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Opinions of Thursday, 3 March 2011

Columnist: Amegashie, J. Atsu

A Canker That Is Growing Everywhere

By J. Atsu Amegashie, University of Guelph, Canada

Conventional wisdom strongly suggests that corruption is a way of life in Ghana. There is perhaps no Ghanaian of adult age who has never paid a bribe for a government service.

About 28.5% of households in Ghana live on less than $2 a day. Recently revised and favorable figures by the Ghana Statistical Service show that the country's per capita GDP is not more than $1500; the IMF's figure (PPP) is $1600.

How are people expected to live in a country where the average income is $1600, credit markets are very weak or inaccessible to most people, and yet people must make two-year advance payments of about $2000 or more for a decent apartment? The cost of living is very high in Ghana. We are not producing enough. Our GDP is very low. Yet that does not deter many Ghanaians from living large . There are three ways of living large when you don't produce enough: (1) borrow (what you have not produced); (2) steal (what you have not produced): corruption; and (3) depend on the charity of others: foreign aid or welfare payments.

Most people in the western world go for the first option and also rely on the third option because they could receive transfers from the state. This is because they have well developed credit markets and are integrated in global credit markets; their banks can raise funds on international credit markets (e.g., borrow from China by issuing financial securities). Of course, the recent financial crisis has shown that this is not a sustainable plan. You cannot borrow forever. In western economies, transfers from the state to the poor are possible because of their sufficiently high national output.

In countries like Ghana where credit markets are very weak or not easily accessible, most people choose to steal what they have not produced (corruption). And, in most cases, they do so by stealing from the state. This means that resources required for crucial public investments in human capital (i.e., education, health care), roads, law and order, etc end up in hands of private individuals (politicians, civil servants) corporations, etc. This creates a vicious circle where the lack of these investments reduces the economy's productive capacity which, in turn, creates the conditions that exacerbate the incentive to steal.

Differences in law enforcement and monitoring also account for the differences in corruption. However, the lack of credit could also force people to find corrupt ways of making ends meet. In addition to reducing the state's capacity to raise revenue for public goods, corruption, if seen as an extra tax on economic activities, worsens the efficiency looses of taxation especially when the government has optimally chosen taxes (including duties and user fees).

Foreign aid may facilitate "living large but producing very little". But it is not enough and rarely ends up in the hands of those who really need it; note that the USA's MCA aid of $547 million over 5 years was approximately $5 per Ghanaian per year. More importantly, foreign aid has the deleterious effect of redirecting energies from domestic sources of revenue mobilization to foreign sources. This is evident in the recent revelations that emerged from Anas Aremeyaw's undercover work “Enemies of the Nation.” If foreign aid is a gift (pure transfer), it makes us lazy and overly dependent on it and if it is a loan, then we still have to produce enough to consume and have something left over to repay the loan. Dependence on foreign aid is not the path to economic prosperity.

Theft can be legal or illegal. When theft is legal, it is euphemistically referred to as rent-seeking, a term coined by Anne Krueger of Stanford University and former Chief Economist of the World Bank. Political lobbying may be legal but it may still be a corrupt activity. Lobbying for government regulations that redistribute income from one group to another but reduce an economy's output of goods and services is an example of rent-seeking. In a 1974 article, Anne Krueger provided quantitative estimates of the social losses imposed on the economies of India and Turkey by rent-seeking for import licences from the state. According to her estimates, such losses amounted in 1964 to 7.3 per cent of the national income of India and to a staggering 15 per cent of the national income of Turkey. While rent-seeking activity exists in every economy, it is worse in economies with a weak private sector and a public sector that is the major employer. In these economies, it leads to a misallocation of talent because some of the best and brightest end up being sycophants and rent-seekers in the public sector rather than competing in the private sector. Others vote with their feet by leaving the country. A weak private sector also means there is a very high return to gaining power in the public sector, so national elections become "do-or-die" affairs.

The phenomenon of living large but producing very little is more likely in countries with strong extended families. In his 1955 book, “The Theory of Economic Growth”, the Caribbean economist and Nobel laureate, the late W. Arthur Lewis remarked that:

“Where the extended family system exists, any member of the family whose income increases may be besieged by correspondingly increased demands for support from a large number of distant relations … A strong sense of family obligation ... may cause a man to appoint relatives to jobs for which they are unsuited ...” (Lewis 1955, p. 114).

The above sentiment will resonate with most successful Ghanaians. This pressure from the family may also cause them to steal from the state or from their employer in the private sector. It may be fear rather than affection for their family members which drives them to nepotism and theft (corruption). This point was made by Jean-Philippe Platteau in his 2000 book “Institutions, Social Norms, and Economic Development”,

“… principles of equity are so adverse to change [that] a single individual, even when endowed with special qualities and powerful psychological resources, cannot successfully defy the conventions of the society. He will unavoidably … be squashed by various forms of opposition, especially when his economic success depends on his behavior as a hardnosed businessman in dealing with fellow tribesmen. To break through, he needs the protection afforded by the deviant actions of a sufficient number of other innovators in his locality. Rising economic opportunities alone will usually not suffice to generate dynamic entrepreneurs in the absence of a critical mass of cultural energies harnessed towards countering social resistance.”

Related to the previous point is a useful idea stressed by Jean-Philippe Platteau in his aforementioned book. It is the distinction between limited versus generalized morality. In hierarchical societies, codes of good conduct and honest behavior are often confined to small circles of related people (members of the family, or of the clan). Outside of this small network, opportunistic and highly selfish behavior is regarded as natural and morally acceptable. In contrast, modern democratic societies tend to have abstract rules of good conduct that are applicable to many social situations, and not just in a small network of personal friends and relatives. As argued by Weber, the emancipation of the individual from feudal arrangements has typically been associated with a diffusion of generalized morality, and with the ability to identify oneself with a society of abstract individuals who are entitled to specific rights. This engenders nation building and, with reasonable law enforcement, reduces the incentive to steal from the state, and also induces people to enter into credit contracts and other contracts with strangers.

