ABSTRACT We show that capitalism is far from common around the
world. Outside a small group of rich countries, heavy regulation of
business, leftist rhetoric, and interventionist beliefs flourish. We
relate these phenomena to the presence of corruption, with causality
running in both directions. The paper presents evidence that, within a
country, those who perceive widespread corruption also tend to demand
more regulation. As regulation is held constant within a country, this
finding is hard to explain if one assumes that causality runs only from
regulation to corruption. We also find that over time, increases in
corruption in a country precede increases in left-wing voting. To
explain our findings, we present a model where corrupt capitalists are
disliked, and voting for left-wing policies is a form of punishment
available to voters even in weak judicial systems. Evidence on emotions
supports this explanation: the frequency with which people report
experiencing anger is positively correlated with perceived corruption,
but this relationship is significantly weaker when business is heavily
regulated.
**********
Economists often argue that capitalism outperforms socialism on
numerous dimensions. These arguments are so compelling that one might be
led to believe that free markets, perhaps with some redistribution, are
the norm around the world. In reality, this is not the case. Outside the
United States and a small set of other rich countries, public opinion
tends to be unimpressed with the performance of capitalism. Resistance
to free markets has been observed in former communist countries, in
underdeveloped countries in Africa, and in some modern democracies in
Europe. In Latin America the phenomenon is especially striking. After a
decade of economic reform in the 1990s, a backlash against markets has
been observed in most of the countries in that region. Such skepticism
toward capitalism in poor countries is all the more remarkable because,
presumably, voters in these countries have the most to gain from the
more rapid growth that capitalism might achieve.
This paper makes two main points. First, we document that
capitalism is indeed relatively more popular in rich than in poor
countries. Second, we argue, both empirically and theoretically, that
one motivation for such antipathy toward markets originates in the
presence of corruption. Economists have connected regulation to
corruption before, but with an emphasis on causality going the opposite
way: from intrusive regulation to more corruption. We argue instead that
in a reasonable theoretical model, causality will run in both
directions.
Why should corruption invite more regulation? Our interpretation is
that widespread or salient corruption causes voters to become upset with
capitalists generally and to demand more regulation, higher taxes, or,
more broadly, an economic system that is less favorable to business. To
put it another way, corruption reduces the public's voluntary
acceptance--the legitimacy--of a country's commercial institutions
and their desire for a system in which capitalists might flourish.
Voters who perceive corruption then vote for more regulation as a way of
punishing the capitalists, whom they see as undeserving. Moreover, they
do so even if the increased regulation generates still more corruption,
slower growth, and other economic "bads"; they are willing to
incur material costs to obtain outcomes that they see as more fair.
Borrowing from the political science literature on the legitimacy
of political institutions, we argue that it is worthwhile for economists
to study the legitimacy of a country's commercial institutions,
defined as the extent to which there is social consent on the
"purpose" of business. We formalize these ideas in a model in
which voters expect business to refrain from making money through
corrupt means. Given that certain characteristics, or "types,"
might be positively correlated across businesspeople within a
country--for example, the degree to which they are or appear to be
honest--corruption on the part of one may impose a negative externality
on all, by inviting higher taxes and a less friendly regulatory
environment for business. Targeted legal actions against capitalists who
are perceived to be corrupt, such as those taken against the trusts
during the administration of U.S. President Theodore Roosevelt a century
ago, may address the externality by reducing the demand for widespread
inefficient regulation.
We present three types of evidence to support our claims. First, we
find that within a country (and hence for a given level of regulation),
those who perceive corruption to be high also tend to demand more
regulation. Second, we find that over time, increases in corruption in a
country precede increases in left-wing voting. And third, using data on
reported emotions from the Gallup World Poll, we find that individual
experiences of anger and the perception of business corruption are
positively correlated, but that this correlation is weaker in countries
where regulation that is detrimental to business is widespread.
Of course, the correlations we report may have different
explanations from those we propose, but data limitations prevent us from
constructing tight tests against these alternatives. Our strategy
therefore is to offer some correlations that are suggestive of our
proposed mechanism, and to present a model in which corruption plays a
central role in eroding trust in the business community. Although our
empirical approach is thus limited in its aims, it is sufficient to cast
considerable doubt on a narrow version of the prevailing model in
political economy, in which the only channel of causality is that going
from regulation to corruption.
Beyond the empirical limitations, it is worth emphasizing that our
paper deals with only a few of the many elements of capitalism, which
range from policies on private versus state ownership of business to the
extent of regulation and the level of taxation. Indeed, the theoretical
mechanisms we propose and the data that are available to us refer to
only some of these different aspects, and so we proxy
"capitalism" with "policies that improve the economic and
social standing of business."
The structure of the paper is as follows. Section I presents the
evidence showing that attitudes and policies favorable to capitalism are
not common around the world, and section II presents a brief taxonomy of
possible explanations, including our main hypothesis, which is that
corruption leads to the popular rejection of capitalism. Section III
presents the main evidence from tests of that hypothesis, section IV
discusses that evidence, and section V presents a model that offers an
interpretation of the evidence. Section VI concludes.
I. Capitalism Does Not Flow to Poor Countries
This section presents and discusses evidence suggesting that
policies and attitudes that can Loosely be called pro-capitalist are not
observed as frequently in poor countries as economists might expect. (1)
We examine three types of evidence: party names and platforms that
indicate the ideological leanings of those in power; surveys of popular
opinion on the desirability of government ownership of business; and
measures of the regulatory hurdles faced by those seeking to start a new
company.
I.A. Political Rhetoric Is Tilted to the Left in Poor Countries
We start by comparing the rhetoric and platforms of political
parties across rich and poor countries. One source of data is Thorsten
Beck and others (2001), who use a two-step approach covering a maximum
of 177 countries over 1975-95. First, they record the party
identification of each country's political leaders, including the
chief executive and the party currently in power in the legislature (or
the largest party in a governing coalition). Second, they classify these
parties according to their preferences regarding greater or less state
control of the economy--the standard left-right scale. They infer these
preferences from the party's name and from information on their
platforms, taken from a set of standard sources. For example, party
names containing words such as "Conservative" or
"Christian Democratic" are classified as right-wing, and those
containing words such as "Socialist" or "Social
Democratic" as left-wing. The "center" category is
reserved for parties that are explicitly called "centrist" or
that the sources reveal as advocating the strengthening of private
enterprise but also supporting a redistributive role for government.
The top panel of table 1 uses this classification system and data
from a representative year to illustrate the relative prevalence of
left- and rightwing governments. We classify countries into three income
categories according to real purchasing power per capita, and by
ideology according to the orientation of the largest party in
government. The data suggest that electorally successful right-wing
parties are more common in the top than in the bottom income group and
that their frequency relative to left-wing governments is lowest among
the poorest group. In other words, governments in poor countries are on
average less supportive of capitalism than those in rich countries, as
captured by a measure based on party names and platforms.
In a working version of this paper (Di Tella and MacCulloch 2002),
we showed that this result is not affected when data for a longer sample
period, or other periods, or other definitions of government ideology
are used. Left-wing governments were more common in the early part of
the longer sample than in the later part; however, in both periods
right-wing governments were relatively more common in rich countries.
This conclusion also holds after controlling for the influence of other
variables (for example, the level of political rights as measured by
Freedom House, an indicator for whether countries were experiencing
civil war, and an indicator for the level of income inequality).
Omitting data from countries that were in the Soviet bloc before 1990
likewise does not affect the results. It is worth noting that countries
with more unequal distributions of income tend to elect right-wing
parties. This point, which has been made informally in contrasting the
United States and Europe, is the starting point of Thomas Piketty's
(1995) analysis and, to our knowledge, has not been documented before
for a wider range of countries.
I.B. Beliefs about Private versus Government Ownership of Business
Cross-country survey data on people's opinions about various
elements of capitalism are available from the World Values Survey (WVS).
Coordinated by Ronald Inglehart, the 1995 wave of this survey asked
adults in over 50 countries several questions of interest. (2) One that
is directly relevant to this paper concerns the desirability of
increasing the private ownership of business:
We categorize those giving answers from 1 to 4 as favoring private
ownership, those giving answers from 7 to 10 as favoring state
ownership, and those in between as having centrist views. (3)
The middle panel of table 1 presents the results. It shows that
46.5 percent of respondents in countries in the top third of the world
income distribution favor increasing private ownership of business and
industry, whereas only 22.9 percent favor increasing government
ownership. The proportion favoring private ownership decreases
monotonically, and that favoring government ownership increases
monotonically, as one reads across the columns. In other words, support
for capitalism is weaker in poorer countries, as captured by the
prevalence of attitudes favoring increasing government ownership of
business and industry.
I.C Regulation of Entry as a Proxy for Prevalence of Capitalism
An alternative approach is to move beyond rhetoric and beliefs and
observe whether the policies actually implemented in poor countries are
interventionist. We focus on the hurdles in place to start a new
business as a proxy for the prevalence of capitalism. Simeon Djankov and
others (2002) collected data in various countries on the amount of time,
number of screening procedures, and total number of procedures required
to register a business. (4) These are defined, respectively, as the
number of business days "it takes to obtain legal status to operate
a firm"; "the number of different steps that a start-up has to
comply with in order to obtain a registration certificate that are not
associated with safety and health issues, the environment, taxes, or
labor": and "the number of different procedures that a
start-up has to comply with in order to obtain a legal status, i.e., to
start operating as a legal entity" (Djankov and others 2002, p.
16).
The bottom panel of table 1 shows that the total number of
procedures required for a start-up company to obtain legal status is
monotonically increasing across country income terciles from richest to
poorest. Other measures (not reported in the table) display a similar
pattern. GDP per capita is negatively associated with the number of days
(the correlation is -0.47), number of steps (-0.50), and number of
procedures (-0.48) required to start a business; all three correlations
are significant at the 1 percent level. In other words, the legal
environment in poorer countries tends to be less favorable to
capitalism, as captured by the amount of regulation in place that makes
it harder for entrepreneurs to start a business.
I.D. Are There Counterexamples in Latin America?
Some well-known cases in Latin America appear to be counterexamples
to the pattern just described. The "Chicago School" reforms in
Chile in the 1970s and 1980s and the administration of President Carlos
Menem of Argentina in the 1990s are two cases in point of pro-market
governments in developing countries. Closer inspection, however,
suggests that these episodes, too, conform to the general pattern. The
"Chicago boys" were able to implement their policies only
after the military government of General Augusto Pinochet took power.
Indeed, a standard informal justification often invoked for military
coups in Latin America in the 1970s was that they were the only way that
"reasonable" (conservative, nonpopulist) ideas could be
implemented, given their weak electoral appeal.
In Argentina the center-left Radical and Peronist parties have
alternated in government (except when the military was in power) for
almost a century. The Peronists are often labeled right-wing because of
the role of fascism in shaping the ideology of the party's founder,
Juan Peron. Yet over the last century the labor share of output has been
highest under Peronist administrations, and the Peronist march speaks of
"fighting capital." Similarly, it is claimed that the Menem
administration in the 1990s turned right-wing, which is a plausible
interpretation of Menem's policies but does not deny the fact that
he was elected on a populist platform that included a massive general
wage hike (the salariazo). Indeed, "neoliberal" reforms in
Latin America have seldom been part of candidates' electoral
platforms, and when they were, as in the case of Mario Vargas
Llosa's presidential campaign in Peru in 1990, they failed. The
pattern of pro-market reforms by unlikely candidates in Latin America is
surprisingly widespread: all of the cases described by Susan Stokes
(2001) in which actual policies did not match the candidate's
electoral promises involved the implementation of
"efficiency-oriented policies of market competition" instead
of the promised "security-oriented policies of state
intervention." (5)
II. Four Possible Explanations
The question posed in our title has a number of possible answers.
