Since the administration is focusing on corruption as a 'root cause' of illegal immigration, let's discuss it.
Black markets and corruption are different manifestations of the same problem, and therefore we use similar approaches in addressing them.
In a well-functioning society, doing good and doing well are largely the same thing. Working hard and faithfully at your job -- for which you are paid -- is both good for the individual and good for society. In some circumstances, though, these two elements are split. Illegal immigration is one such case, where a prohibition means that doing well -- earning money in a job an employer needs done -- nevertheless is not good, because the government has deemed this sort of transaction to be bad and illegal. This then interjects the vocabulary of morality, and the debate devolves into a good-versus-evil framework. (In technical terms, the principal is split from the agent. For those interested in a more formal presentation of the theory involved, see slide 16 of the linked presentation. And if you're interested in where you fall on the political spectrum based on our framework, see slide 4.)
Doing good and doing well are similarly divorced in the case of corruption. Ordinarily, a politician is elected -- hired -- to serve the interests of the community faithfully for the salary provided. Alas, this simple, straightforward definition contains the seeds of corruption. First, there is no agreement on what constitutes 'serving the interests of the community'. Some want redistribution from the top down. Some want efficient, low cost services with plenty of space for individual initiative. Some prioritize cultural cohesion. Politicians can flip among these objective functions at will and therefore cannot be held fully accountable for any of them. For example, the current Biden climate infrastructure initiative can be justified on the basis that it protects society from some indefinite but drastic future outcome; on the basis that it will make us all better off economically; and on the basis that it will provide 'good, union jobs'. So which one is it, really? As a practical matter, enforcing accountability is hard, because there is no single standard by which a politician's performance can be judged.
Furthermore, politicians are typically grossly underpaid. Consider: The US House and Senate majority leaders make less than a first year associate at a top US law firm. The salary of the president of Honduras is about $50,000 / year. Certain groups and persons will find it easy to outbid the public for the attention of politicians, including senior decision-makers, particularly in emerging economies like those of Latin America.
These two factors -- low wages and a lack of specific, accountable goals -- create the preconditions for corruption. Pay is too low and wiggle room is too much.
During her Guatemala visit, the Vice President called for enforcement-based measures to counter corruption. This involves setting up a task force, one supposes within Guatemala in this case, to track down and punish those involved in corruption, and thereby deter such corruption and compel politicians to act in the public interest, however that may be defined.
To even write this down is to question its plausibility.
In emerging economies, corruption takes place in many forms. Police take bribes; municipal bureaucrats shake down local businesses for building permits. However, the corruption to which the Vice President alludes is larger scale, systemic corruption. (Of course, in Central America, corruption associated with narcotics is rife. For those interested, I would refer you to my earlier analysis of the topic.)
Garden-variety systemic corruption is typically associated with government procurement, notably related to infrastructure, defense, and state-owned companies. A relative of mine, an honest and honorable man, was minister of infrastructure in Hungary in the mid-1990s. When his party returned to power some years later, he was again offered the position and turned it down. I asked him why he would decline such an important and prestigious post. He answered, "Steven, literally every person who walked through my door offered me a bribe. It was too stressful. I couldn't take it." These bribes were no doubt offered by companies without respect to nationality, including companies from the United States. A vendor simply cannot risk losing a big contract for failing to offer to grease the right hands.
Such contracts, however, usually require approval on a national level, and therefore all the key cabinet ministers would be involved. The decision would be collective and therefore any payoffs would be collectively distributed. In many cases, certainly in Hungary, ministers have long-standing relationships with each other, often from childhood. In such a construct, an honest official anywhere near the top cabal is a mortal threat. Therefore, only the corrupt would be allowed anywhere near the inner circle. To become part of this circle, one has to become a 'made man', which in this case means that the individual must not only be involved in corruption, but to be witnessed doing so before the others in the group. This is how the cabal buys omertà, the silence of co-conspirators, by ensuring that, should a member turn on them, they also have sufficient information to send the informant to jail. In this sort of system, the entire leadership will tend to be corrupt and honest officials will be actively purged from the senior ranks of government. This is true no less in Latin America than in Hungary.
It is into this sort of environment that the Vice President is proposing an anticorruption task force. One in which a corrupt cabal controls the executive and legislative branches, the army, the police, the intelligence services, often some critical companies, and with a bit of persuasion, the judiciary. One in which the backbenchers in the legislature depend on the patronage and trickle down graft of political leadership and therefore have an incentive to stay in line. An anti-corruption initiative might have success from time to time, but it will consistently lose over the longer term, and it will lose because the issue is not the morality of the players, but rather the structure of compensation. As with the black market of illegal immigration, an enforcement-based approach -- and an anticorruption task force is exactly that -- is doomed to fail.
Nor does a task force address issues which may be both popular and corrupt or which may be legal but thoroughly antithetical to economic growth. Among these are constraints on trade, for example, high import duties. Import duties may protect infant industries in theory, but more likely they provide windfall profits for domestic producers, profits which businesses would ordinarily be willing to share with those politicians who granted the franchise. High tariffs also make it much more difficult to build industries based on imported goods. For example, the high cost of living in Costa Rica is cited as a chief reason for expats to leave the country, and high import prices are a principal driver of expat costs.
Corruption is also often associated with state-owned companies. Take, for example, Puerto Rico's electric utility, PREPA. In in Puerto Rico as in much of the rest of the world, governments are incentivized to set selling prices below market and to stuff such companies with unneeded employees to secure union support and to provide phantom employment for relatives of politicians. If the wife of the governor is hired as a public relations consultant to, say, PREPA, is that corruption? If the Puerto Rican government decides to keep electricity rates below full cycle costs and staff the power company well beyond its actual needs, is that corruption? Or is it popular public policy?
