Shady activities like smuggling, bribery and murder would seem to be a black hole for economists, who thrive on data collected from direct observation. Yet like a pair of academic gumshoes, Edward Miguel, an associate professor of economics at the University of California, Berkeley, and Raymond Fisman, professor of social enterprise at Columbia Business School, have learned to trace the paper trails of underworld crime. In their new book, Economic Gangsters: Corruption, Violence and the Poverty of Nations, the two economists use real-world clues to uncover the secrets of criminal (but economically rational) behavior.
Miguel and Fisman are part of a new wave of development economists who have been expanding the use of randomized evaluations, a method of controlled experimentation more common in medical research than in economic research. By randomly assigning different interventions to different groups, they try to produce hard data to cut through the rhetorical tug-of-war that often surrounds development projects. In 2001, Miguel, an affiliate of the Poverty Action Lab at MIT, used randomized evaluations to show that a daily two-cent pill to prevent intestinal worms was more effective at keeping kids at school in rural Kenya than more expensive methods like providing new textbooks.
By combining randomized evaluations with their insights into violence and corruption, Miguel and Fisman hope to pinpoint policies that could help nations overcome persistent poverty. They spoke with Miller-McCune.com about how that would work.
Miller-McCune: The cover of your book features a silhouette of a machine gun-toting, fedora-wearing gangster. What does this guy have to do with economic theory?
Edward Miguel: Take the example of Al Capone. He was trained as an accountant, and he was a savvy, organized businessman in addition to being a criminal. That image of someone making calculated decisions flows directly from economic theory. The gangster figure allows us to use an analytical frame to shed light on what, at first, doesn’t look like rational behavior.
M-M: When did you begin to develop this passion for studying crime, corruption and poverty?
Raymond Fisman: I started as a math guy and wanted to do something with real applications. I went to economics grad school, didn’t like it, so I transferred to Harvard Business School. One of my advisers had connections in Indonesia, and he packed me off to Jakarta to wander around the stock exchange. Once you start thinking about corruption, it’s pretty interesting.
EM: I had a different trajectory. I traveled a lot as a kid — my dad’s from Uruguay; my mom’s from Poland — and almost every summer we were in Europe or South America. From the beginning I was curious about why my relatives in those countries were so much poorer than we were. I always saw these as issues of justice and fairness. I think the way the world is organized right now is unfair to large numbers of the population. I went to grad school at Harvard and was sent to Kenya by adviser Michael Kramer. Once I started working there, I was hooked.
M-M: One of your more popular joint studies compares the number of New York City parking tickets amassed by U.N. diplomats with their home countries’ rank in the World Bank corruption index. Why do you think this ended up being such a hit?
EM: Part of the reason we think it resonated is that everyone wants to know how their country ranks. There were articles in dozens of countries. That’s what gave us the idea that there would also be interest in a book about economics and corruption.
M-M: Speaking of popular appeal, Ray and his colleagues at Columbia made a big splash last year with their study on speed dating, which concluded that on first impression, men favor good looks and women favor intelligence. How does it feel to get your 15 minutes of fame for a randomized evaluation study?
RF: I’m not annoyed to have so much notoriety, but I’m annoyed that this is the article that made me notorious. I would never have predicted that it would have captured people’s imaginations the way it did. People frequently ask me about the link between studying corruption and studying dating. The obvious link is that they’re both domains of cheap talk. People lie to you a lot, and you have to come up with ways of uncovering how people reveal their preferences in actions, not words.
M-M: Whether you’re looking at the parking tickets of U.N. diplomats or witch-killings in Tanzania, your book emphasizes the overlap of cultural norms and economic incentives. How do you separate these two factors in human behavior? Or is it impossible to separate them?
RF: It’s not always easy to sort out crimes of passion from crimes of calculation. If we’re to think about solutions to violence and corruption, it’s important to understand what’s driving behavior. At first glance, the witch-killings look like a cultural or psychological practice, but this is a superficial overlay to an economic problem — it’s a narrative people tell themselves because they have to do an odious act.
EM: Too often in social science, people take extreme positions, where the economists are all about individual incentives and the sociologists are all about culture. We’re part of the group of economists who don’t think that we have to exclude culture or psychology from the study of economics. If you want to understand society, you have to look at both.
M-M: Your book makes a specific critique of Jeffrey Sachs’ Millennium Villages project, a multimillion-dollar effort to lift villages out of poverty through integrated investments in agriculture, health, infrastructure and education. This is supposed to be the development project of the century; what do you think is wrong with it?
EM: Development economists haven’t taken the project seriously because they know the results can’t be measured. We want the limitations of the project to be better known — not to target Sachs specifically but to illustrate the larger point that a lot of work in development economics is being done without rigorous evaluation. It’s symptomatic of a larger problem.
RF: If we go back to the villages 10 years from now and find that people are 50 times richer, that’s such a successful outcome that you won’t need further proof that the (whole policy) works. But if you get more modest results — which is more likely — then you’ll have to parse out costs and benefits.
EM: In the ’70s, the World Bank tried something similar called Integrated Rural Development, which didn’t work. The problem is that in both cases, they haven’t set up a control group to learn what the impacts are. At the end of the day, it’s unclear what we’re going to learn from the experience.