In this section we briefly mention three that appear plausible before
offering a fourth that, in our view, better accounts for the observed
pattern.
II.A. The Capture Hypothesis
According to the capture hypothesis, people want capitalism but
their wishes are blocked by entrenched interest groups who deliver
bribes (and perhaps issue threats) to politicians in exchange for
regulations that favor them. This is close to the consensus explanation
among economists today. The related "tollbooth" theory
explains regulations as being designed by self-interested politicians
and bureaucrats to help them extract bribes. (6) Note, however, that if
corruption enables unpopular regulation, there is no reason why more
corruption would lead voters to desire more regulation, as our findings
in this paper suggest.
II.B. The Learning Hypothesis
The learning hypothesis holds that people reject capitalism because
they fail to understand its benefits. Of course, if people are assumed
to make such gross mistakes, it is hard to see how markets that rely on
rationality could be good for welfare. A more appealing version is that
people are in the process of learning the correct model, because it is
possible in principle that capitalism is not the superior system and
that in many circumstances a more heavily regulated economy will
actually maximize welfare. Evidence of the superiority of capitalism, in
this version, has been accumulating and is known to economists but has
not yet reached the voters. Here the seminal paper is Piketty (1995),
who proposes a model in which economic agents seek to understand, in the
presence of shocks, the connection between work effort and income before
deciding on the level of personal taxation. These agents cannot observe
other people' s choices regarding effort, nor can they infer them
from occupational choices, and so they experiment until they settle on
the likely value of the parameter (incomplete learning). (7)
II.C Socialism Is Good
The third hypothesis argues that people reject capitalism because
socialism is in fact better for them. Although the observed failure of
some forms of socialism reduces the appeal of this hypothesis (at least
in the extreme version), the experience with capitalism of some former
communist countries after the collapse of the Berlin Wall has not been
impressive either. In fact, the evidence of prolonged economic
disorganization after 1989 in some Eastern European countries suggests a
related hypothesis: people know how well capitalism works once the state
has been developed to the point where it can provide adequate
institutional support, but they also know that this might take a long
time. In that case, if their discount rate is sufficiently high, people
may in fact be better off under socialism. The evidence collected by
Olivier Blanchard and Michael Kremer (1997) is consistent with this
view. A less extreme view is that a certain amount of regulation or
taxation is necessary to help markets function efficiently, for example
by addressing externalities, but that this can be accomplished without
necessarily abandoning capitalism altogether. (This is sometimes called
the "public interest theory" of regulation.) However, to serve
as an explanation, this theory has to contend with survey evidence that
a majority of voters in rich countries like the United States do not
want for themselves the higher levels of government ownership and
taxation observed in many poorer countries.
No doubt other possible hypotheses might be offered to the question
posed in our title. But even within the subset discussed, clear evidence
in any one direction is lacking (it would be hard to provide definitive
tests), and so there is no clear consensus. Instead we propose another
hypothesis, explore its logic, and provide some suggestive evidence in
its favor. We call it the "unpleasant capitalists" hypothesis.
II.D. Unpleasant Capitalists
According to the "unpleasant capitalists" hypothesis,
people reject capitalism because it favors a set of individuals whom
they do not like. Although they understand that capitalism would make
them better off economically, they would rather introduce regulations
and taxes that punish a group of people whom they consider
"bad," and they are unhappy when they observe capitalism
conferring benefits on these people. Note that this hypothesis requires
that people have other objectives in addition to maximizing their own
material payoff, unlike what standard economic models assume.
One possible origin of this hostility toward capitalists is a
history of corruption in the country: it is easy to dislike the elite of
a poor country if they are perceived to have profited from government
contracts awarded through corruption and favoritism. In contrast, in a
rich country it might be easier to credit the economic elite with
genuine wealth creation in the form of new products, greater efficiency,
and the like. A related idea is that in some countries capitalists are
associated with a hostile foreign power, for example a former colonial
master--indeed, we have found some evidence consistent with this idea
(results not reported). Such a history could lead to a similar degree of
hostility toward "undeserving" capitalists even without the
perception of corruption. (8)
The general idea behind the unpleasant capitalists hypothesis is
related to Max Weber's notion of social legitimacy, but as applied
to commercial institutions instead of the state. Weber (1978) described
nonmaterial considerations, such as fairness, as giving legitimacy to
certain relationships, leading individuals to accept them voluntarily,
sometimes even against their own material interest. (9) Research in
economics on the "ultimatum game" makes a related point.
People appear willing in some circumstances to "burn money"
(that is, to reject insulting offers), implying that the material payoff
is not their sole objective. And, importantly, in some variations of
this game the "standing" of the proposer of the offer
influences the outcome. (10) As in the capture hypothesis above, there
is a connection between corruption and government intervention, but only
under the unpleasant capitalists hypothesis would one expect to observe
a stronger public desire to regulate when corruption is greater. Another
similarity with the capture hypothesis is that the subgroup of the
population that votes can be considered an interest group affecting
regulation (although here they are not just maximizing their income).
(11)
III. Corruption Reduces the Appeal of Capitalism: Some Suggestive
Evidence
Our hypothesis is that lack of capitalism in poor countries is
connected to, and is at least in part due to, the existence of
widespread corruption in such countries. (12) In a simple cross section
of countries, Beck and others' (2001) measure of left-wing
government is significantly positively correlated with corruption. (13)
Of course, such a simple cross-country result could be explained by
government intervention causing corruption. In this section we present
evidence suggesting that this cannot be the whole story. Although the
evidence is not conclusive and is often open to alternative
interpretations, it nonetheless presents a pattern that is highly
unlikely to emerge if the capture hypothesis were the only channel
connecting corruption and regulation.
To explore whether corruption also creates a demand for government
intervention, we use three types of data. First, we use aggregate
(country-level) data on corruption and the ideology of government to
show that surges in a country's corruption index typically precede
the election of left-wing governments, but that ideology lagged is
uncorrelated with corruption. Given the quality of the data, this is, of
course, only suggestive evidence for the hypothesis that corruption
causes regulation.
Second, we use survey data to study the correlation between
ideological beliefs and the perception of corruption across people
within a country at a point in time. We look at both ideological
self-placement on a left-fight scale and beliefs about the desirability
of increasing private (relative to government) ownership of business and
industry. The finding of a correlation would be consistent with either
of two alternative hypotheses: that a sensibility that makes one prone
to observe corruption and a desire for more regulation are fixed traits
of left-wing individuals; and that observing corruption causes people to
become more left-wing. However, such evidence is difficult to reconcile
with a world where only the capture theory is important in explaining
the prevalence of left-wing policies.
Third, we study the correlation between self-reported experiences
of anger (from the 2006 Gallup World Poll) and the perception of
corruption within countries. Of course, anger could lead people to vote
for less regulation instead of more. Thus, we estimate the correlation
in high- and low-regulation countries separately. A lower correlation in
a high-regulation sample would be consistent with the hypothesis that
the observation of corruption angers people, but that the presence of
regulation that interferes with business dampens this reaction. Under
the assumption that voters prefer not to experience anger, this evidence
suggests the possibility that corruption causes regulation.
Although economists have recently begun considering the use of
measures of well-being as summary measures of utility, data on
individual emotions (which may or may not aggregate into a consistent
measure of well-being) may also have research value. Anger is an obvious
candidate for researchers interested in political economy. Psychologists
have gathered extremely useful evidence for our purposes showing that
anger appears to be associated with two conditions: the belief that
others (as opposed to the situation or oneself) were responsible for
some undesirable outcome; and that redress is still possible (and the
self can still influence the situation). (14) Jennifer Lerner and
Larissa Tiedens (2006) discuss evidence showing that anger makes people
indiscriminately punitive (and optimistic about their own chances of
success at punishing the guilty). Interestingly, anger does not seem to
be just a personality trait of left-wing individuals: Deborah Small and
Lerner (2008) find that individuals induced to feel anger choose to
provide less public assistance to welfare recipients than those induced
to feel other emotions. (15)
III.A. Corruption and Left-Wing Government over Time within
Countries
Table 2 reports correlations between Beck and others' (2001)
measure of government ideology and the aggregate (country-level)
corruption index data from the International Country Risk Guide, taken
from Stephen Knack and Philip Keefer (1995). The corruption variable is
available for the period 1982-94 and measures analysts' opinions of
the extent of corruption in a country. The estimates are derived from
panel regressions using the Arellano and Bond (1991) two-step
generalized method of moments (GMM) estimator for dynamic panel datasets
that controls for unobserved effects. Our measure of a government's
ideological stance uses the number of legislative seats held by parties
of a given ideology: we assign each country's government a value of
-1,0, or 1 according to whether the largest government party is on the
right, center, or left, respectively, using as weights the proportion of
seats that the party holds in the legislature. Similar results are
obtained when other available definitions are used. We measure time in
four-year periods, since four years is the most common duration of
electoral terms in our sample. Each observation thus approximates one
election cycle in one country; similar results are obtained when the
unit of time is one year (and when ordinary least squares is the
estimation method).
The results of regressing the ideology measure on the first lag of
the corruption measure (first column of table 2) show that increases in
corruption tend to precede increases in the political representation of
left-wing parties. The size of the estimated coefficient on the
corruption variable (0.10) implies that a l-standard-deviation increase
in corruption (1.5 on a 0-6 scale) corresponds to a change of 25.9
percent of a standard deviation in the government's ideology [=
(1.5 x 0.10)/0.58, where 0.58 is the standard deviation of government
ideology]. For comparison, the second column reports the symmetrical
exercise, regressing corruption on the first lag of the ideology
measure; the results indicate that increases in left-wing representation
in government do not tend to precede increases in corruption--the
estimated coefficient does not achieve statistical significance.
III.B. Perceptions of Corruption and Ideology across Individuals
within Countries
The data we use to investigate individual perceptions come from the
1995 wave of the WVS, which includes three questions that are relevant
to our investigation. The first two broadly capture a desire for
regulation. The first of these concerns ideological self-placement:
"In political matters, people talk of 'the left' and
'the right'. How would you place your views on this scale,
generally speaking?" The interviewer then shows the respondent a
1-10 scale, with "Left" written below the number l and
"Right" below 10. We construct a dummy variable called
Left-Winger, which takes the value 1 if the answer is either 1, 2, 3, 4,
or 5, and zero otherwise; similar results are obtained when we use
information on each of the 10 categories. The second question is that
discussed in section I concerning the desired form of ownership of
business. The dummy variable Public Ownership captures the
respondent's desire for an increase in public ownership of
business, taking the value 1 if the answer is 6, 7, 8, 9, or 10 and zero
otherwise; again, similar results are obtained when we exploit all l0
categories.
The third question of interest asks about the respondent's
perception of corruption in government: "How widespread do you
think bribe taking and corruption is in this country?" The four
possible responses are "almost no public officials are engaged in
it"; "a few public officials are engaged in it";
"most public officials are engaged in it"; and "almost
all public officials are engaged in it." Because only 4 percent of
respondents gave the first answer, we merged the first two categories;
thus, we have three variables for perception of corruption--Few Corrupt,
Most Corrupt, and All Corrupt--each taking the value 1 according to the
respondent's answer. None of our substantive conclusions depends on
our collapsing of the first two categories.
