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Elliott Morss has spent most of his career teaching and working as an economic consultant to developing countries on issues of trade, finance, and environmental preservation.

Dr. Morss received a B.A. from Williams College in 1960 and a Ph.D. in political economy from The Johns Hopkins ... more

Bad Governance and Corruption in Countries: What Causes It?

Date: Friday, June 16, 2017 3:28 PM EDT

Elliott R. Morss, Ph.D.                      ©All Rights Reserved

 

Introduction

 

In earlier writings, I have pointed to the primary shortcoming of democracy as a form of government. Special interest groups get what they want via lobbying and campaign contributions while the general question of what is good for the country is put on the back burner. An excellent example of this is what Eisenhower warned about – the military-industrial complex. The complex is not happy unless the US is at war. And for the last 60 years, it has gotten what it wants: since Vietnam, the US has almost always been at war, wars of questionable merit. The military-industrial complex has been helped along by an electorate that is stunningly uninformed on global matters.

 

Recently, a new book questions this focus on special interest groups as being at the root of the problem. In “Inside Job: How Government Insiders Subvert the Public Interest”, published by Cambridge University Press and available online through Internet outlets like Amazon and Barnes & Noble, Dr. Mark Zupan focuses on government officials who find ways to enrich themselves while subverting the “national interest.” Zupan has been the 14th president of Alfred University, located in upstate New York, since July 2016. He holds a B.A. and Ph.D. in economics from Harvard and MIT, respectively. He has previously served on the faculties at USC’s Marshall School of Business, the University of Arizona’s Eller College of Management, Dartmouth’s Tuck School of Business, and the University of Rochester’s Simon Business School. He was Associate Dean of MBA programs at Marshall and a two-term business school dean at both Eller and Simon.

 

I quote from Zupan:

 

National decline is typically blamed on special interests from the demand side of politics corrupting a country’s institutions. The usual demand-side suspects include crony capitalists, consumer activists, economic elites, and labor unions. Less attention is given to government insiders on the supply side of politics – rulers, elected officials, bureaucrats, and public employees. In autocracies and democracies, government insiders have the motive, means, and opportunity to co-opt political power for their benefit and at the expense of the national well-being.

 

So who is to blame: the special groups outside of government or the government officials who subvert the national interest? Of course, it is not really an either-or question. The complicity of both groups is needed. But one can question the relative importance of each player. To look more closely at this, Dr. Zupan has agreed to be part of a Q & A session with me.

 

Elliott: Generalizations are problematic. So let’s start with the US. I would argue that in the US, most politicians do not view getting elected as a way “to line their wallets.” They go to Washington hoping to represent the people that elected them in a responsible manner. But as soon as they arrive in DC, they encounter lobbyists. They are “sitting ducks.” Table 1 provides lobbying expenditures by industry in 2016. There are 11,166 registered lobbyists working in DC.

 

Table 1. – Lobbying Expenditures by Industry, 2016

 

Source: Open Secrets

 

Mark: Demand-side interests definitely matter more in democracies than in autocracies. That said, we cannot ignore the role that supply-side interests play in democracies such as the United States. And it’s not just the pecuniary interests of individuals on the supply-side of politics in democracies that matter. We also have to take into account the role played by the non-pecuniary, ideological goals of individuals on the supply side of politics.

 

On the pecuniary side, there are well-known cases from both sides of the political aisle--individuals such as Gingrich, Hastert, LBJ, and the Clintons—who have done well financially due to their government ties. There are also studies by economists Alan Ziobriowski, James Boyd, Ping Cheng, and Brigitte Ziobrowski on the performance of financial portfolios of members of Congress prior to the passage, in 2012, of the Stop Trading in Congressional Knowledge (STOCK) Act. The average senator’s portfolio beat the market by more than 12 percentage points per year over a 15-year period prior to the STOCK Act while members of the House saw their portfolios appreciate by an average of 6 percentage points per year more than the market during the same 15-year time period. Either we are electing mavens to Congress who are financially more astute than Warren Buffett or there appears to be some financial rewards associated with being in power.

 

On the non-pecuniary side, what originally got me interested in the topic of the supply side of politics is when a faculty mentor at Harvard, Joe Kalt, and I were seeking to explain Senate voting behavior on an issue such as coal strip-mining legislation. What was striking to us when we did the study in the 1980s was how little of the senators’ voting behavior could be explained by the demand-side pocketbook interests from their respective states (e.g., coal consumer interests, coal producer interests, environment groups, and so on). Rather, senators appeared to have a great deal of latitude to vote their own ideological interests on particular pieces of legislation. And, while these ideologies varied greatly across senators such as Ted Kennedy and Orin Hatch, their personal, non-pecuniary goals were the most significant explanatory variables by far of their voting behavior.

 

Mark: In democracies, capture of the state by special interests at the expense of the public interest is often symbiotic and involves both demand- and supply-side special interests. Take the case of sugar import quotas which annually hurt American sugar consumers by $500 million more than they benefit domestic sugar producers in states such as Louisiana and Hawaii. Why do these quotas persist? Certain demand-side groups, namely sugar producers, have more concentrated stakes and thus are more readily mobilized to lobby on behalf of the quotas than do other groups who stand to lose from the quota but whose stakes are much more diffuse. The average American sugar consuming family, for example, has been estimated to lose roughly $50 per year from the quotas and thus doesn’t have much motivation to lobby for eliminating the quotas—even though there are a lot of such families across the country. So, thanks to the political clout of demand-side producer interests coupled with the congressional representatives on the political supply side from sugar-producing states, the quotas remain in place and the United States is worse off, by half a billion dollars on net, per year. And not only has this policy remained in place, but its effects have metastasized as producers of alternatives to sugar such as high fructose corn syrup (HFCS)—who benefit from the fact that sugar import quotas make sugar more expensive in the United States—are now working in tandem to preserve the policy, as are the political representatives from their home states. Archer Daniels Midland, as a producer of HFCS, is a political bedfellow to the sugar-producing Dole Food Company. And Congressional representatives from Illinois (ADM’s home state) are bedfellows on the supply side of politics with congressional representatives from the sugar-producing states of Louisiana and Hawaii.

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