Monday, October 26, 2009

Corruption And The Rust Belt

Rust Wire asks what role corruption plays in depressing local economies. It refers to this 2007 piece by Transparency International.

"According to economist Sanjeev Gupta, national corruption lowers economic growth and per-capital income, despite the argument that a certain amount of corruption can “grease the wheels” of the economy by circumventing bureaucratic regulations.

“Corruption increases the cost of investment for entrepreneurs who need to devote their scarce time and resources to fulfilling government regulations and bribing officials,” Gupta writes. “This cost can be high for small and medium-sized enterprises.”

“Second, corruption acts as a barrier to foreign investment and results in the flight of capital out of a country. The use of public funds to acquire assets abroad shrinks the economy’s savings pool that could otherwise be used for investment. This has repercussions for future generations, particularly in resource-based economies.”"

While, the role of corruption, the lack of clear rules and transparent institutions is almost universally considered a big drag on developing countries, Few have the guts to say it might be one of the biggest factors depressing the "rust belt" and even fewer try to do much about it.

Yet another big public scandal in Cleveland repeats a common theme in places like Ohio and Michigan.

"Damiani, a close ally of County Auditor Frank Russo, orchestrated the arrangement in which his law firm had near-total control over V.A.S. Enterprises, the commercial real estate appraisal firm that got more than $21 million in contracts with the auditor's office over a decade, according to federal prosecutors. V.A.S. did only $9 million in work, according to an audit released last week.

One of Russo's top aides has admitted taking $154,000 in bribes and helping to funnel $1.2 million in kickbacks to Russo from the Damiani-connected firms. In return V.A.S was awarded contracts to perform commercial audits, according to charges and plea agreements."

The Transparency International story suggests that the costs of opaque and corrupt government may fall hardest on small business people who lack inside connections, or political power. Small business job loss is much harder to guess at than big business, but it's very, very bad.

Clearly, at least by what's currently known we are not in Cleveland's league, but let's just say that transparency isn't big here.

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