Table 3 reports results of our analysis of the responses of more
than 50,000 people in 46 countries who answered the questions of
interest. We estimated probit regressions of the following form:
(1) [Y.sub.ij] = a(Most [Corrupt.sub.ij]) + b(All [Corrupt.sub.ij])
+ c([Personal Income.sub.ij]) + d([Country.sub.j]) + [[epsilon].sub.ij],
where [Y.sub.ij] is, alternatively, the Left-Winger or the Public
Ownership variable for individual i living in country j, [Country.sub.j]
is a country dummy, and [[epsilon].sub.ij] is a standard error term that
is independent and identically distributed (i.i.d).
The first column of table 3 shows a positive and significant
correlation within countries between the perception of corruption and
Left-Winger. This result survives the exclusion of income as a control
as well as the inclusion of a wider set of personal characteristics such
as sex, age, age squared, marital status, occupation, employment status,
education, and other measures of income (although the sample size drops
somewhat). The personal controls enter with the signs that one might
expect: for example, people with higher incomes and men tend to lean
ideologically toward the right. The key coefficients on the dummies
capturing the perception of corruption are monotonic, large, and
precisely estimated. To obtain a simple measure of the size of the
effect, we report the coefficients in terms of marginal probabilities. A
causal interpretation suggests that moving from a situation where people
perceive little or no corruption to a situation where all officials are
perceived to be corrupt raises the probability of self-placement on the
left of the political spectrum by 6.1 percentage points. (But see below
for an alternative interpretation.)
The second column of table 3 reports analogous results for our
second dependent variable, Public Ownership. The correlation of this
variable with Most Corrupt is also positive and significant, suggesting
that people who perceive more corruption tend to want to see an increase
in government ownership of business and industry. Similar results are
obtained with other measures of economic attitudes available from the
WVS; the perception of corruption is also positively correlated with the
perception that the poor are unlucky (rather than lazy) and the belief
that government should reduce income differences (results not reported).
(16) The third and fourth columns of table 3 repeat the exercise
restricting the sample to the United States, with similar results
(although less precisely estimated).
As noted above, two interpretations of this correlation are
possible. One of these is causal: people who observe an increase in
corruption change their beliefs toward the left. The second is not
causal, but instead holds that the first regression reported in table 3
simply identifies a fixed trait of left-wingers, namely, that they tend
to see corruption everywhere. In either case, however, a surge in a
country's level of corruption would lead to an increase in support
for left-wing parties. In the first case the reason is obvious. To
understand the second, consider a model of voting behavior involving
competition between a right-wing and a left-wing candidate (who display
their ideologies as fixed traits) for the vote of an uninformed public.
When an exogenous upward shock to corruption takes place (is reported in
the media, for example), the public notes that, at least on this issue,
the left-wing candidate, who has been vociferating against corruption,
has been correct all along. This makes it more likely that the public
will think highly of the left-wing candidate from then on. (17)
Note that the perception of corruption could refer to either of two
different types of corruption: government corruption (that is,
extortion), which is typically initiated by a bureaucrat or politician
with authority over a firm that would otherwise be honest; and business
corruption (that is, capture), which is typically initiated by a firm
approaching a bureaucrat or politician to seek a favorable change in the
law. Corruption of the capture variety is likely to be the more damaging
of the two to the legitimacy of business. (18)
Finally, the "unpleasant capitalists" hypothesis would
also predict that the strength of the correlation between observing
corruption and demanding more regulation will depend on the level of
regulation already in place. There are two possible reasons. First,
voters might realize that regulation causes corruption (and other
"bads") so that their advocacy of more regulation as a
punishment for capitalists is limited by the material costs of this
strategy. Second, when regulation is high, acts of corruption may be
considered more justifiable: voters may judge that firms had little
choice but to bribe their way out of the morass of regulations. (Our
model in section V makes this more precise.) Moreover, in
high-regulation environments any corruption that might be observed is
likely to be interpreted as extortion rather than capture. A simple
suggestive test is to repeat the regressions in table 3 but to split the
sample into high-, middle-, and low-regulation countries using Djankov
and others' (2002) measure of the number of procedures that a
start-up has to comply with in order to obtain legal status. We define a
low-regulation country as one where this number is less than 9, and a
high-regulation country as one where it is greater than 12.
Table 4 summarizes the main coefficients of interest when we
reestimate the basic Left-Winger regression in the first column of table
3 separately for the low-regulation and high-regulation samples. In both
samples a higher perception of corruption increases the probability of
voting left, but the effect is smaller in the high-regulation countries:
the coefficient on the All Corrupt variable is more positive for the
low-regulation countries (0.09) than for the high-regulation countries
(0.04), and the difference is significant at the 1 percent level.
Similar results are obtained when Public Ownership is the left-hand-side
variable (results not reported). The perception of corruption in the
low-regulation countries increases the probability that a respondent
will support more government ownership, whereas the correlation between
perception of corruption and Public Ownership in the high-regulation
countries is insignificant: the difference in the size of the effect
across the two samples is also significant at the 1 percent level.
III.C. Anger at Corruption and the Demand for Regulating
Capitalists
Our final empirical exercise uses survey data on emotions from the
2006 Gallup World Poll to examine whether people who perceive corruption
in business are more likely to experience anger. The results reveal a
positive correlation, which, importantly, is weaker where business is
heavily regulated. The Gallup data have separate measures for an
individual' s perception of business corruption (which we interpret
as capture) and of government corruption (which we interpret as
extortion). Our Anger dummy variable is assigned a value of 1 when an
individual reports having felt this emotion "a lot" during the
day before the interview. We estimate the following probit regression:
(2) [Anger.sub.ij] = a(Government [Corruption.sub.ij]) + b(Business
[Corruption.sub.ij]), + c([Regulation.sub.j]) + d(Government
[Corruption.sub.ij]) x [Regulation.sub.j]) + e(Business
[Corruption.sub.ij] x [Regulation.sub.j]) + f(individual
[controls.sub.ij]) + [[epsilon].sub.ij],
where Government Corruption takes the value 1 for a positive answer
to the question, "Is corruption widespread throughout the
government in this country?" and Business Corruption takes the
value 1 for a positive answer to the question, "Is corruption
widespread within businesses located in this country?" We use two
proxies for Regulation, called Number of Procedures and Time to
Register, defined as in section I.C. These are objectively defined,
measured at the country level, and correlated with other measures of
government regulation or intervention in the economy (see Djankov and
others 2002). We also test whether the correlation between corruption
and anger differs according to the extent of regulation in place. The
full sample consists of 68,587 observations across 80 countries
worldwide. Number of Procedures is scaled down by a factor of 10, and
Time to Register by a factor of 100, for ease in reporting the results.
To interpret the results in the first column of table 5, consider a
country where 11 regulatory procedures (the sample average) are
necessary to start a business. The observation of business corruption is
associated with a 4-percentage-point increase in the probability that an
individual experienced anger the previous day (from the coefficient on
Business Corruption) less the 3.3-percentage-point (= 0.03 x 11) effect
due to the negative and significant interaction term between Business
Corruption and Number of Procedures. Consequently, the net effect of
business corruption in the presence of these regulatory procedures is to
increase anger by an (insignificant) 0.7 percentage point. The effect of
observing government corruption is different, at least to the extent
that it has an insignificant interaction with the number of procedures.
Note that the standard deviation of the number of procedures is 4.5,
with a range from 2 to 21, and the average share of respondents
reporting anger across the countries in our sample is 19.3 percent.
To interpret the results in the second column, consider a country
where 48 business days (again the sample average) are required to set up
a business. The observation of business corruption is again correlated
with a 4-percentage-point higher chance that an individual experiences
anger, less the 2.9-percentage-point (= 0.06 x 48) effect due to the
negative and significant interaction term between Business Corruption
and Time to Register. In this case the net effect of business corruption
is to increase anger by an (again insignificant) 1.1 percentage points.
Government corruption, on the other hand, has an insignificant
interaction with Time to Register. Note that the standard deviation of
the latter variable is 31, and the range is from 2 to 152. (19)
IV. Discussion
Our interpretation of these results is that corruption, especially
in the form of capture, reduces the legitimacy of business and
commercial institutions. When people observe corruption, they may
believe that the rich are less "deserving" and become less
accepting of their privileges. This makes populism, or, more precisely,
voting in favor of inefficient regulation or taxes, more likely, much as
when players in an ultimatum game reject positive offers. Alternatively,
voters may experience anger when they see businesspeople earning their
positions through bribes or other illegitimate means, and they are
placated when business is regulated.
Perhaps the main weakness of the unpleasant capitalists approach is
that it requires auxiliary hypotheses to explain the precise type of
intervention observed. Capitalists can be punished through a variety of
means, and we lack strong arguments to explain why voters would choose
more regulation when less inefficient forms of punishment, such as
redistributive taxation (without affecting the production process), are
available. While leaving a full investigation for future research, we
provide here some tentative answers. The first is to note that taxation
without regulation leaves businesspeople with a high position in the
social hierarchy, whereas stronger regulation and control of business
send a more direct message that business's status is diminished.
(If this is the true explanation, one would also expect to see it
reflected in other aspects of society, such as the extent of conspicuous
consumption by businesspeople.) A second possible explanation is that
the pre-tax income distribution in a free-market economy with corruption
might be perceived as too unfair, requiring economy-wide tax rates so
high as to discourage effort (or encourage evasion). Such deadweight
losses from taxation might be avoided if the actions that businesspeople
can take are limited by regulation at the production stage in certain
sectors. A third explanation is that taxation might be less observable
to the public than regulation. It is worth noting that more regulation
is likely to prevent more competition and to be associated with higher
rents to incumbent firms. One problem here is that it may be difficult
for the public to perceive this kind of effect. And, of course,
introducing competition, for example by allowing foreign entry, might
also benefit incumbents by providing them an opportunity to sell their
companies to the new entrants. Thus, a proposal for less regulation is
ostensibly even more favorable to business. Finally, some types of
mental processes (for example, "categorical thinking" as in
Mullainathan and Shleifer 2006) could lead to the grouping of policies
into bundles (for example, high taxes, high regulation, and a high level
of state ownership; see also footnote 17).
An even more difficult problem is that voters would be better off
if they were offered the possibility of punishing the unpleasant
capitalists individually, rather than punishing all capitalists
regardless of blame through higher general regulation. A good legal
system would contribute to the emergence and success of a political
party that would credibly promise to punish deviant or corrupt
capitalists and at the same time promise to push for less regulation.
(20) It is worth pointing out that U.S. presidents of the trust busting
era were not seen as particularly antimarket and in fact included
Republican presidents William McKinley, Theodore Roosevelt, and William
Howard Taft. McKinley appointed the U.S. Industrial Commission on
Trusts, which investigated such well-known business figures as Andrew
Carnegie and John D. Rockefeller, and his successors Roosevelt and Taft
actually dissolved several trusts. (21) More recently, the case of Korea
may also illustrate this mechanism. After the 1961 military coup,
Korea's new leader, General Park Chung Hee, decreed the Illicit
Wealth Accumulation Act. He then arrested some of the country's
more prominent businessmen, including Lee Byung Chull (the head of
Samsung), seized their assets, and paraded them through the streets of
Seoul carrying placards with legends such as "I am a corrupt
swine." Later on, business groups received favorable treatment, and
Park was able to implement policies that were not antimarket and were
extremely popular (see Oberdorfer 1997).
