Corruption and Old Age

Episode 3 of Friedman’s Free to Choose focuses on freedom and prosperity and much of it is set in Eastern Europe. The episodes are online here:

http://www.ideachannel.tv/

In episode 3, at 14 minutes in, there are segments on informal emerging small businesses in Central Europe under communism. A private Hungarian construction company is trying to expand, but can’t get permits and needs foreign currency. They have to purchase it on the black market (shown in the video) in order to expand. Later are shown informal clothing companies in Budapest where workers earn three times average wages making clothes sold by street vendors.

In Sebastian Mallaby book “The World’s Banker”Chapter 7 is “The Cancer of Corruption.” Mallaby argues that corruption was a topic World Bank officials did not discuss publicly. It was only durring Wolfensohn’s erratic tenure that the World Bank lurched into corruption issues and began churning out studies of corruption. Corruption became was made an issue (in a speech he gave to bank officials, p 176).

The chapter then has a discussion on Indonesia, on how rapidly it grew (following World Bank advice says or implies the author, which is misleading at least…) An anecdote on p. 180:

Wolfenshon, Suharto and China’s vice-premier Zhu Rongji are having tea during break in big summit: Suharto was talking to Zhu, and he summoned Wolfensohn over; and then he broached the subject of corruption: “The latest corruption rankings produced by… Transparency International were most upsetting Suharto declared, for they rated Indonesia as less corrupt than China; he had been happier with the previous year’s results, which had recognized his own country as the more energetic embezzler. Zhu looked visibly annoyed, but Suharto carried on. “Don’t you think we should tell the president of the World Bank about corruption in this part of the world?”… Then Suharto looked at Wolfensohn. “You know, what you regard as corruption in your part of the world, we regard as family values.”

Interesting that Suharto, like Saddam, led administrations that early on were considered efficient and less corrupt than those around them. It was as they got old and their families expanded, skimming more money from a wider range of projects, that corruption began to bite. It was when Suharto’s wife (“Madam Tien Percent”) became ill in early 1990s that, according the the author, “the children ran amok, and the time when the ruling family would rake off only 10 percent soon became a pleasant memory.” p.178 (I highly recommend, by the way, a video clip from the movie Dick Tracy, when all the mob bosses get together to discuss the grand plan for the city. The lead bad guy describes his vision that every time anyone buys anything in the city, the mob will collect 10 percent. After he finishes his grand gangster plan, it is only a barely above-average sales tax.)

So a benefit of democracy would be to kick out Presidents as they get old and naturally corrupt, beguiled by fawning associates, children, and grandchildren. Interestingly, this is much the same benefit of stock ownership for family-run firms whose founders age and whose children often prove less competent and entrepreneurial. Only outside ownership allows ousting of the founder, who left to his own preferences would ride the firm to bankruptcy or the grave, which ever comes first.

As Lord Acton noted: “power corrupts…”