A Booming Economy Spawns Political Corruption and Impunity

Politicians become more corrupt during economic booms, not because citizens stop caring, but because good times make corruption harder to detect and less likely to be punished

When the Economy Booms, So Do Corruption and Impunity

By Carlos Scartascini - Andrés Barinas-Forero

Citizens in Latin America and the Caribbean often associate corruption with economic crises.  Since 2016, survey data show that individuals who believe their country’s economy has worsened are significantly more likely to say that most politicians are corrupt.  But are politicians actually more corrupt when the economy is bad, or are citizens just more sensitive to misconduct during downturns?

In a new IDB study, we explore how economic conditions influence corruption and the willingness of citizens to hold politicians accountable.  Combining theory and experimental evidence, we reveal a surprising pattern: politicians become more corrupt during economic booms, not because citizens stop caring, but because good times make corruption harder to detect and less likely to be punished.

A Theoretical Model to Test Citizens and Politicians’ Behavior

To study this phenomenon, we designed a theoretical model where citizens fund public goods through taxes, and politicians decide whether to allocate those funds honestly or siphon some off as private rent.  Citizens can then choose to punish politicians, at a personal cost, such as joining a protest or pursuing legal means, if they believe corruption occurred.

Good economic conditions are modeled as reductions in the cost of creating public goods.  This is equivalent to what happens in many countries in Latin America when local authorities receive additional funds because the price of abundant natural resources goes up or when exchange rates make it cheaper to buy inputs.  When the cost of producing public goods falls, politicians can offer more goods for the same level of taxes.  That makes it harder to detect when politicians skim money.  Moreover, citizens may be less inclined to punish them, even when they suspect foul play.

A Laboratory Experiment

To test these ideas, we ran a laboratory experiment with 800 university students in Colombia.  Participants played the roles of either citizens or politicians, making decisions across several rounds that mimicked the incentives and uncertainties of real political life.  The citizens received money with which to pay taxes, which were then transferred to the politicians.  The politicians then had to decide how much to allocate of those funds to provide public goods (and how much they could pocket).  In some rounds, the cost of producing public goods—manifested in real money—was high (bad times), and in others, it was low (good times).  Once citizens observed the public goods provided, they could decide to punish the politicians by reducing their salary if they believed the politician had been corrupt, mimicking what would happen in real life if voters decided to vote the politician out of office.   

The results were clear: corruption increased by 14% when the economy improved.  Meanwhile, the rate at which citizens’ punished politicians remained mostly stable, but their ability to detect corruption and their desire to respond to it was weakened.

One of the most striking results came from what politicians expected: they believed they were less likely to be punished during good times, and they were right to think so.  The public goods looked better, even when the politicians had skimmed off the top, and citizens were less likely to act on their suspicions.  As a result, politicians had stronger incentives to engage in corrupt behavior.

It is worth noting that because public goods are usually provided by the different levels of government (local or municipal, state or provincial, national) and citizens have a hard time disentangling who provided what, corruption can be further obscured by the actions of other levels of government.  That is, a local corrupt politician may not be voted out of office if at the same time the higher levels of government are investing heavily in the district.

Upending Assumptions About the Economy and Corruption

This study upends the assumption that corruption thrives only in times of hardship.  Instead, it shows that booms may shield misconduct by creating the illusion of competent governance.  Politicians can skim off the top without triggering alarm bells, especially when citizens are materially satisfied or politically cynical.  For policymakers, the implications are clear: oversight and accountability mechanisms are crucial even when things seem to be going well.  Transparency in public spending, citizen access to detailed budget information, and clear attribution of public goods provision (who funded what) can help make corruption more visible and accountability more effective. Otherwise, periods of prosperity may come with hidden costs—not just in money lost, but in trust eroded.

Source/Comment

Anti-Money Laundering Regimes are Worthless

Anti-Money Laundering (AML) Policies are Costly and Ineffective

I TOLD YOU SO: IDB SAYS ANTI-MONEYLAUNDERING REGIMES ARE INEFFECTIVE! 

By Professor Gilbert Morris
Nassau, NP, The Bahamas

Since 1998, as advisor to the late great Pierre Diarier - then Chairman of the Swiss Private Bankers Association - I travelled the world (more than 100 countries) explaining that:

1. The OECD Tax Competition Initiative was bogus and unconstitutional

2. The OECD has zero authority; is not an international organisation in international law; nor was its spawn the FATF

3. European Union anti-tax competition initiatives were fiats, undermining the multilateral system

4. Tax advoidance is legal and is every individual’s duty to himself

5. Tax Information Exchange Agreements (TIEA) were bogus, unconstitutional and secured by threats and so a violation of the Vienna Convention on Treaties 1969

6. Automatic Information Exchange was a breach of humanrights, inconsistent with any legitimate legal thesis, and replaced judicial authority with administrative tyranny