The unpleasant capitalists hypothesis can also be linked to a
literature in anthropology in which mythmaking plays an important role
in the construction of society. Couched in these terms, the hypothesis
emphasizes that economic organization in developing countries lacks
cultural heroes: an American prompted to name a prominent businessperson
might think of people who invented great products or built a great
company (like Henry Ford or Bill Gates), but a respondent in a
developing country is likely to respond with the names of businesspeople
who made their wealth in contracts with the state. The perception of
Bill Gates as a cultural hero may favor the development of a capitalist
system with low taxes, and the lack of such heroes in poor countries
could be connected to their rejection of capitalism. In this vein it is
also possible to derive a rejection of capitalism from the observation
of corruption for efficiency (rather than fairness) considerations. For
example, in a simple signal extraction problem involving managerial
talent, the observation of corruption reveals to the public that the
firm's manager has decided to spend time and effort lobbying
politicians rather than working and innovating, reducing the likelihood
that the manager is productive. (22)
Given the current economic dislocation in the United States, it is
of interest to note that during macroeconomic crises there is often the
perception of corruption among large companies (particularly banks).
This can be exacerbated when firm owners are perceived to be looting
their companies even as they are being bailed out by the government
(see, for example, Akerlof and Romer 1993). Our paper suggests that the
design of macroeconomic bailouts can have lasting influences on the
economic system by affecting the perception of how deserving the
bailed-out bank owners and other capitalists are. (23)
V. A Model Linking Corruption and Ideology through Fairness
Considerations
We now turn to a simple model intended to formalize the idea that
"unpleasant capitalists" weaken public support for capitalism.
The setup is a two-period model in which workers (who are also voters)
in the second period update their evaluation of the altruism of firms,
after observing the level of corruption in the first period. From this
evaluation, workers decide on the level of taxes to set in the second
period. Given the new level of taxes, firms and bureaucrats again
jointly decide how much corruption to engage in (which hurts the
workers). The preferences we assume imply that workers do not normally
confiscate the wealth of the rich, because they would regard that as
unfair (see, for example, Akerlof and Yellen 1990 and Rabin 1993).
Specifically, individuals are assumed to have "reciprocal
preferences" (see Levine 1998 and Rotemberg 2005).
V.A. Preferences
Assigning the subscripts b, f and v to variables corresponding to
bureaucrats, firms, and workers, respectively, and denoting by U their
material payoffs (apart from any altruistic feelings), we can define
their preferences as
(3) [W.sub.b] = [U.sub.b] + [[lambda].sub.b][U.sub.v]
(4) [W.sub.f] = [U.sub.f] + [[lambda].sub.f][U.sub.v]
(5) [W.sub.v] = [U.sub.v] + [[lambda].sub.vf]([[??].sub.f][U.sub.f]
+ [[lambda].sub.vb]([[??].sub.b])[U.sub.b],
where [[lambda].sub.s] is a parameter denoting the unconditional
level of altruism of the firms or the bureaucrats toward the workers.
(All firms are assumed to be equally altruistic, but their level of
altruism is unknown to the workers.) The workers' level of altruism
is [[??].sub.vs] and is assumed to be an increasing function of
[[??].sub.s], the workers' best estimate of the firms' (or the
bureaucrats') level of altruism. (24) Without loss of generality we
assume that there are no altruistic feelings between firms and
bureaucrats.
This formulation assumes that workers would want to respond as they
themselves have been treated. As stressed by David Levine (1998) and
Julio Rotemberg (2005), this function has to adopt some positive values
in order to explain voluntary contributions in public goods experiments,
and some negative values in order to explain rejections of positive
offers in ultimatum games. For purposes of this application, it is
sufficient to assume that [lambda] is an increasing function of
[[??].sub.s]. For simplicity, let the firms' altruism parameter
take one of two values, [[lambda].sub.f][epsilon]
{[[lambda].sub.1],[[lambda].sub.2]}. The ex ante probability that the
value of the altruism parameter [[??].sub.f] is [k.sub.f] and is common
knowledge. The bureaucrats' level of altruism, [[lambda].sub.b] [is
less than or equal to] [[lambda].sub.1], is assumed to take just a
single value known to the workers. In this special case, [[??].sub.b] =
[[lambda].sub.b], although in a more general version of the model,
[[lambda].sub.b], can also be allowed to take either of two values.
V.B. Government
Each worker is endowed each period with an amount, R, of resources
that is put into the custody of a bureaucrat (one can think of this as,
for example, a flow value of a public good used in national defense).
The firm pays a lump-sum tax t to each worker. (25)
V.C. Technology and Contracts
The numbers of firms, bureaucrats, and workers are assumed to be
equal, so that the economy is organized as a collection of trios, each
consisting of one firm, one bureaucrat, and one worker. The operations
of the firm produce output p.
V.D. Corruption (of the Capture Variety)
When corruption is present, the firm produces no output, and the
players receive the payoffs described in equations 3 through 5, which we
now denote [W.sup.corrupt.sub.s] (corruption is observed only within a
trio). In this case the worker's material payoff is 0, and the firm
and bureaucrat each obtain R/2 - m, where m is a common moral cost that
is privately observed (by the bureaucrat and the firm but not by the
worker). Its distribution is common knowledge and is denoted by F(m).
When corruption is absent, the firm does produce output and the players
receive [W.sup.honest.sub.s] In this case the worker's material
payoff is [[alpha].sub.v]p, and the firm and the bureaucrat receive the
shares, [[alpha].sub.f]p and [[alpha].sub.b] p, respectively. It is
reasonable to assume that the bureaucrat's material payoff is
smaller than the film's.
[FIGURE 1 OMITTED]
V.E. Timing
At the beginning of the first period, the worker receives her
endowment, which is placed in the custody of the bureaucrat, and sets
the initial level of taxes [t.sub.0] (figure 1). The
bureaucrat-firm-worker trios are then formed. Within each trio, two of
the players (the firm and the bureaucrat) learn the value of the common
moral cost. Firms then either produce output or engage in corruption
with the bureaucrat. At the start of the second period, the worker
observes whether there has been corruption (given [t.sub.0]). The worker
then estimates [[??].sub.s] (without information about the realization
of the moral cost) and votes on a new level of taxes [t.sub.1]. In the
second period there is again a corruption decision (the consequence of
the new t) because the worker again receives the endowment, which is
placed in the custody of the bureaucrat. A moral cost is again revealed
to the firm and bureaucrat, determining whether either production or
corruption occurs. (26)
V.F. Results
For a given level of taxes, one can define a threshold moral cost
for each altruism parameter such that a firm with a lower moral cost is
corrupt. Thus, a firm for which
(6a) [[alpha].sub.f]p - t + [[lambda].sub.f][U.sub.v](R +
[[alpha].sub.v] p + t) [greater than or equal to] R/2 - m
produces, where [U.sub.f](0) = 0 and is assumed linear for
simplicity. Otherwise it is corrupt. Call the level of m for which the
equation above holds with equality [m.sub.f]. A similar logic determines
[m.sub.b], the moral cost that makes the bureaucrat indifferent between
participating in the corrupt transaction and not. That is,
(6b) [[alpha].sub.b]p + [[lambda].sub.b][U.sub.v](R +
[[alpha].sub.v]p + t) = R/2 - [m.sub.b].
Note that for corruption to occur, both the bureaucrat and the firm
need to be willing to deal with each other. Since the honest material
payoff to the firm is higher than that to the bureaucrat, the binding
moral cost is always the firm's, [m.sub.f]. The initial level of
taxes, t = [t.sub.0], is set by the workers so as to maximize expected
utility, using ex ante probabilities [k.sub.1] and [k.sub.2]:
(7) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII].
After observing the state r, where r [member of] {corruption,
honesty}, the worker is able to update her best estimate of the
firm's altruism parameter:
(8) [[??].sub.f] = [[lambda].sub.1]z ([[lambda].sub.1|r]) +
[[lambda].sub.2]z ([[lambda].sub.2|r]),
where z(x) are conditional probabilities. Since the binding moral
cost is always the firm's, updating occurs only with respect to the
firm's level of altruism:
(9) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII].
The worker's problem after observing the state r is to set the
new level of taxes, t = [t.sub.1], so as to maximize expected utility:
(10) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII].
The first-order condition is given by
(11) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII].
Equation 11 suggests that the worker balances her income from taxes
against her desire to be fair to the firm and against the incentive
costs of high taxes (captured through an increase in corruption and in
the size of the unofficial economy). The following proposition can be
established:
Proposition:
1. Observing corruption increases the desired tax when fairness
considerations dominate the decision (because corruption lowers the
chance that the firm is altruistic toward the worker).
2. When firms are relatively productive, there is less corruption,
ceteris paribus.
3. When taxes are high, corruption does not change the
worker's estimate of the firm' s level of altruism.
Proof:
1. Note that z([[lambda.sub.2|corruption]) < [k.sub.2]. Then
[t.sub.1|corruption] > [t.sub.1|honesty], where [t.sub.1|r] = argmax
[EW.sub.v|r], since the first-order condition reduces to [partial
derivative][U.sub.v]/[partial derivative]t - [[lambda].sub.vf]
([[??].sub.f]) = 0 when fairness dominates considerations of the size of
the shadow economy. If corruption is observed,
[[lambda].sub.vf])([[??].sub.f]) decreases, which implies that taxes
must rise, assuming [[partial derivative].sup.2][U.sub.v]/[partial
derivative][t.sup.2] < 0.
2. Define a productive firm as one that has a large p (relative to
R). Calculate the probability of corruption as [2.summation over
(f=1)][k.sub.f]F([m.sub.j]) and then note that [partial
derivative][m.sub.f]/[partial derivative]p < 0.
3. The reason is that [m.sub.2], [right arrow] [m.sub.1] as taxes
rise.
The intuition behind our key result--that the observation of
corruption leads to higher taxes--is as follows. Firms dislike taxes. An
act of corruption means that both the firm and the bureaucrat have been,
to some degree, unfair toward the worker. But why should the worker
react by punishing the firm and not the bureaucrat? First, recall that
the worker gets some of the tax receipts. Second, and more important,
for a similar level of altruism, the bureaucrat is always more prone
than the firm to be corrupt, because it is assumed that the bureaucrat
is being paid less than the firm. Thus, the act of corruption reveals
only the firm's level of altruism. This intuition also carries over
to the case where bureaucrats can have either of two levels of altruism.
It predicts that a person who sees corruption among public officials as
widespread will express a dislike of capitalists relative to other
groups (such as ethnic or religious minorities). In fact, the
correlation between these two questions in the WVS is significant at the
1 percent level and has the predicted sign. (27) An alternative
explanation exploits the natural distinction between extortion and
capture. By assumption, bureaucrats misbehave more than firms in the
case of extortion, whereas the opposite is true under capture. Then, if
capture cases tend to involve better-known actors in business and
politics than do extortion cases, they will tend to be covered more
often in the media and to be more salient in the eyes of the public at
elections.
The model emphasizes the notion of commercial legitimacy, whereby
the privileges (high income, status, laws protecting their activities,
and the like) of businesspeople are accepted by the voters. This idea,
which parallels the political science notion of legitimacy of the state,
is summarized in the model by the degree of mutual respect (or
reciprocal altruism) of the different actors. (28) In particular, the
main variable of interest--the level of taxation--is determined by a
combination of self-interest, a sense of fairness toward others, and an
incentive constraint arising from the difficulty of producing output in
a highly taxed economy. (29) This is related (but not identical) to a
class of efficiency problems generated by high taxes that prevent the
poor from fully taxing the rich. More precisely, in this model the main
cost of taxes from the point of view of the voters is that firms hide
more of their income (by joining the unofficial economy). Formally, the
costs of this outcome are similar to the standard efficiency costs of
high taxes. (30) One advantage of the present setup is that voters
update less when taxes are high, which could capture the idea that
corruption is perceived as more "justifiable" when taxes are
high.
