Grease doesn’t fix the machine

When the economic crisis struck, debate over how to re-start the world’s financial engine took precedence over discussion about long-term institutional reform – even in countries where change was crucial. The “change” I am talking about is not a country’s long-term fiscal sustainability or imbalances in trade and finance. It is a much more down-to-earth issue. As a governing politician, I know I must choose my words and their connotations extremely carefully, but I’m not going to beat around the bush: Corruption. It is an enemy that we must never make a truce with, even though it might help us win short-term victories against fiscal hardship. Why? Because corruption will stab you in the back.

When countries are desperate for growth, they need to be extremely cautious about how they try to surmount the obstacles that stand in their way. The relationship between growth and corruption has been debated for decades (this paper by the IMF’s Paolo Mauro was probably the groundbreaker). Some argued that corrupt cash helps to “grease” the wheels of society, while others said it was more like sand that slowed the wheels down. The “grease people” held that bribery makes bureaucracy function. More scientifically put, bribes are “speed money’ that incentivize efficient production of essential public goods. Meanwhile, the “sand people” argued that corruption lowers incentives to invest and innovate because it reduces the security of property rights. Corrupt bureaucracies tend to delay issuing permits and licenses and may even “ration” them. Moreover, corruption might be present in still-unseen channels. To make a long story short: Corruption ultimately kills growth. It imposes barriers and hurts the business environment. That is why destroying corruptions means more economic freedom. The sand-grease debate was never very heated, since most of the data (not to mention common sense) pointed to the sand argument.

I, too, support “sand theory.”

Why does corruption exist? In 2000, U.S. economist Daron Acemoglu and his colleagues suggested the weather was to blame for the proliferation of crooked institutions. According to this theory, European imperial powers set up particularly exploitative governing institutions in colonies where the climate was too harsh for Europeans to migrate in large numbers. When the Europeans pulled out, local elites inherited those institutions and carried on with the same abusive practices. Acemoglu and friends found that institutional abuse today accounts for the wide-scale differences in GDP per capita between countries.

They might be putting too much blame on weather, but the problem of corruption surely has to do with institutions and the legislative framework.

Source: Boris Podobnik, Jia Shao, Djuro Njavro, Plamen Ch. Ivanov and H.E. Stanley: Influence of corruption on economic growth rate and foreign investment.

Southeastern Europe is clearly struggling with some bad institutional heritage. For us, organized crime and corruption are a legacy of communism, compounded by the crippling sanctions imposed on us during the 1990s.

So how can we defeat corruption? Academic literature tells us that the recipe is straightforward, but by no means easy: Rule of law, secure rights to property, institution-building, better remuneration for government officials, stricter oversight, and a government that is smaller in size, but convincingly stronger in terms of law enforcement. We have been using this recipe for years now. It has been a political priority and we have made some spectacular steps – for example, my ministry has a brand-new alert mechanism for identifying money laundering.

The stakes are high: If we lag behind, the result will be both a painful delay in EU integration and diminishing economic growth.

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7 Responses to Grease doesn’t fix the machine

  1. Dutch says:

    Dear Mr. Luksic,

    Corruption is evident in Africa as well as in Sicilia, and Calabria. Somehow SEE maybe has traditional ground for corruption to thrive but Slovenia certainly was part of Yugoslavia and is part of EU. Somehow it didn’t stop them, obviously even in EU they have organized crime, and corruption.
    But hell yeah, lets blame it on communists. No matter they aren’t active for 20 years, and only your colleagues who came from those communist regimes are leading us for past 20 years.
    Now its not their fault that the country is so corrupt, its the fault of the communists.
    [irony]Yeah right.[/irony]

    Yes corruption is the problem. But bigger problem is that corrupt people keep on getting functions, and those that corrupt them keep on getting more influential. Obviously then you set a recipe for success, and expect someone to go right way, when s/he knows the other one is faster and has guaranteed success.
    Why would anyone in their right mind do that? Especially people whom “you’ve” created to have a lot of money but no morals/ethics.

    US Empire has easily dealt with corrpution it is not their problem because it is legalized in form of lobby groups, Brussel is to follow.
    I wonder why is it that they never mention it in Montenegro as a way to proceed?
    Nor does anyone else?
    Why are not consulting groups actually lobby groups which are insitutionalized?
    So that half of Montenegro can actually get their career path and career name. Connector 😀 (the one who has a lot of connections :p).