7. Small states should shed their mortal cowardice, and leverage the multilateral system to demand universal regulations consistent with a rule-governed world; which the late great Eric Crutchley of #Cayman National Bank had the courage to fund

8. The U.S. and U.K. were and are the largest financial centres and the G20 are where 90% of financial crimes are committed

9. The entire AML regime showed a retarded lack of understanding of global money aggregates and the logistics of money movement

10. Small International Financial Centres (IFC) should form an Organisation of International FinancialCentres to research and advocate globally

Of course, governments of every sort whispered to me that I was right, yet few acted to counteract this global junta, issuing its fiats, stealing data from small jurisdictions only, whilst issuing onesided blacklists, greylists and whitelists - each one more bogus than the other - offending every principle of statistical categorisation.

Now the IDB says it’s all bogus: As in the past IFCs will rejoice without admitting their enabling cowardice.  But the powerful don’t retreat without purpose.  That the IDB is making such a bold statement against an AML regime in which billions were wasted and careers were ruined, means the new strategy is not merely afoot, but ‘they’ have devised a means for control and dominance already.  And that is their duty to ride Donkeys where they find them.  It’s our jobs not to continue being the Donkey!

I warned about capitulating from fear rather than from/with strategy; as if our brains stopped when we finished at the same universities with those seeking to impose nonsense upon us.

Now again, as I warned in 1998, I warn here: THIS IS THE FRONT END OF CENTRAL BANK DIGITAL CURRENCIES and AML will be replaced by surveillance.

Therefore, IFCs should launch a comprehensive study - resulting in a White Paper - on “Constitutional Modelling of CBDC” and instead of reacting to global initiatives, cultivate a mandate for the future as responsible members of the global community!

Source/Comment

FTX Ventures was a large money sink

CEO of Alameda explained how they lost it all

All-Hands meeting:

At the all hands meeting, Caroline revealed the truth.  A little over a year ago, FTX started spending a lot of money.  Various investing shell companies set up w/ FTX or Alameda names were created, some known most unknown, that invested in various illiquid assets that no one in the firm or FTX knew about.  

FTX Ventures was a large money sink.  These various illiquid assets were also money sinks.  I think one of the investments was like 1bb on a crypto mining company that went bankrupt?  Alameda had also bought out Binance’s stake in FTX for ~1-2bb.

FTX was buying luxury apartments in The Bahamas, building an office in The Bahamas and then currently in the middie of building a newer, costlier office that would be in the shape of an F. Stadium naming rights, advertisements, endorsements also aren't cheap. 

It's important to note that at this point in time, none of the user funds had been touched and this had all come from mainly from Alameda loaning FTX money and being given FTT as collateral.  Alameda was able to loan so much money to FTX partly because they just had a lot of money, but also because they had many loans themsevies from lenders such as Genesis. 

Getting loans at that time was generally pretty easy.  There is where the hole in the balance sheet came from Around 6 months ago. 

LUNA crashed to 0, sending reverberations across the crypto world as they wiped out ~800bb in market value.  Alameda didn't actually lose much money directly from Luna crashing, in fact they were probably net short at the time of the crash.  

However, the Luna crash caused many firms to become liquidated, the most notable one being 3 Arrows Capital(3AC).  3AC had taken out a ton of loans (see point above about loans being easy to get), and 3AC defaulting caused a lot of these loaners to go bankrupt.  

This event created what is known as the “credit crunch”.  In the credit crunch, many loaners suddenly recalled all of their loans just to see who was still liquid.  

Alameda lost a lot from giving out loans to firms who defaulted.  Alameda was now also on the hook for money they didn't have, since they had given a lot of the loan money to FTX or had lost it loaning to now bankrupt counterparties.  

SBF had two choices at this point, let Alameda get liquidated or send user money from FTX to ensure Alameda’s survival.  

As you read online, SBF chose the latter.  From this point onwards, it was just a ticking time bomb before the truth was found out and both FTX and Alameda liquidated.  

No one at FTX or Alameda knew how much was spent and that FTX user funds had been used to save Alameda.  All the credit crunch did was expedite how quickly FTX/Alameda's frivolous spending would be found out.  Caroline painted Alameda and FTX getting liquidated as a likely event rather than a tail event (which would've been helpful to know before they hired me...).  

It was also revealed at this time that Binance had stepped away from their deal to acquire FTX, citing that the hole in the balance sheet was too big to fill.

People and Businesses of Vision Enterprisingly Linking, Networking, Supporting and Advertising in Unity for the Ongoing Benefits of Every Deserving Member in the Group

OTHER PEOPLE WELCOME AND APPRECIATE LOVE, LIKES AND COMMENTS ON THEIR SOCIAL MEDIA, AND OTHER POSTS TOO

By Dennis Dames

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