A difficulty for fairness models is that outcomes are judged
according to how close they are to a target or "fair" outcome,
but there is no natural way to define that outcome. We follow Levine
(1998) and Rotemberg (2005, 2008) in assuming that an agent's
feelings toward others are affected by what they believe others feel
toward them. Thus, more value is placed on money in the hands of an
individual who is thought to be more altruistic.
There may be an ideological externality in the sense that the
individually rational acts of corrupt firms lead to the belief that all
capitalists are undeserving and harmful to the rest of society. A
natural extension is to allow different kinds of firms (good and bad) to
exist in the economy simultaneously. It then becomes important to
specify the extent to which altruism is correlated across firms. In
small or stable societies, firms might be perceived to be part of a
homogeneous group (as in the present model), and this leads to more
updating against all firms (a stronger ideological externality). This
provides some justification for the preoccupation of some firms with
getting others to adopt forms of corporate social responsibility.
Finally, in a repeated-game extension of the model, if a political party
offering low taxes credibly promises to control corruption in the
future, its appeal may still be less than that enjoyed by the party
offering high taxes. The reason is that after observing corruption in
the past, reciprocal preferences imply that voters will seek to punish
firms by imposing higher taxes. And since corruption will be controlled
in the future, there will be no incentive costs of higher taxes in terms
of driving firms into the shadow economy, reinforcing the first effect.
The regression equations in section III are designed to test the
prediction in part 1 of our formal proposition. The desired level of
taxes is proxied by the left-right placement of either the government
(in section III.A) or the individual (in section III.B). The
"anger" regressions in section III.C test for the transmission
mechanism suggested by the term interacting the worker's level of
altruism toward firms (which depends on the observed level of
corruption) and the firm's payoff (which depends on the level of
taxes or regulation in the workers' utility function.
VI. Conclusion
U.S.-style, pro-capitalist political ideas face electoral
difficulties in poor countries. The first part of this paper showed,
using data on business entry regulation, on the ideological orientation
of political parties, and on people's beliefs about the benefits of
private versus government ownership of business, that intrusive
regulation and left-wing rhetoric and beliefs are more common in poor
countries than in rich ones.
The second part of the paper suggested an explanation for these
phenomena based on the idea that corruption plays a role in shaping
ideologies. We then presented a model in which corruption generates the
perception that capitalists are "undeserving" (for example, of
their wealth and of the freedom to run their businesses without
supervision). When the legal system is slow to punish them, the demand
for more regulation, higher taxes, and government intervention to make
the environment less business-friendly increases, even if this has
material costs. Thus, corruption, even when limited to a small group of
businesspersons, might interfere with the spread of capitalism. In some
circumstances, however, the government can preserve capitalism by
punishing only those capitalists whom the voters perceive as corrupt--as
Teddy Roosevelt did almost a century ago.
We have presented suggestive evidence consistent with this
"unpleasant capitalists" hypothesis. First, we showed that
increases in aggregate (country-level) corruption tend to precede
electoral gains by left-wing parties in national elections. Second, we
showed that in a given country at a given time, people who perceive
corruption to be widespread also tend to place themselves toward the
left of the ideological spectrum and to demand more government ownership
of business and industry. We also found cross-country data on reported
emotions, from the Gallup World Poll, to be consistent with the
mechanisms involved in our explanation: anger is associated with
perceptions of widespread business corruption, but the presence of
regulation that makes life harder for business weakens this correlation.
We interpret our findings to mean that voters get angry when they see
businesspeople engaging in corrupt behavior, and that they are then more
likely to elect left-wing governments that will more stringently
regulate business, thus reducing their anger. More broadly, the paper
shows that corruption has an ideological side to it, eroding the
legitimacy of business and hampering the electoral performance of
pro-capitalist parties.
ACKNOWLEDGMENTS We thank our Brookings Panel discussants, George
Akerlof and Peter Klenow, as well as Gregory Mankiw, Andrei Shleifer,
and Julio Rotemberg, for very helpful suggestions. We also thank Rawi
Abdelal, Nittai Bergman, Pedro Dal Bo, Steven Davis, Victor De Gennaro,
Juan Dubra, Catherine Duggan, Oded Galor, Amihai Glazer, Ed Iacobucci,
Christopher Kingston, Rafael La Porta, Howard Rosenthal, Antoinette
Schoar, Enrico Spolaore, Jorge Streb, Nicolas Szekasy, and seminar
participants at the University of California, Berkeley, the University
of Chicago (applied economics), Brown University, the June 2003 World
Bank Conference on Institutions, Enforcement and Corruption (Capri,
Italy), the University of Colorado, Columbia University, the 2003 Latin
American and Caribbean Economic Association (LACEA) Conference (Puebla,
Mexico), the University of Toronto, the Canadian Institute for Advanced
Research (Ottawa), the National Bureau of Economic Research Behavioral
Macro and Entrepreneurship Conferences, Princeton University, and the
October 2003 Wallis Conference on Political Economy (Rochester).
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RAFAEL DI TELLA
Harvard Business School
ROBERT MACCULLOCH
Imperial College London
(1.) On economists' views of markets, see, for example,
Blendon and others (1997).
(2.) Although national random sampling and quota sampling were
used, the populations of China, India, and Nigeria, as well as rural
areas and the illiterate population in countries generally, were
undersampled.
(3.) Ideally, the data would refer to levels of government
intervention rather than simply ownership, but these data are
nonetheless useful, particularly in conjunction with data showing that
poor countries on average already have more government ownership of
business than do rich countries.
(4.) "Screening procedures" is a subset of the total
number of procedures: Djankov and colleagues also collected data on the
cost to a firm of obtaining legal status, which we do not include in our
analysis.
(5.) Stokes (2001, p. 2). A well-known case of a conservative
politician veering left once in power is that of U.S. President Richard
Nixon, who initiated diplomatic relations with communist China; however,
this case is again consistent with the general pattern, as Nixon was the
president of a rich country.
(6.) Standard references include Tullock (1967), Stigler (1971),
and Peltzman (1976). On the tollbooth theory, see McChesney (1987), De
Soto (1989), and Shleifer and Vishny (1993). More recently, Parente and
Prescott (1999) cast these ideas in terms of technology adoption by
monopolists, Rajan and Zingales (2003) do so with attention to public
confusion over the economic cycle, and Acemoglu and Robinson (2000) with
an emphasis on political power.
(7.) For a related discussion in the context of trade policy, see
Sachs and Warner (1995) and Buera, Monge-Naranjo, and Primiceri (2008).
For evidence on the connection between shocks (crime, oil, or
macroeconomic) and pro-market beliefs, see Di Tella, Donna, and
MacCulloch (2007. 2008), Di Tella, MacCulloch, and Dubra (forthcoming),
and Giuliano and Spilimbergo (2008). On the relationship between the
size of a country and the beliefs prevalent within that country, see
Alesina and Glaeser (2004).
(8.) Four related papers are Aghion and others (2009), Alesina and
Angeletos (2005), Landier, Thesmar, and Thoenig (2008), and Panizza and
Yanez (2005).
(9.) See also the work in political psychology on system
justification by Jost and Banaji (1994).
(10.) For example, when Hoffman and others (1994) assigned roles to
subjects according to their performance on a general knowledge quiz,
proposers became more aggressive in their offers. In research reported
by Ruffle (1998), recipients competed on a task affecting the size of
the pie in a dictator game. Allocators rewarded skillful recipients more
generously, even at the cost of accepting a lower material payoff for
themselves. This research also shows that offers to skillful recipients
are motivated by a taste for fairness and not by strategic
considerations. In Ball and others (2001), the status of participants in
a certain market was determined in two different ways: in one, status
was assigned according to subjects' scores on a trivia quiz,
whereas in the other, status was randomly assigned. (The assignments
were observed by all participants.) Prices (and market surplus) favored
the high-status person under both conditions. Rose-Ackerman (2002)
discusses the impact of grand corruption on the "social
contract." On consent to taxation, see Levi (1988).
(11.) This differs from existing normative models of regulation in
that it does not need to assume that the objective is to maximize
consumption, or that the lull population is being counted. Note that a
challenge to these models is to explain why people bother voting at all.
(For a start, see the model of altruistic voters of Rotemberg
forthcoming.) Several normative models of regulation have made the point
that the optimal amount of intervention can change in the presence of
corruption (see, for example, Ades and Di Tella 1997; Banerjee 1997, and
Glaeser and Shleifer 2003 as well as work by sociologists and political
scientists on state capacity, such as Evans, Rueschemeyer, and Skocpol
1985 and Woo-Cummings 1999).
(12.) That corruption is indeed extensive in poor countries is
documented by, for example, Mauro (1995) and Knack and Keefer (1995).
(13.) This finding is robust to the inclusion of other covariates
including GDP per capita, income inequality, and dummies for the
dominant religion, a recent history of war, and a history of communist
rule. The variable measuring right-wing beliefs is positively correlated
with income inequality, consistent with the empirical problems of the
basic economic model (Meltzer and Richard 1981). For work on the
varieties of capitalism, see, for example, the contributions in Hall and
Soskice (2001).
(14.) See Smith and Ellsworth (1985), Lazarus (1991), and the
review by Lerner and Tiedens (2006). A focus on anger is preferable in
this context because other negative emotions follow alternative
appraisals: sadness (rather than anger) follows negative events that are
blamed on situational forces, whereas shame follows such events that are
seen as one's own personal responsibility. Rotemberg (2005)
connects anger to macroeconomic phenomena.
(15.) See also Bodenhausen, Sheppard, and Kramer (1994) on
stereotyping and Goldberg, Lerner, and Tetlock (1999) on punishment.
(16.) The laziness question is, "Why, in your opinion, are
there people in this country who live in need? Here are two opinions:
Which comes closest to your view? 1. They are poor because of laziness
and lack of will-power, [or] 2. They are poor because they are unlucky
or society treats them unfairly."
(17.) Interestingly, the perception of corruption exhibits a
nonsystematic pattern with certain noneconomic beliefs: for example, it
is positively correlated with the view that homosexuality is never
justifiable, which presumably is a trait of the politically
conservative. These results are discussed in detail in Di Tella and
MacCulloch (2002). A difficult question is why certain beliefs often
appear in bundles: for example, conservatives tend to believe both that
effort pays and that abortion is wrong. For an attempt to explain part
of this phenomenon through the use of metaphor, see Lakoff and Johnson
(1980). For a review, see Feldman (2003).
(18.) In practice, the distinction between capture and extortion is
blurred, because a firm being extorted may in turn convince the
bureaucrat to deliver other favors, which may harm competitors. Often a
firm that submits to extortion is not legally responsible for bribery.
One question in the WVS does not talk about business explicitly but
instead mentions "big interests" (and yields stronger
results). It asks, "Generally speaking, would you say that this
country is run by a few big interests looking out for themselves, or
that it is run for the benefit of all the people'? 1. Run by a few
big interests. 2. Run for all the people.'*
(19.) We also investigated the effects of corruption and regulation
on other emotions: regressing love on corruption, regulation, and their
interaction yields no significant coefficients on any of these
variables, and regressing joy on these same variables yields no
significant coefficients on business corruption or the interaction
terms. This accords with the view of psychologists that these emotions,
although significantly negatively correlated with anger, capture
emotions related to different kinds of events.
(20.) Note that businesspeople in general would also benefit from
strengthening the legal system because it would eliminate the negative
(ideological) externality mentioned in the introduction: without a
strong legal system, corrupt capitalists hurt honest capitalists by
inviting intrusive regulation for all. The possibility of a corruption
trap also exists, whereby beliefs about corrupt capitalists fuel
intrusive regulation, prompting more business corruption. See Glaeser
and Shleifer (2003) on alternative strategies of law enforcement, with
an application to the rise of regulation during the Progressive Era.