    Or we will have to be like sheep’s and do only what everyone else does before us, and always behind Croatia at least two years?

    Maybe we are unable to create trends, but we sure can follow them equally well like others, but not even that.. Even there we are late 😦

    If Your past talks about Your future, the Montenegrin approach to corruption, it is certainly the sector worth investing in, as it will have steady average growth in decade to come.

    ps. You are talking about lagging behind? I am sorry that I am unable to comprehand this sentance as it assumes we are somewhwere in front now, and that we can go backwards by lagging; only in the wildest dreams. Since this is so bad I can’t see where could it go worse except straight to Africa..

    “Legal-Grease Dutch”

    • igorluksic says:

      Dear Dutch, thanks for your amusing critique. Assuming you are a fellow Montenegrin, I welcome your comment as a clear sign of the public devotion to change the status quo in terms of corruption. In my opinion, the picture you draw is too gloomy. If you look at the current data from Transparency International (or several other independent watchdog groups), you will see quite an improvement our country’s corruption levels – even if much work remains, as I mentioned.

  2. Thunderbird says:

    @Dutch: I completely agree that corruption is not just the heritage of the communist era, and it is a phenomenon that is deeply and traditionally rooted in SEE societies. But I really think that the sanctions and state socialism matters, as they maintained this “cultural heritage”, as Mr. Luksic wrote down. And I start to get bored of everybody is saying that how corrupt Montenegro is. Yes, it is corrupt. Really corrupt. But you can find very similar patterns of corruption in several Western countries – as you also mentioned. and I think we are in better position than most of the countries around us. But if a Western politician just have to say a reason for delaying the EU-integration, he should say “Montenegro has problems with corruption and organised crime”, without telling any details. I think these are often just empty words without any recognition.

  3. Mr. Lukšić,

    instead of engaging into scholarly discussions about the euro and the weather that is to blame for the corruption (in other words, the ‘cosmetics’ – the superficial layer of Montenegrin reality), perhaps you could write about the deadlock in which all the Montenegrin institutions currently find themselves, eagerly maintained by your government and our Prime Minister, Milo Đukanović.

    Perhaps you could tell our international friends how you supported the rescue of the bank that belongs to the Prime Minister’s brother, in which the Prime Minister also has the shares.
    Or the fact that police and the justice system do not function, as only petty criminals are being caught to fill the quotas for the EU officials, whereas the ‘big fish’ are sitting in cafes with policemen and politicians (if they are not shooting from guns at their weddings).
    Perhaps you could tell them about the Prime Minister’s friends and best men – who they are, how much they own (officially and unofficially) and how they have made it.
    You could also talk about all the laws that you will pass only to make EU happy, but without the intention of adhering to them. About how company tenders are a formality, and how it is in fact only important to know the right people and give them the right amount.

    Or, arguably most importantly, you could write about how organized crime may be a legacy of times past, but how the Prime Minister and co. have done nothing to change that situation, on the contrary (wars, smuggling, murders…). How secret services are used for many dirty jobs, from typical maffia operations to work on the terrain, i.e. ensuring the votes.

    The list is too long, but one thing is clear: it does not contain scholarly discussions anywhere close to the top, as the economy is in shambles and people first need to be fed and freed up from fear and manipulation.

  4. zuborko says:

    Oh, c’mon guys, are you nuts?! You believe that our highly respected and experienced minister runs this blog to tell the world true story about you and me?! You know, it’s trendy nowadays to have a blog! Each chap and his uncle have a blog! Doesn’t matter if you have something smart to say!

    Beside, it takes brain to see those things you mention… and balls to tell!

    By the way, I don’t have a clue what are you talking about? What corruption? I don’t think it exists here! Don’t you listen to news at 7.30 PM each day! Economy flourishes, salaries skyrocket, unemployment disappears, criminals have morality, every children has been born with UDG degree, tourism is as developed as industry, environment is so preserved that no one can enjoy it – this state is indeed paradise, it develops so fast, and if it just continues this way, in just five years we will be there where other countries were thirty years ago! So, please, don’t disturb minister in his divine mission! 😉

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