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%)
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 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.

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 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
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 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

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 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

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 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.

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 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.

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 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

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 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

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 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

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 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

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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

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 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.

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 Research design
Empirical strategy and econometric specification

Evolution of volume and prices of mineral exports

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 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

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 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.
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 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.

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

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 The ENAHO’s Governance Module

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

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 Mil gracias!!

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