(21.) Eliot Spitzer+ when he was New York State attorney general,
defended his high-profile cases against "big business" in
similar terms: "'Does anybody out there really believe that
the market is better off with those problems before we revealed them?...
Just as would anybody want to go back to the world before Teddy
Roosevelt, where we broke up the cartels'? I think not. And so even
though those who pretend to speak for the free market kick vigorously
against us when we reveal these problems, ... the reality is that the
market survives only because we reveal these problems, make them
eminently clear, and try to confront them in a very real way"
(Spitzer 2005, at about minute 32: emphasis added). Spitzer was later
elected governor of New York with 69 percent of the vote.
(22.) For a model with these characteristics, see Di Tella and
MacCulloch (2006).
(23.) The debate over regulation and limits to compensation in the
wake of the recent bailouts suggests that this paragraph touches on only
a few of several relevant considerations. One complication from a
normative perspective is that a weak government may also make a crisis
(and the necessity of a bailout) more likely.
(24.) An alternative interpretation of [lambda] is as a measure of
the perceived merits of the capitalists (or the bureaucrats).
(25.) A standard assumption is that bureaucrats derive some level
of enjoyment from the size of the public sector. This effect is already
present in the model, arising indirectly since higher taxes increase the
payoff to workers, whom bureaucrats care about. Thus, our results can
also be derived assuming that bureaucrats care directly about the size
of the public sector by letting [U.sub.h] = g(t), where g is an
increasing function of t.
(26.) It has to be assumed that the probability that the worker is
the median voter is sufficiently small that firms can ignore signaling.
(27.) This important aspect of the model where income differences
between bureaucrats and capitalists drive the changes in beliefs against
the richer actor can be taken as a metaphor for the differences in power
between the two, whereas in the case of extortion the more powerful
party is the bureaucrat.
(28.) This formalizes the idea that "corporations have an
obligation to refrain from illegal payoffs as part of the quid pro quo
implied by the laws that permit corporations to exist and to
operate" (Rose-Ackerman 2002, p. 1889).
(29.) As in work on why the poor do not expropriate the wealth of
the rich (for example, Piketty 1995; Putterman 1996; Roemer 1998;
Benabou 2000: Benabou and Ok 2001: and Alesina and Angeletos 2005). Note
that even if efficiency considerations were absent, a sufficiently
strong desire for fair outcomes would bring about an interior solution.
This is desirable given that the correlation between income inequality
and taxation across rich countries is weak. We are ultimately more
interested in the correlates of the equilibrium level of taxes than in
what this level is.
(30.) See Johnson and others (2000) and Svensson (2003). Extending
the setup to include firm investment shows that corruption can be more
damaging than taxes (as long as moral costs are discovered after
investments are made), consistent with the arguments in Shleifer and
Vishny (1993) and Wei (1997). An emphasis on tax evasion as a response
to tax increases (for example, instead of labor supply responses) is
consistent with the empirical evidence in Auerbach and Slemrod (1997).
Comments and Discussion
COMMENT BY GEORGE A. AKERLOF This paper by Rafael Di Tella and
Robert MacCulloch is an important one. It establishes and codifies some
important facts. Those facts correspond to an important view of the
cause and cures of underdevelopment. The paper also gives a new
perspective on the detailed nature of that cure.
Here are some of the facts that the authors establish. The first is
that poor countries tend to have governments that at least rhetorically,
but probably also in reality, too, lean left rather than right. Poor
countries not only are more likely to have such left-wing governments,
but also have higher levels of corruption. They also tend to regulate
business more, at least as indicated by measures of the number of
procedures and the length of time needed to establish a business.
Indeed, these measures suggest that poor countries tend to overregulate
business. There appears to be more red tape. Furthermore, the authors
establish the conditional possibility that, given income, countries tend
to be more left-wing when more corrupt. An increase in corruption (a
corruption "shock") also increases the probability of electing
a left-wing government.
These facts are consistent with an interesting model that the
authors propose. In this model the public reacts to corruption shocks by
voting for the left and for more regulation, because they perceive that
it is the capitalists who have acted badly. In the spring of 2009, this
idea seems remarkably timely.
The arguments of this paper take us back nearly two and a half
centuries to the very beginning of modern economics. One of the
important takeaways from the Wealth of Nations was Adam Smith's
dislike of monopolies, and especially of government-created monopolies,
where the producers, with the connivance of the bureaucrats, used their
powers to take advantage of the poor consumers. Monopoly-creating and
monopoly-protecting governments were a shield and an abettor of
corruption. Every economist understands this image. It seems, then, a
paradox that poor-country voters, rather than eschewing government
bureaucracy and its ill consequences, lean left rather than right in
response to a corruption shock. Shouldn't the response to an
increase in corruption be to decrease bureaucracy rather than increase
it?
The authors enumerate at the beginning four different reasons why
poor people are electing these left-leaning governments. There may be a
political equilibrium of interest groups. Or people may fail to
understand the benefits of capitalism. Or they may prefer socialism for
its own sake. Or, finally, capitalists may be considered bad people who
need to be punished, and punished more, the more corruption there is.
The last of these explanations is, of course, especially novel, and
the authors present a signalling model with reciprocal altruism that
corresponds to it. In that model, corruption is more indicative of bad
intentions (Ivan Boesky might call it greed) on the part of capitalists
than on the part of bureaucrats. To punish the capitalists, the voters
lean left, calling for more bureaucracy. That, of course, is the focus
of the authors' special model.
This paper brings forth some new ideas in development economics.
One of those ideas concerns how to treat corruption. The authors'
picture of government in this paper is one in which political platforms
and parties lie along a one-dimensional spectrum from left to right.
George Lakoff (2004) would agree with that characterization. He has
found that just knowing that someone is a conservative or a liberal is
predictive of a wide range of views that one might think would be
mutually independent. Lakoff says that conservatives have one view of
the family: there should be a strict father, who makes rules that should
be obeyed, whereas liberals have a much more permissive view of the
family, in which parents and children negotiate standards regarding
behavior. Lakoff claims that such a division will predict views on
issues as seemingly disparate and as seemingly independent as whether or
not the United States should have invaded Iraq and how much aid should
be given to the poor. (The strict father says that Saddam Hussein
violated the United Nations resolution and should therefore be punished,
and that welfare mothers have violated the rule that families should be
independent and should likewise take the consequences.)
Corresponding to such a unidimensional view of politics, the
potential responses available to the public, as depicted in the paper,
are either to elect a more left-wing government, with more regulation
and more bureaucrats, including, presumably, more "policemen on the
street," or, alternatively, to elect a right-wing government, with
less regulation and fewer bureaucrats and, presumably, fewer
"policemen on the street." But one implicit and important
conclusion of the paper is that governments might be characterized in
more than one dimension. Indeed, a two-dimensional approach to politics
underlies the authors' repeated and approving mentions of Theodore
Roosevelt. In this approach a response to corruption and to
overregulation might instead be to elect a government that is more left
wing in the sense of increasing the surveillance and prosecution of
corruption, but also more right wing in the sense of decreasing the
government regulation of private activities that provides much of the
opportunity for corruption. Indeed, one of the important messages of
this paper is that such two-dimensional reform is needed in many poor
countries.
Such reform then gives a twofold approach to capitalism. In terms
of Teddy Roosevelt, "Speak softly and carry a big stick" would
mean adopting a pro-business policy that imposes relatively little
regulation on firms, but aggressively prosecuting those who misuse the
freedoms granted under such a policy. Such two-dimensional policies
would be both favorable to business and hostile to corruption in ways
that cannot be pictured in a one-dimensional left-wing, right-wing
trade-off. Thus, one of the important political-economy conclusions of
the paper is that politicians in poor countries should emulate Teddy
Roosevelt: they should be pro-business on the one hand, but also
anticorruption on the other. There is scope for political platforms that
are contrary to the current one-dimensional spectrum from left to right.
I have suggested to one of the co-authors that he should run for
president of Argentina on such a platform.
The authors' fundamental and basic observation that poor
countries have biases toward left-wing governments, even where
right-wing governments are capable of achieving more rapid economic
growth, also poses a conundrum that requires answers. The authors allude
to some potential cultural and historical reasons for this phenomenon.
Some of these go back to the allegiances and allies of the colonial
independence parties. Everyone probably has a favorite personal example.
Mine is India. The history of Indian independence reveals the historical
origins of left-wing ideas in that country. Biographies of leading
Indian nationalists such as Gandhi and Nehru document their close ties
to Britain, but, especially, they reveal the extent to which these
leaders were influenced by people in Britain who sympathized with the
colonized peoples, and who viewed Indians without racial or ethnic
stigma. We would today classify as on the left, rather than on the
right, those who included colonized peoples as well as their fellow
Englishmen, Frenchmen, and so forth in the thought, "All men are
created equal." (And in historical fact, many on the right did not
believe in equality at all.) I quote the U.S. Declaration of
Independence advisedly, because the American revolutionaries--like the
Indian nationalists 175 years later--were deeply grateful to prominent
sympathizers in England.
But there is a deeper reason for left-wing bias in poor countries,
beyond the interaction and sympathy with left-wing parties in the
"home" country at the time of independence. That deeper reason
goes back to the nature of colonial rule itself. One of the great
mysteries of modern history (and of economics) is how Europeans came to
dominate a good share of the globe. In country after country, sometimes
more than a century apart, handfuls of European adventurers took over
the local governments and dispossessed the locals. These colonizers came
from Britain, France, Spain, Portugal, the Netherlands, and even to some
limited extent from Germany, Italy, and Scandinavia. Historians have
described these takeovers, such as Hernando Cortes' conquest of
Mexico and the British takeover of Bengal, in minute detail. But the
details curiously make the reasons for the takeovers, if anything, more
mysterious. What stands out in all the histories is the extent to which
the Europeans considered themselves a separate tribe, and the extent to
which they denigrated the colonials. Edward Said (1994) described the
extent to which the colonized peoples were cast in the role of
"Orientals." Frantz Fanon (1968) described the psychological
helplessness engendered in the colonized themselves by this denigration
of their culture and the advancement of the culture of the colonizing
country on their soil. Left-wing parties' ideology of equality thus
has appeal, beyond its economic prescriptions, to those non-Europeans
who, in the postcolonial period, are reacting to the stigmatization that
was one of the instruments of their subjugation.
The susceptibility of third world governments to manipulation even
by minuscule outside forces was, of course, the major fact of the
colonial conquest. But, remarkably, this same phenomenon continues into
the postcolonial era and is still a reason for these countries to vote
on the left. Tim Weiner's Legacy of Ashes (2007) shows that the
Central Intelligence Agency has played a major, if clandestine, role in
the politics of many poor countries. Often very small interventions, as
in Mohammed Mossadegh's Iran in the 1950s, have resulted in
dramatic political upheavals. The CIA's ability to influence, and
sometimes even topple, local third world governments indicates that the
fragility of local governments and institutions discovered by Cortes and
Francisco Pizarro in the 16th century, by the Nabobs of Bengal in the
18th and early 19th centuries, and by many others in the history of
conquest persists to the present day. Genuine fear in poor third world
countries of such outside influence gives another reason why third world
elites lean to the left, and why they fear American influence. One can
add, more than parenthetically, that this fragility of power in the
poorest countries is most likely the most essential reason for their
poverty, as well as for their government failures, including their
inability to curb corruption.
In conclusion, two big ideas stand out in this paper. The first is
that the poorest countries have a bias toward left-wing regimes. These
regimes have served their countries badly. The second big idea is that
right-wing regimes, which bolster capitalism, business, and growth,
should also take firm stances against corruption. That will be not only
useful for growth, but a good political strategy as well, as the voters
will come to expect that corruption will be punished.
