Remittances Linked to Corruption
A new IMF Working Paper has found an association between remittances a country receives, and the deterioration of institutional quality in that country. It seems counter intuitive but basically they are saying that if citizens have more non-taxable income, there is less incentive for the government to spend its own resources on those citizens. The government is then more likely to blow their money on private jets and whatever else it is corrupt leaders buy (diamond mines?). The authors say it works similarly to the oil curse, which says that natural resource-rich countries are more likely to be corrupt.
As Cho points out on his blog, New Zambia, showing association doesn’t prove causality, and there could easily be other factors that explain both of these phenomena. But it’s a fascinating idea. If we assume that the prevailing wisdom is correct and institutions are a vital part of economic development, this report would suggest the match institution building programs with our efforts to make remittances easier to transfer.
February 17th, 2008 at 8:51 am
The report actually doesn’t strike me as all that surprising. Extend by analogy the lessons learned about apparent windfalls in other social contexts. Daniel Moynihan on the degradation of the family & urban life associated with unearned welfare payments; the substitution effect of lotteries; the misallocation of cigarette company settle money by state legislatures. In each case the external subsidy serves not just to meet the recipients’ financial need, but to amplify systemic dysfunction.
Thirty years ago this sort of observation was fightin’ words; now the rising generation takes it as a given. The result is an environment that can seem wryly amusing to someone who remembers the bitter fights of the Reagan years quite well. Today’s social entrepreneurs tend to self-identify as liberal progressives, yet back in the day a market-based solution to poverty would have been condemned as heretical conservativism.