Honesty For Hire

July 31, 2012

Free Market Foundation

Corruption is a serious problem for governments in the developing world. But there is a way for a troubled nation to reduce corruption and increase revenue collection: adopt external institutions, say Kris Mitchener, a National Fellow at the Hoover Institution, and Noel Maurer, an associate professor at the Harvard Business School.

For instance:

Angola outsourced its customs collections to Crown Agents for Overseas Governments and Administrations, a British non-profit with expertise in public financial management.

As a result, the African nation tripled its tariff revenue in the span of a few years even as it reduced its tariff rates.

Angola’s case suggests that a nation can reduce corruption and collect more public revenues if it is willing to relinquish sovereignty in some limited, well-defined capacity to either a low-corruption government or a private organisation with a strong reputation for honest management. Because Crown Agents officials had an incentive to maximise revenue collection and punish corrupt behaviour, Angola was able to break the corruption equilibrium in customs, generate greater public revenue, and show the way to further reforms, explain Mitchener and Maurer.

Money aside, why would the leader of a state agree to relinquish sovereignty to foreign agents?

Using outsiders reduces the power of officials within the state to expropriate rents; this reduction can engender stability.

The use of outsiders increases the resources available to the central government, which can provide more public goods or increase its coercive power over actual and potential violent opponents; greater revenue can also permit greater foreign borrowing, such that small increases in state revenue can be leveraged into much larger increases in state resources.

Using outsiders to manage reforms can increase transparency.

Clearly, inviting the help of outsiders can help countries take on otherwise intractable institutional challenges and overcome obstacles to sustained economic development, say Mitchener and Maurer.

Source: Kris Mitchener and Noel Maurer, Honesty for Hire, Hoover Institution, July 2, 2010.

For text: http://www.hoover.org/publications/hoover-digest/article/35696

For more on International Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=26

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 31 August 2010