M-M: What would you do if you had carte blanche to do a randomized evaluation in any area on any group of people?
EM: I’d be most excited about randomized evaluations that deal with violence. One of the core ideas of Economic Gangsters is that by providing insurance to the poor, you head off violence. I’d love to do a randomized evaluation that rolled out insurance programs in certain regions of certain countries and got a sense of the impact of that insurance on crime and violence.
RF: There are a lot of people who assume they have the right answer. How much does it matter if we double a policeman’s salary from $20 to $40? What if we bundle that with enforcement? We’ve pitched this to policymakers, but it’s hard to put into practice. And we’re never going to get randomized salary raises for half of the Senate.
M-M:In the chapter on Chinese smuggler Lai Changxing, you show how convoluted tariff rules invite lawbreaking, especially when similar products have very different tariffs. This sounds like a rule policymakers should heed. If this book has any useful lessons for the next president, what are they?
EM: If I were to have a few minutes with President Obama or President Palin or whoever, I’d want to tell them about three specific points: One would be dealing with tariff dispersion. Another would be rethinking foreign aid to be more responsive to crises and economic shocks. Foreign aid today is more devised to promote investments in infrastructure and education, rather than to address the fact that political instability comes on the heels of economic collapse. Third would be an emphasis on more rigorous impact evaluation in policies. This is something that’s been lacking in the development field; only in the past few years has demand arisen for more evaluation. The Bush administration has been part of that change, through the Millennium Challenge Corporation. There have also been moves for reform in the World Bank, the Poverty Action Lab at MIT and the Gates Foundation. I would tell the next administration to fully fund the Millennium Challenge Corporation and demand that all outcomes be evaluated using rigorous methods.
RF: I don’t know if I’d have any advice to policymakers, other than to listen to the basic suggestions that economic advisers provide.
M-M: In addition to studying violence, you seem to have some firm ideas on how to combat it. In the book, you talk about implementing a Rapid Conflict Prevention Support program in rural Africa. How would this work?
EM: It’s basically an insurance program to prevent the poor from falling off a cliff. The closest model we have already is a local program in Botswana. The government identifies when there is a drought year, then moves aggressively to provide food aid and public works employment to the people affected. In sub-Saharan Africa, in the year following a drought, the risk of civil wars increases substantially. In societies where the government has the capacity, it could implement the program. In societies where government is very corrupt or doesn’t have the capacity to implement, we could imagine donors stepping in to coordinate efforts.
M-M: It sounds like an African version of the Great Society.
EM: There are parallels between the Dust Bowl and sub-Saharan Africa — the climate sucks; rainfall sucks. In 1932, a lot of people thought the U.S. was on the verge of a revolution, and that’s when programs that made a safety net for the poor were created.
RF: The difference is that here it’s possible for some parts of the country to subsidize other parts, whereas the economies in sub-Saharan Africa are much more agrarian than the U.S. was even back in the 1930s.
EM: Yeah, the U.S. in the 1930s could help poor farmers in Oklahoma, but that’s not the case in Sierra Leone, and that’s where foreign aid could play an important role.
NOTE: This interview has been edited for length and clarity.
Examples of Economic Gangsters
Insider Trading
How much is it worth to be the offspring of a president? Economic Gangsters tracks the 1996 stock price of a media conglomerate owned by Tommy Suharto, son of the late Indonesian dictator. Sure enough, whenever rumors surfaced of Suharto père’s health problems, the stock price of Tommy Suharto’s company plummeted. The economists estimate that the value of family connections accounted for 25 percent of the stock price. Incidentally, Halliburton stock remained steady through each of the four heart episodes Vice President Dick Cheney suffered while in office. Left: The Jakarta Stock Exchange.
Smuggling
How do smugglers beat the system? Ray Fisman and Shang-Jin Wei opened the lid on the lucrative Hong Kong-China route by comparing their official trade statistics, which showed that billions of dollars in luxury goods exported from Hong Kong failed to show up in China’s import records. Wherever the Chinese government had created a wide margin in tariffs for similar goods, smugglers resorted to a “chickens-turned-turkeys” tactic — passing off goods as a cheaper alternative in order to beat the tariff. Complicated regulations are catnip for smugglers. Pictured: Hong Kong.
Culture Is Destiny
How does culture affect personal attitudes toward corruption? Fisman and Miguel found a perfect natural experiment in the parking records of UN diplomats in Manhattan. Since foreign dignitaries enjoy diplomatic immunity, they have little incentive to pay their parking tickets except out of respect for local law. Sure enough, the number of embassy parking violations strongly correlated with the home country’s ranking on the World Bank corruption index. Popular attitudes toward the U.S. also seemed to play a role — diplomats from countries with pro-America views had fewer violations than other countries with similar levels of corruption.
Culture Is Economics
As a field researcher in the Meatu region of Tanzania, Edward Miguel encountered a gruesome cultural practice: the murder of elderly women accused of witchcraft. Digging deeper, he discovered that witch murders skyrocketed during years of drought — in other words, elderly women were being made the scapegoat of economic failure. A nearby region dealt with the problem by addressing both its cultural and economic roots: Traditional healers sheltered elderly women during times of drought, alleviating the economic burden on their families, and then helped them return to their communities after a public “cleansing” ceremony.
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