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Graft Paper

From the January/February 2008 Issue

Harvard’s Ben Olken, 32, studies the economics of bribery and assassination in developing nations. Plus, “bowling alone” in Indonesia.

Olken_Ben_Young EconomistIn his nondescript office on Massachusetts Avenue in Cambridge, nestled in a far-off corner of Harvard Square, Ben Olken ruminates on the economic consequences of tyrannicide, the damaging effects of television on social cohesion, and the byzantine system of bribery in Indonesia. Olken, a 32-year-old with an undergraduate degree from Yale (in mathe­matics and “ethics, politics, and economics”) and an economics doctorate from Harvard, is a ris­ing star in the field of developmental economics. Olken is currently a member of Harvard’s Society of Fellows, a prestigious institution within the institution, where the best young scholars pursue what interests them. Among economists alone, former Junior Fellows include Paul Samuelson, Carl Kaysen, Jeffrey Sachs, Steven Levitt, and James Tobin.

Olken is “one of the most exciting young scholars in economics,” his Harvard adviser, Lawrence F. Katz, former chief economist to the U.S. Labor Department, told The Chronicle of Higher Education. He is.

Olken wonders whether economic devel­opment and the path to democratization are shaped more by broad historical forces or by the actions of specific leaders—be they demo­cratically elected prime ministers or thuggish authoritarians. With the assistance of his fre­quent research partner Ben Jones, an economist at Northwestern, Olken has challenged broadly held assumptions by publishing a pair of papers asking how heads of state affect economic out­comes and democracy.

In “Hit or Miss? The Effect of Assassinations on Institutions and War,” Olken and Jones looked at the effects of political assassination, using a strict empirical methodology that takes into account economic conditions at the time of the killing and what Olken calls a “novel data set” of assas­sination attempts, successful and unsuccessful, between 1875 and 2004.

Olken and Jones discovered that a country was “more likely to see democratization follow­ing the assassination of an autocratic leader,” but found no substantial “effect following assassinations—or assassination attempts—on democratic leaders.” They concluded that “on average, successful assassinations of autocrats produce sustained moves toward democracy.” The researchers also found that assassinations have no effect on the inauguration of wars, a result that “suggests that World War I might have begun regardless of whether or not the attempt on the life of Archduke Franz Ferdinand in 1914 had succeeded or failed.”

Olken’s research on assassination suggests that World War I might have begun regardless of the murder of Archduke Ferdinand.

In “Do Leaders Matter? National Leadership and Growth since World War II,” Olken and Jones explored whether “individual political leaders make a difference in economic growth.” This is tricky business for the researcher because, as Olken explains, a country’s economic situa­tion can affect the election of a leader: when the economic outlook is good, for instance, presi­dents are more likely to be reelected. So Olken and Jones looked at 57 leaders who died in office from accidents or natural causes and “found big changes in growth when autocratic leaders die in office—both positive and negative,” but no sub­stantial change when democratic leaders died in office. “The results suggest,” they write, “that individual leaders can play crucial roles in shap­ing the growth of nations,” provided they are ruling with minimal or nonexistent checks and balances to their power (think Augusto Pinochet or Robert Mugabe).

A significant portion of Olken’s field research is conducted in Indonesia, a country for which he has much affection: he has previously lived there, speaks the language, and understands the country’s social mores.

So when he decided to test the validity of the much-debated “bowling alone” theory—Harvard political scientist Robert Putnam’s argument that television, among other “individualizing” cultural phenomena, has had a negative effect on the social fabric of the West—he found himself in Indonesia, a country not affected by many of the cultural externalities that compromise Putnam’s American-based study.

According to Olken’s research, in Indonesia, where TV coverage isn’t yet universal, one finds that “better signal reception, which is associ­ated with more time spent watching television and listening to radio, is associated with sub­stantially lower levels of participation in social activities and with lower self-reported measures of trust.” This, he notes, has had a deleterious effect on political and social par­ticipation: “The main results suggest that each additional channel of television reception is associated with 7 percent fewer social groups existing in the village, and with each adult in the village attending 12 per­cent fewer group meetings.” That would seem to confirm Putnam’s thesis. But the results were nuanced. Olken noted that “despite the impact on social capital, improved [TV] reception does not appear to affect village governance, at least as measured by discussions in village-level meetings.”