REFERENCES FOR THE AKERLOF COMMENT
Fanon, Frantz. 1968. Black Skin, White Masks. Grove Weidenfeld.
Lakoff, George. 2004. Don't Think of an Elephant/Know Your
Values and Frame the Debate: The Essential Guide for Progressives.
Chelsea Green.
Said, Edward W. 1994. Orientalism. Vintage Books.
Weiner, Tim. 2007. Legacy of Ashes: The History of the CIA.
Doubleday.
COMMENT BY PETER J. KLENOW Rafael Di Tella and Robert MacCulloch
maintain in this paper that capitalism is unpopular in poor countries
because voters perceive capitalists as corrupt. Voters see capitalists
bribing politicians and therefore favor policies to limit crony
capitalism. Thus, Di Tella and MacCulloch propose a causal pathway from
voter-perceived corruption to voter approval of anticapitalist policies.
I consider this hypothesis highly plausible and fairly novel to the
economic literature.
Yet the hypothesis is paradoxical if many anticapitalist policies
(for example, the license raj in India) facilitate rather than
discourage corruption. One can easily imagine this kind of reverse
causality, flowing from regulation to corruption. And to the extent that
corruption causes regulation, it may be because incumbent firms lobby
politicians to grant them monopoly rights. A related hypothesis,
advocated forcefully by Stephen Parente and Edward Prescott (2000), is
that anticapitalist policies are chosen precisely so as to create or
protect the rents of politically connected firms and workers.
Di Tella and MacCulloch first document that developing countries
tend to be led by left-leaning parties and to regulate business entry
more than other countries do, and that survey respondents in these
countries profess greater support for government ownership of
industries. These observations are positively correlated with perceived
corruption not just across country-years, but also across time within
countries (bursts of corruption boost left-leaning parties a few years
later) and across individuals within countries (those who perceive more
corruption disproportionately favor left-leaning parties and a bigger
role for government in running industries).
The time-series and cross-individual evidence supports the case
that perceived corruption leads to anticapitalist policies, rather than
the reverse. But why were there bursts of corruption? And did they occur
disproportionately under right-leaning governments in the sample?
Perhaps corruption turns voters against incumbent politicians, not
capitalism per se. And why do some individuals perceive more corruption
than others? Perhaps the personality type that is prone to be outraged
by capitalism on ideological or redistributive grounds is also more
attuned to instances of corruption by capitalists. Jaime Napier and John
Jost (2008) provide related evidence that conservatives report greater
subjective well-being than liberals because the former are less troubled
by economic inequality.
More important, if voters want to limit crony capitalism, why erect
barriers to entry? Don't such barriers favor the corrupt
capitalists at the expense of consumers? According to a recent World
Bank survey (2008a), entry barriers do in fact limit entry. Of course,
such limits could be in the public interest. But Simeon Djankov and
others (2002) present a plethora of evidence that these
government-imposed barriers reflect "regulatory capture"
rather than enlightened corrections of market failures.
If the Di Tella and MacCulloch hypothesis is correct, then voters
should be availing themselves of more effective ways of curbing corrupt
capitalism. First and foremost would be high-profile prosecutions
(fines, asset seizures, imprisonment) of exposed corruption. The elite
investigating unit in South Africa known as the "Scorpions"
comes to mind. Another possibility would be antitrust policies--the
opposite of entry restrictions--to drive down incumbent rents. State
ownership of industry, likewise, could limit capitalist corruption.
Progressive tax rates on business and household income might be even
more effective at limiting the benefits of capitalist corruption. Of
course, all of these potential palliatives are themselves vulnerable to
abuse. Still, it remains far from clear why restricting business
start-ups would be at all effective, much less the method of choice, for
punishing corrupt capitalists. If capitalist corruption breeds hostility
toward capitalism, do poorer countries pursue these alternatives to
entry regulation as well? If not, why not?
A separate question is whether the populace in poor countries is
convinced that capitalism maximizes the economic pie (as measured by GDP
per capita). Most economists probably believe that it does; World Bank
(2008b) is an example of this view. Dani Rodrik is a notable voice of
dissent, often citing the disappointment that has followed capitalist
reforms in Latin America and the purported success of government
industrial policies in East Asia. (See Rodriguez and Rodrik 2001 for a
skeptical view of the benefits of openness, for example.) William
Easterly and others (1993) and Easterly (2005) argue that there is only
a weak relationship between country growth rates and changes in any
observed government policies, much less adoption of capitalist policies.
Some studies, to be sure, do find large productivity benefits from
capitalist reforms. Two examples are Rafael La Porta and Florencio
Lopez-de-Silanes (1999), on Mexico's early 1990s privatization
wave, and Chang-Tai Hsieh and Klenow (2009), on China's move away
from inefficient state-owned enterprises.
If economists do not see the evidence as clear-cut, there is plenty
of room for public skepticism about whether capitalism maximizes average
incomes. Francisco Buera, Alexander Monge-Naranjo, and Giorgio Primiceri
(2008) present a model in which policymakers gradually learn whether
"market-oriented policies" or "state intervention"
maximize growth in income per capita. These authors use the index
constructed by Jeffrey Sachs and Andrew Warner (1995) as a measure of
market orientation, and their model allows countries to learn from their
own experience and the experience of other countries. They find slow
adoption of liberal (that is, pro-market) policies in a large set of
countries from 1950 to 2001, because market orientation is associated
with only mildly higher average growth rates. They claim that reversals
of reforms are easily imaginable given the thin case for market
orientation in many countries.
Even if people are convinced that capitalism maximizes average
income, it may not maximize their own income (or they may not believe it
will). This is exactly what Parente and Prescott have in mind when they
say that rent seeking results in barriers to competition and entry. But
the same point could apply just as well to, say, labor income versus
capital income: workers could imagine their share of the pie shrinking
even as the overall pie expands in the wake of liberal reforms.
Similarly, the subset of the population in a given region, of a given
ethnicity, or of a given skill class could suffer from pro-capitalist
reforms. Pinelopi Goldberg and Nina Pavcnik (2007) survey the literature
and find that globalization (for example, reducing trade barriers) tends
to increase economic inequality within developing countries. Of course,
if the pie expands enough after pro-capitalist reforms, then even those
gaining less than proportionately may nonetheless gain; here an example
is the rural population in China in recent decades.
To recap, Di Tella and MacCulloch propose that poor countries are
hostile to capitalism because they associate it with ill-gotten gains to
corrupt capitalists. They provide some suggestive pieces of supporting
survey evidence, even if the evidence is far from airtight. I think this
hypothesis should be taken seriously and subject to much further
investigation, thanks to their contribution.
REFERENCES FOR THE KLENOW COMMENT
Buera, Francisco J., Alexander Monge-Naranjo, and Giorgio E.
Primiceri. 2008. "Learning the Wealth of Nations." Working
Paper 14595. Cambridge, Mass.: National Bureau of Economic Research
(December).
Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and
Andrei Shleifer. 2002. "The Regulation of Entry." Quarterly
Journal of Economics 117, no. 1: 1-37.
Easterly, William. 2005. "National Policies and Economic
Growth: A Reappraisal." Chapter 15 in Handbook of Economic Growth,
vol. 1A, edited by Philippe Aghion and Steven J. Durlauf. Amsterdam:
North Holland.
Easterly, William, Michael Kremer, Lant Pritchett, and Lawrence
Summers. 1993. "Good Policy or Good Luck? Country Growth
Performance and Temporary Shocks." Journal of Monetary Economics
32, no. 3: 459-83.
Goldberg, Pinelopi K., and Nina Pavcnik. 2007. "Distributional
Effects of Globalization in Developing Countries." Journal of
Economic Literature 45, no. 1: 39-82.
Hsieh, Chang-Tai, and Peter J. Klenow. 2009 (forthcoming).
"Misallocation and Manufacturing TFP in China and India."
Quarterly Journal of Economics 124, no. 4.
La Porta, Rafael, and Florencio Lopez-de-Silanes. 1999. "The
Benefits of Privatization: Evidence from Mexico." Quarterly Journal
of Economics 114, no. 4: 1193-1242.
Napier, Jaime L., and John T. Jost. 2008. "Why Are
Conservatives Happier Than Liberals?" Psychological Science 19, no.
6: 565-72.
Parente, Stephen L., and Edward C. Prescott. 2000. Barriers to
Riches. MIT Press.
Rodriguez, Francisco, and Dani Rodrik. 2001. "Trade Policy and
Economic Growth: A Skeptic's Guide to the Cross-National
Evidence." NBER Macroeconomics Annual 2000, vol. 15, pp. 261-325.
Sachs, Jeffrey D., and Andrew Warner. 1995. "Economic Reform
and the Process of Global Integration." BPEA, no. 1: 1-118.
World Bank. 2008a. "Entrepreneurship Survey 2008."
Washington. go.world bank.org/T8G73Z9ZM0.
--. 2008b. The Growth Report: Strategies for Sustained Growth and
Inclusive Development. Washington.
GENERAL DISCUSSION Justin Wolfers suggested some alternative titles
for the paper that might make one less comfortable about using the
evidence presented, such as "Why Is the United States So
Right-Wing?" or "Why Doesn't the Welfare State Flow to
Rich Countries?" or "Why Doesn't Managed Capitalism Flow
to Rich Countries?" Wolfers questioned the authors' notion
that regulation, an inefficient mechanism, serves as punishment for
corruption, and he wondered whether the authors were using
"capitalism" as a synonym for "the absence of
regulation," when in fact these are very different concepts. For
example, the floor of the New York Stock Exchange is arguably the most
regulated place in the world, but also the most capitalist. Finally, he
suggested that the authors consider running "placebo"
regressions using other indicators of emotion, such as perceptions of
depression and love, which tend to be highly correlated with each other,
in addition to the use of anger, to test whether the anger regression
captured a real effect.
Luigi Zingales also found the use of the word
"capitalism" somewhat problematic and offered a distinction
between pro-market policies (designed to increase competition and
efficiency) and pro-business policies (aimed at capturing rents for the
incumbents). Outside of the United States the experience most people
have of "capitalism" is not of the pro-market variety but
rather the pro-business one. It is not surprising, then, that they
associate capitalism with corruption, and that they respond to
corruption with a demand for less free markets. If they could experience
the benefits of noncorrupt pro-market policies, Zingales felt, even
populists would support markets more strongly.
Carol Graham echoed Wolfers's and the discussants'
comments about the use of anger as a measure, and particularly about the
idea that angry people are more likely to perceive corruption. In both
the United States and Latin America, people who lean to the right
politically tend to be happier and therefore less likely to perceive
corruption. She also wondered whether increasing regulation really made
angry people calmer. Noting that some Latin American countries, such as
Chile and Peru, have seen a rise in popularity of parties that are
left-leaning but also pro-market, Graham questioned the true role of
regulation against corruption, suggesting instead that a collapse of
populist policy could have increased support for market-friendly
policies.
Addressing the question of why more demand for regulation is found
in countries with higher corruption, Philippe Aghion proposed an answer
based not on right versus left but on the concept of social capital.
More-corrupt countries may tend to have less social capital, because in
those countries even lower-level civil servants demand bribes, thus
automatically reducing social capital because poorer people and
businesses cannot afford to pay for necessary government services.
Aghion also stressed that the causality between corruption and demand
for regulation runs both ways: when there is more corruption, people
demand more regulation, but the increase in regulation erodes the
incentive to invest in social capital, and more corruption results.
