote the public good, and undermined our faith in those rules, systems and institutions. Although we haven't offered a hard and fast definition of what corruption is, that last sentence in italics comes pretty close to how we would seek to describe corruption concisely. See more on this here and here.

With this in mind, it is worth returning to our recent writings on the topic, looking at how tax havens are corrupting the international financial system.

Now for something different, from the same Stiglitz interview.
"Corporations are a legal entity," Stiglitz explained. "We create them. And when we create them we create all kinds of rules. They can go bankrupt. And that means they owe more money and they get away scot-free. They can create an environmental disaster, and then go bankrupt and again go away scot-free. So, as legal entities we have the right to make the rules that govern them."

"As individuals we have certain basic rights," Stiglitz continued. "We aren't created by the law. We exist by nature. But corporations are man-made. They are supposed to serve our interest, our society's interests. And we are creating them with powers that are not serving our society's interests."
Just as we have been pointing out. Corporations have to be accountable to society, not just to a narrow range of shareholders. And that has huge, huge, tax justice implications. Read more on that here, and please join the debate.

And now for this, furthering Stiglitz' theme of looting.

Nobel prize-winning economist George Akerlof co-wrote a paper in 1993 describing the causes of the S&L crisis and other financial meltdowns. As summarized by the New York Times:
In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer [co-author of the paper, and himself a leading expert on economic growth] said, would have operated in a completely different manner.
. . .
At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take.
And do tax havens, or secrecy jurisdictions, create an incentive to loot? You bet they do. Like nothing else.


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