It has been argued that in most sub-Saharan African countries, the kin system is a valuable institution that provides critical community goods and insurance services in the absence of market or public provision. However, the nature of risk-sharing and insurance are different from how these institutions are commonly understood in modern economics. In modern economies, the participants in an insurance market periodically pool their risks (i.e., contribute to the insurance fund through the payment of premiums) before the state of the world is known (who will be lucky or fortunate; who will be in a car accident or not; who will be unemployed or not; etc). In the insurance scheme of the extended family or kinship system, no risks or contributions are pooled before the state of the world is known. Instead, there is an implicit social contract that, after the state of the world is known, the lucky ones should transfer resources to the unlucky. Once the state of the world is revealed, everyone depends on those that were successful for a very long time, if not forever. This has helped many hard-working Ghanaians. But in most cases, it appears that it has been abused. This insurance scheme is more redistributive than it is efficiency-enhancing.

While most participants in insurance schemes in modern economies take their actions behind a Rawlsian “veil of ignorance”, the insurance schemes of the extended family system are driven by a “veil of full knowledge.” This need not be a problem if, like a system of pay-as-you-go social security, the population of those who are successful is rising faster than the population of those who are unsuccessful. Unfortunately, this is not the case. In a world of poor governance, limited opportunities, and perverse incentives, successful family members carry a very heavy burden. This leads to low national output and worsens the problem of corruption.

However, family pressures or a high dependency ratio do not explain everything. Greed also plays a very important role; it partly explains the desire to "live large while producing very little". During their tenure in office, government officials like the president and some ministers of state enjoy so many perks; some do not pay taxes, do not pay for their accommodation, electricity, transportation, healthcare, clothing and security. They are also paid a decent salary with enviable bonuses and per diems. Yet when ex-president Kuffour left office in 2009, he wanted the state to give him six fully insured vehicles – fueled and chauffeur driven, to be replaced every four years; two houses; an annual luxury holiday package; a lifelong health package; a non-taxable pension; security personnel; $1 million for a foundation, and more. When his predecessor, JJ Rawlings left office in January 2001, he moved into the now ravaged mansion at Ridge by merging two government bungalows. He is alleged to have taken 13 cars with him. He was in power for 19 years -- 11 years as a dictator -- and has his own mansion at Agyirigano, a suburb of Accra, but wants the state to accommodate him.

Why do our leaders seek medical attention abroad (in Western countries) while they refuse to invest enough resources in our domestic health system? Foreign hospitals for the elites but ill-equipped and under-staffed local hospitals for the masses? Everyone is trying to raid the “commons.”

In poor and very unequal societies, the return to social status is very high. Ghana has both: a high level of poverty and a high level of inequality. Unfortunately, this creates the right conditions for a poverty trap because in societies with higher levels of poverty, the emphasis on material-driven status -- when it is financed from public coffers --- is relatively more counter-productive. A very high return on social status is likely to induce professors, doctors, engineers, and other high-ability individuals to invest more in directly unproductive rent-seeking activities like lobbying, and networking with the political elites as part of wealth redistribution (i.e., get their piece of the national pie).

We care too much about social status that is based on material wealth regardless of how such material wealth was acquired. In the western world, the richest people are in the private sector and the politicians, at least while in office, do not dream of competing with them nor do they see it as a sign of lower status. They cannot afford the cars and houses that these people in the private sector can afford. In Ghana and other parts of Africa, the politician wants to earn more than or be in the same class as the businessmen, CEOs, and other professionals in the private sector. A friend in Ottawa (Canada) rides the bus with the Governor of the Bank of Canada. When US vice-president Joe Biden was a member of the senate, he took the train to work. Even if the public transport system is good, I do not think that a professor, governor of the central bank, or minister of state in Ghana could take the bus or train to work without public ridicule. One former official of Ghana, whose name I have forgotten, justified the practice of allowing ministers to retire with state cars on the grounds that ex-ministers should not use the same means of transportation as the public. The attitudes of our leaders and are own attitudes reinforce each other. After all, our leaders are the products of our own societies and so reflect our values. How many Ghanaians wouldn't laugh at a former minister of state if his car was below the average quality of cars in Ghana? How many will praise him for his selflessness and unassuming lifestyle if he lived in a modest two bedroom apartment? We, the people, have to respect and honor those who lead a modest life and work hard; we should not glorify theft. We are part of the problem. Still, our politicians must lead by example.

In Ghana and most countries in sub-Saharan Africa, most of our problems are typically chicken-or-egg problems. Solving such problems requires a lot of discipline. Given that we are not producing enough for all, we have to change our values by not trying to live large; too many people want SUVs; want to pay the fees of their kids for an education in a western country; afford big houses and vacations abroad; etc. We cannot reap what we have not sown. We have to invest, be patient, and wait for the fruits of our labor to grow. But doing so requires a demonstration by our leaders that they are in the same boat with us or that their boat is not too big and cozy.

The fight against corruption requires a non-partisan approach; it should not be politicized. The test should not be which party did marginally better than the other. The benchmark should not be what the other party did. Instead, it must be a high level of demonstrable commitment to fight corruption from the top to the bottom. Let's produce more and stop living large. In the era of accountability and responsibility, Kutu Acheampong's “Kafo didi” should not be our guiding principle. When we produce very little but live large, we are, to borrow the words of the dancehall musicians Bounty Killer and Barrington Levy, “living dangerously”.

Written by J. Atsu Amegashie.