Trust, he argued, is the key factor in determining the success of
deregulation. In a low-trust environment, deregulation will lower trust
further unless investments in social capital are made as well. He
posited that many transition economies have failed to undertake these
"left-wing" investments.
Robert Hall interpreted the paper as assuming that capitalism is
the natural choice for any country, because capitalist countries have
the highest incomes. In a study he had conducted with Charles Jones,
however, high incomes were found to be a result of competent and honest
government, and in particular of governments that suppress corruption.
Capitalism actually scored negatively in the study. The most striking
result, Hall stressed, was that government involvement in production is
not by itself negatively related to income. Granted, these findings do
not fully explain why, for example, the Scandinavian left suppresses
corruption and delivers high incomes, while the Syrian left is highly
corrupt and achieves abysmal income levels. But, Hall argued, rather
than try to get countries to elect parties that follow the Adam Smith
doctrine, the emphasis should be placed on getting left-leaning
governments to perform well and suppress corruption.
Betsey Stevenson followed up on the idea that regulation is not
necessarily the same thing as punishment for capitalists and is not
necessarily antimarket. Indeed, some regulation is necessary for
well-functioning markets. A question worth asking, she suggested, is to
what extent regulation substitutes for trust and to what extent it
crowds out trust. Citing the recent example of the call for a 90 percent
tax rate on executive bonuses in the wake of the AIG episode, she
conceded that the public, when angry, may punish capitalists by taking
things away from them. However, she noted that regulations introduced
under these circumstances may not be part of the punishment and may be
supported as a way to make the market function better.
Jeffrey Miron wondered whether democracy is the right form of
government for poor countries, given that they seem to vote themselves
into vicious circles of corruption and regulation. He noted that it is
difficult to name any poor democracies that have escaped that trap, but
relatively easy to come up with examples of autocratically governed
countries that have grown fairly successfully.
Alan Blinder wondered why, if the problem is anger over corruption,
the solution is not more-progressive taxation rather than more
regulation. Citing the paper's claims that people who perceive more
corruption tend to favor regulation and government ownership of
business, and that sharp increases in corruption tend to precede
increases in left-wing voting, he asked the authors, with tongue
slightly in cheek, whether they were predicting that the United States
would see increases in regulation and nationalization and a larger
Democratic majority in Congress over the next few years.
Now I'd like you to tell me your views on various issues. How would
you place your views on this scale? I means you agree completely
with the statement on the left; 10 means you agree completely with
the statement on the right; and if your views fall somewhere in
between, you can choose any number in between. Sentences:
Private ownership of business and Government ownership of business
industry should be increased, and industry should be increased.
Table 1. Selected Measures of Attitudes and Policies toward
Capitalism, by Country Income, 1992-99
Country income tercile (a)
Measure Top Middle Bottom
Ideological learning of government, 1992 (percent of countries) (b)
Right 60.0 45.7 15.3
Center 12.6 14.3 3.9
Left 27.4 40.0 80.8
No. of countries 40 35 26
Preference for greater private or state ownership of business, 1995
(percent of respondents) (c)
Private 46.5 41.4 37.0
Neutral 30.6 23.6 21.9
State 22.9 35.0 41.1
No. of countries 20 22 8
Difficulty of registering a business, 1999 (d)
No. of procedures 7.9 11.4 12.2
Standard deviation 4.2 3.6 4.3
No. of countries 29 27 27
Sources: World Bank, World Development Indicators 1995; World
Values Survey 1995; Djankov and others (2002).
(a.) Countries are classified according to real purchasing power
per capita.
(b.) As determined by the authors using the ideology of the largest
party in government, according to the classification scheme of Beck
and others (2001).
(c.) Respondents in the 1995 wave of the World Value Survey were
asked, "How would you place your views on this scale? 1 means you
agree completely with the statement on the left; 10 means you agree
completely with the statement on the right; and if your views fall
somewhere in between, you can choose any number in between. Sentences:
Private ownership of business should be increased [left side];
Government ownership of business should be increased [right side]."
A response of 1, 2, 3, or 4 is classified as a preference for private
ownership; a response of 5 or 6 as neutral; and a response of 7, 8, 9,
or 10 as a preference for state ownership. The panel is based on 70,986
individuals.
(d.) Measured by the number of different procedures that a business
start-up has to comply with in order to obtain legal status.
Table 2. GMM Regressions Relating Left-Wing Government
Ideology to Corruption (a)
Dependent variable
Left-Wing
Independent Government
variable Ideology (b) Corruption (c)
Left-Wing 0.74 ** -0.06
Government
Ideology lagged (0.22) (0.10)
one period
Corruption 0.10 * 0.31 **
lagged one (0.05) (0.16)
period
GDP per capita -0.16 -0.34
lagged one period (d) (0.18) (0.31)
Wald [chi square] = (3) 38.4 4.3
z value of Arellano-Bond test -1.5 1.1
for zero autocorrelation in Probability > Probability >
first-differenced errors (e) z = 0.14 z = 0.29
Sources: Beck and others (2001): Political Risk Services,
International Risk Guide: World Bank. World Development
Indications 1995; authors' regressions.
(a). The table reports results of Arellano-Bond two-step GMM
dynamic panel data estimations, controlling for unobserved
effects. Data are 137 panel observations from 72 countries and 3
four-year periods over 1982-94. Standard errors are in
parentheses. Asterisks denote statistical significance at the *
10 percent and ** 5 percent level.
(b). Left-Wing Government Ideology is defined as the orientation
of the largest party in government. which is classified as either
right-wing, centrist, or left-wing and assigned the value -1. 0,
or 1, respectively; this value is then weighted by the proportion
of seats that the party holds in the national legislature.
(c). As measured by the International Country Risk Guide country
corruption index. The index ranges from 0 to 6 (higher numbers
indicate greater corruption in our rescaling) and is based on the
opinions of country experts as to the extent to which "high
government officials are likely to demand special payments" and
"illegal payments are generally expected throughout lower levels
of government in the form of "bribes connected with import and
export licenses, exchange controls, tax assessments, police
protection, or loans."
(d). Adjusted for purchasing power parity in parity in constant
1992 dollars and multiplied by 10,000 for ease of reporting.
(e). The test reports whether the null hypothesis of zero
autocorrelation can be rejected. In both columns the null is not
rejected at the 10 percent level of significance.
Table 3. Probit Regressions of Ideological Orientation on
Perceptions of Corruption (a)
Dependent variable
Whole sample
Public
Independent variable Left-Winger (b) ownership (c)
Most Corrupt (d) 0.03 *** 0.006
(0.006) (0.006)
All Corrupt (c) 0.06 *** 0.02 ***
(0.007) (0.006)
No. of observations 44,962 53,182
(45 countries) (46 countries)
Pseudo-[R.sup.2] 0.03 0.08
Dependent variable
U.S. sample only
Public
Independent variable Left-Winger ownership
Most Corrupt (d) 0.09 *** 0.005
(0.032) (0.02)
All Corrupt (c) 0.11 *** 0.02
(0.04) (0.03)
No. of observations 1,182 1,273
Pseudo-[R.sup.2] 0.01 0.02
Sources: World Values Survey 1995; authors' regressions.
(a.) The table reports the marginal effect of moving from one level of
perception of corruption to the next higher one on the probability
that the respondent will hold left-wing views or favor public
ownership of business. Data are survey responses from the 1995 wave
of the World Values Survey. All regressions include country dummies
and control for household income using dummy variables for each third
of the sample income distribution. Standard errors are in parentheses.
Asterisks indicate statistical significance at the *** 1 percent
level.
(b.) Dummy variable equal to 1 if the answer to the following question
is 1, 2, 3, 4, or 5, and zero otherwise: "In political matters, people
talk of 'the left' and 'the right'. How would you place your views on
this scale, generally speaking?" (The interviewer then shows a scale
with the numbers 1 to 10, with the word "Left" below 1 and "Right"
below 10.)
(c.) Dummy variable equal to 1 if the answer to the following question
is 6, 7, 8, 9, or 10, and zero otherwise: "How would you place your
views on this scale? 1 means you agree completely with the statement
on the left; 10 means you agree completely with the statement on the
right; and if your views fall somewhere in between, you can choose any
number in between.: (The interviewer shows a scale of numbers with
"Private ownership of business and industry should be increased" on
the left and "Government ownership of business and industry should be
increased" on the right.)
(d.) Dummy variable equal to 1 if the respondent chose the third answer
to the following question, and zero otherwise: "How widespread do you
think bribe taking and corruption is in this country? 1. Almost no
public officials are engaged in it. 2. A few public officials are
engaged in it. 3. Most public officials are engaged in it. 4. Almost
all public officials are engaged in it."
(e.) Dummy variable equal to 1 if the respondent chose the fourth
answer to the above question, and zero otherwise.
Table 4. Probit Regressions of Ideological Orientation on
Perceptions of Corruption, by Country Level of Regulation (a)
Dependent variable: Left-Winger
Low- High-
Independent regulation regulation
variable (b) sample sample
Most Corrupt 0.06 0.02
(0.10) (0.008)
All Corrupt 0.09 0.04
(0.02) (0.009)
No. of 8,450 22,609
observations (9 countries) (22 countries)
Pseudo-[R.sup.2] 0.02 0.04
Sources: World Values Survey 1995; Djankov and others (2002);
authors' regressions.
(a.) The dependent variable is the dummy variable for left-wing
orientation described in table 3, note b. The table reports the
marginal probability of moving from one level of perception of
corruption to the next higher level on the probability that the
respondent will hold left-wing views. Data are survey responses
from the 1995 wave of the World Values Survey. Regressions
include country dummies and control for household income as
described in table 3. Standard errors are in parentheses. All
results are statistically significant at the 1 percent level.
(b.) See table 3, notes d and e, for destinations.
Table 5. Probit Regressions of Respondent-Reported Anger on
Measures of Corruption and Regulation (a)
Dependent variable: Anger
Independent 5-1 5-2
variable
Government 0.05 *** 0.03 ***
Corruption (b)
(0.01) (0.01)
Business 0.04 *** 0.04 ***
Corruption (c) (0.01) (0.01)
Number of -0.01
Procedures (d) (0.008)
Government Corruption -0.02
x Number of Procedures (0.01)
Business Corruption x
Number of Procedures -0.03 ***
(0.01)
Time to Register (c) -0.04 ***
(0.00)
Government Corruption x -0.02
Time to Register (0.01)
Business Corruption x -0.06 ***
Time to Register (0.01)
No. of observations 68,587 68,587
(80 countries) (80 countries)
Pseudo-[R.sup.2] 0.04 0.04
Sources: Gallup World Poll 2006; Djankov and others (2002);
authors' regressions.
(a.) The dependent variable is a dummy variable equal to 1 if the
respondent answered yes to the following question, and zero
otherwise: "Did you experience the following feeling during a lot
of the day yesterday? How about anger?" The table reports the
coefficients of the explanatory variables in terms of marginal
probabilities. Both regressions include a control variable
measuring the respondent's "satisfaction with standard of
living." Data are 68,587 observations from 80 countries surveyed
in 2006. Standard errors clustered at the country level are in
parentheses. Asterisks indicate statistical significance at the
*** 1 percent level.
(b.) Dummy variable equal to 1 if the answer to the following
question is positive, and zero otherwise: "Is corruption
widespread throughout the government in this country?"
(c.) Dummy variable equal to 1 it the answer to the following
question is positive, and zero otherwise: "Is corruption
widespread within businesses located in this country?"
(d.) Number of different procedures (divided by 10 for ease of
reporting) that a start-up has to comply with in order to obtain
legal status in the country.
(e.) Number of business days it takes to obtain legal status to
operate a firm, divided by 100 for ease of reporting.