In his paper “The Simple Economics of Extortion,” co-written with Patrick Barron of the World Bank, Olken again traveled to Indonesia to study “if the way in which we think about pric­ing for firms also applies to corrupt officials.” In other words, do the crooked respond to market forces in the way a corporation would? To test this, Olken and Barron looked at the number of roadside checkpoints—which act, essentially, as illegal toll booths where the motorist is required to pay a bribe—in Aceh, a region on the north­western tip of Sumatra long engaged in a guerilla war with separatist rebels.

In short, to reduce corruption, Olken found, it’s cost-effective to do more audits, not to trust the grassroots.

“I looked at what happens when there is a change in the number of checkpoints along the road in Aceh. When I started data collection, you had to stop at, say, 90 checkpoints along a 600-kilome­ter route,” Olken says. “A lot of the checkpoints were associated with the military occupation. But when the peace agreement was signed [in 2005], the military pulled out, and the number of check­points declined. The question is: how do the prices at the remaining checkpoints change?”

There are three theories on how prices are set, he says. Is the bribe purely the product of cultural norms, influenced by customs specific to the region? Is the bribe simply an individual transaction, not affected by culture? Or is the bribe economy embedded within a bigger mar­ket? “Just as if there was a firm running a toll booth,” Olken says, “the firm would balance off how much revenue they are getting from the tolls, versus the fact that if they were charging more for the tolls there would be fewer cars driving through; they’ll be making an optimal trade-off. So, in fact, that bribe is the equi­librium of a firm’s price-setting decision.”

Olken and Barron found that when the number of checkpoints decreases, prices increase: “So it looks like the guys are behaving like a firm would behave.”

So what does all of this mean to institutions, like the World Bank, struggling against endemic corruption? There is often an understandable desire to go after “the big fish” in corrupt soci­eties, thus making an example of those whose pockets are fullest. “What this paper shows is that there is a potential cost of doing it that way. If corruption is decentralized, the model pre­dicts that the total amount of bribes is going to be higher than if there was a single, centralized person coordinating all the checkpoints.” Such results have broad implications for countries mired in corruption: “One policy that has been advocated in a lot of countries is simplifying the process of business registration. This the­ory predicts that that would be a good thing to do in reducing corruption because you would be moving from a decentralized corruption, where bribes are set independently, to a single, central­ized person, and the total amount you would pay would be less.”

Olken also has looked at graft and corruption in road projects in Indonesia. In his April 2007 paper, “Monitoring Corruption: Evidence from a Field Experiment in Indonesia,” he sought to determine the best method of reducing theft and graft in public works projects by doing controlled field experiments in 608 Indonesian villages.

Some village leaders involved in the building of roads were told that, upon completion of the project, they would be visited by government auditors, which increased “the probability of an external government audit in those villages from a baseline of about 4 percent to essentially 100 percent.” Other villages were chosen to partic­ipate in grassroots “accountability meetings,” during which project coordinators would pub­licly account for the use of government funds in a town-hall-like venue. Villagers would be offered anonymous forms to report graft.

Olken’s conclusion was that “increasing gov­ernment audits…reduced missing expenditures, as measured by discrepancies between official project costs and an independent engineer’s estimate of costs, by eight percentage points. By contrast, increasing grassroots participation in monitoring had little average impact…. Overall, the results suggest that traditional top-down monitoring can play an important role in reduc­ing corruption.” In short, to reduce the amount of corruption, it’s cost-effective to do more audits, not to trust the grassroots.

What’s the practical use of these results? Can they be applied to, say, corrupt countries in Africa? The study seems to suggest, Olken says, that, even in developing countries, “audit agen­cies might be more useful than people would have otherwise thought.” A widely held presumption was that auditors too were corrupt, and that they would only end up extracting more bribes, mak­ing the situation significantly worse.

The Indonesian study, he argues, might “sug­gest that that assumption is actually incorrect” and that when formulating an anti-corruption strategy, governments and institutions “shouldn’t dismiss the auditors out of hand.” Since mini­mizing corruption is often a key prerequisite in the development of democratic institutions, campaigners for clean government would do well to heed Olken’s advice.

Michael Moynihan is an associate editor at Reason magazine.

Image credit: photograph by Jared Leeds.

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