State-owned companies compensate for artificially low selling prices and excess expenses by reducing capital expenditures. Management can always make existing equipment last another year with some patching up. But as a result, entire sectors wither over time. PREPA's generation and transmission network was creaking before Hurricane Maria obliterated it entirely. Without continuous power, attracting manufacturing, hospitality and IT-related industries is hard. An e-commerce business cannot function without the internet. A hotel-based tourist industry cannot flourish when the electricity for air conditioning is unavailable on hot days.
Many factors beyond garden variety corruption influence economic growth, and some of the key issues remain entirely outside the mandate of an anticorruption task force.
One of the interesting features of consulting to emerging country governments, indeed, most governments, is the lack of demand for good policies. Economists and consultants often push good policies, but they are rarely demanded. And the reason is simple: New policies involve risk and effort, and they are often unpopular in the short run. Why should politicians extend themselves if their pay will be the same either way? History shows that they won't. Instead, in Hungary for example, we consistently saw bureaucrats and politicians seeking to maximize immediate political acceptability subject to budget constraints. And it may not be so different here. Consider: As part of the administration's 'root causes' initiative, USAID will provide up to $7.5 million over three years to support entrepreneurs and innovators – including women, youth, and indigenous people -- in Guatemala. Does anyone at all think this will prevent even one person from migrating from Guatemala to the US? Such a feeble offering is no more than a bone to throw at the press to signal political acceptability subject to a very small budget constraint. It is not going to help solve the problem, and it is not intended to. The initiative is merely a symbolic gesture in a void of policy and analysis.
Performance incentives can address these issues. If economic growth creates prosperity, and prosperity reduces the root causes of illegal immigration, then pay for economic growth. Imagine that for each percentage point of GDP growth above some threshold, national elected officials would receive a pro rata bonus. If this were, for example, $25,000 per legislator for each percentage point of growth over 3%, then the incentive program would cost around $30 million per year, assuming Guatemala's GDP growth rate were 10% per annum. A growth rate of 10% for a decade would materially end the economic incentive for Guatemalans to illegally immigrate to the US (which I will discuss under another header).
Incentives also address critical issues which anticorruption task forces do not. The first of these is mission. Legislators are elected to represent the people. But what is that? When a representative arrives at the country's congress, what are they supposed to do? Incentive pay provides a clear mission: the objective of the legislator is to create sustainable prosperity. You would be surprised how far that simple self-awareness goes.
Second, performance pay would create advocacy for growth across the entire legislature, not only in the ruling party or coalition. This will change the balance of power. In the current system, a typically corrupt cabal at the top holds inordinate power. If material bonuses are available at lower levels for performance, and these bonuses are applicable to the opposition as well, then back-benchers and the opposition would have an incentive to support pro-growth policies. Note that this does not directly address the matter of corruption, and as so often in our policy advice, we don't care. Corruption can be a mere transaction cost like legal or investment banking fees. That will not materially affect growth. It certainly hasn't in, say, China. Rather, the issue is the nature of the underlying project. If corruption leads to the building of a bridge to nowhere, then the damage is not the bribe of, say, 5% of project cost, but rather the other 95% of the project outlays. Similarly, in Hungary, excessive demands for bribes across multiple bureaucracies -- in some cases, totaling more than 100% of project costs -- would prevent important projects from progressing at all. Bureaucrats are often not only corrupt and venal, but collectively stupid. Again, a legislature motivated by bonuses would provide a counterweight to such inertia.
A key feature of an incentive plan is that it does not limit decision-maker flexibility. One of the problems of, say, IMF stabilization programs, is their harsh and dogmatic nature, which often undermines their longer term viability. In Hungary, I again and again saw that outsiders did not grasp local politics. Conditions on the ground mattered. An initiative which was impossible in, say, October, would sail through the legislature the following April. Incentives create demand for good policy, but they do not limit decision-makers ability to make bad policy, because sometimes that is what the public wants. Let the locals determine the nature and sequencing of policy, with the understanding that they will be handsomely compensated if they can create sustainable growth.
Importantly, an incentive plan makes polarization and demonization expensive. Imagine, as a hypothetical, that every elected official in the US House, Senate and White House would receive a $2 million bonus if a legalize-and-tax approach to migrant labor were passed. Do you think we might see a miraculous meeting of the minds and a reduction in the victims-and-criminals rhetoric which characterizes this topic? If you extended this bonus to the top 50 people working on illegal immigration in the US, do you think this would help us get over our policy differences at the think tank level? (And the payback period to the federal budget? Seven weeks. A properly run market-based visa program would pay back $1 billion in bonuses in seven weeks.) In Hungary, I worked with communists and fascists, and I can tell you that every one of them would willingly trade their mothers for a decent bonus. Create a financial incentive for cooperation, and even those who disagree with each other -- as is common in business organizations -- will find a way to work together and temper their rhetoric. We do not need to purge fascists to get rid of fascism or sideline socialists to end socialism. We need to change the rules of the game, not the players. Change the rules, and the players are all but irrelevant. Try to change the players -- as with anticorruption task forces -- without changing the rules, and new players will not lead to better behavior. The last fifty years of governance in Latin America should be enough to demonstrate that point.
No doubt many of my readers will be aghast at the notion of pay for performance in governance. These same readers will, however, decry corruption, polarization, inertia and poverty. Moreover, if you are reading this, you have almost certainly given up any hope of good governance in Latin America, probably decades ago. And this may prove true. But until we actually convey our desires in quantitative terms — maximizing GDP growth — and offer material compensation for achieving these goals, we won’t know whether Latin America governance can be improved. So let’s take the basic steps first. I would bet a substantial sum of money that a compensation-based system would work just fine.
