#16 - Guilherme Lichand (Harvard University)

Can a  little bit of corruption be good for your health?


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Guilherme Lichand's Harvard page and his job market paper.

 

Transcript

It’s great to have you here Guilherme. Your paper it’s fascinating and thought provoking. Why did you decide to look into the issue of corruption in the health sector and its potential downstream effects?

Great. The idea – not only in health, but more broadly – is that while we have increasing evidence of what tools can most effectively fight corruption (in particular, audits have been shown to significantly decrease missing government expenditures), we have much less credible evidence about what is the effect of those tools on the outcomes that corruption is supposed to detrimentally affect. The distinction matters, because bureaucratic performance has multiple dimensions; rent capture is just one of them. On the other dimensions we have, for instance, the quantity and the quality of public goods’ provision. So while, on the one hand, limiting the extent to which bureaucrats can capture rents should mechanically increase resources flowing towards public goods’ provision, on the other hand it might decrease incentives for bureaucrats to exert effort on those other dimensions. Theory predicts that the implications of deterring corruption on public service delivery should be ambiguous, and, hence, we try to understand whether deterring corruption helps or hurts public service delivery. That’s the prime motivation on the paper.

 

Any reason why you picked Brazil over any other country that you could have done this research on?

 

Brazil introduced an anti-corruption program nationally in 2003, so it provided a great opportunity to try to answer this question. First, because the programme was introduced right at the mid-point of the Mayor’s political term. The term is from 2001 through 2004, and the programme was announced exactly in January 2003. Second, because these audits are retrospective. Basically, when auditors go there, they follow the paper trail of every investigation, at least up to three years prior to the time of the audit. This way we have the data we needed to try to answer this question. That also takes us to the point of why health. The answer is, first – given the audit data that we needed to code – because we needed to restrict that attention to a particular area of public policies, because it is a huge amount of data. Second, because of outcomes – availability is very good at the municipal level for health. We have a lot of indicators at the municipal level that are measured for all municipalities every year, and that was really what we needed in terms of data requirements to try to answer this question.

 

What's the main finding of your paper?

On the one hand, we find that the program greatly reduced corruption – and by this I mean procurement manipulation, off-the-record settlements with vendors, and resource diversion. These kind of problems, according to the audit reports, are greatly decreased by the introduction of the program. But on the other hand, what happened is that the program also dramatically deteriorated the quality of health indicators – and by this I mean hospital beds per thousand inhabitants, immunisation coverage, or household access to piped water and proper sanitation, in comparison to other health indicators that involve much less procurement. So to anticipate the results, what basically happened is that, it seems, we thrown the baby out with the dirty bath water. The programme was a major institutional improvement in terms of transparency, but by focusing so much on corruption – both in terms of public opinion and administrative punishments –, what seems to have happened is that spending fell by so much that corruption per dollar spent has actually increased after the program.

 

Really?

Yes.

 

So let’s break that down into sub-questions or comments. So the audit programme did reduce corruption so you guys were able to measure that, right, okay, so that is one element. So in terms of the let’s say, first degree objective of the programme it worked as it was supposed to work in terms of reducing corruption at least in absolute levels if not, as you were saying, in relative levels per spend.

So when we look at the percentage of investigations that were coded as corruption, looking at these audit reports, indeed it is the case that the baseline incidence of corruption is decreased by half. It is a major effect. Just to give you a sense, among those transfers that involved a lot of procurement – we look at how programs earmarked to specific spending, like buying hospital beds or contracting hospital reforms, those sort of transfers –, before the program, about 37% of our investigations were coded as corruption, some sort of the problems that I previously mentioned. After the program, that rate falls to about 12%, and this is the same rate for those audit transfers that did not involve procurement at all – like those earmarked to pay wages of doctors or local procurement staff. So, basically, the idea is that, as you said, if you just focus on corruption, then the program would do exactly what it was supposed to do: every investigation now had much less of this procurement problems that were very prevalent beforehand.

 

But on the other hand?

Yes, on the other hand... before we even tried to look at the mechanism, if we look at the outcomes – because, you know, corruption fell by so much you might think that health indicators would become much, much better after this –, what we find is that these health indicators (comparing again these two sets of transfers: those with a lot procurement and those basically with no procurement) become significantly worse. Just to give you a sense: in a cross-sectional comparison, the magnitude of the effect is equivalent to losing between half and all of the support of the federal government towards municipalities’ health budget. Because municipalities depend so essentially on federal redistribution to be able to provide those local public goods, this effect might mean that they have no budget left, and this is consistent to the effects when we look at spending. After we found these effects on the health indicators, we wanted to understand the mechanism. What was happening? Why was corruption going down but health indicators becoming worse? So we looked at two other dimensions of bureaucratic performance. First, quantity – proxied by spending. What we find is that using the same strategy, differential spending across the two sets of transfers fell by at least 50% after introduction on the program. This effect is consistent with the deterioration of the health indicators. And just by residual, since corruption fell by about 30 percentage points (the percentage of investigation coded as corruption), and since spending fell by at least 50%, this must mean that corruption per dollar spent must have increased by at least 20 percentage points. So that’s where this figure comes from.

We also look at quality: from these audit reports, we can also look at implementation problems. We find that, basically, infrastructure problems abound, infrastructure is no longer functional (or high quality), and also medication stock problems abound after the program. Because you’re not spending, then all these problems are coming about and this is consistent with the overall story that (i) either because bureaucrats can no longer capture rents they have less incentive to exert effort in these other dimensions or, (ii) and this is something we might talk more about, these procurement guidelines are so complex and the quality of these local procurement staff is so low that it’s now easier just not to spend and blame the federal government for not transferring resources than perhaps running into a procurement mistake and being labelled as corrupt.

 

We’ll address that in a minute. There was something that I was listening to you and I think it’s important to probe a little bit further there as well, which is it makes sense that the outputs or at least a proxy for the outputs, would go down if spend goes down as your analysis show so, you know, fewer beds per a thousand inhabitants, worse outcomes in terms of immunisation or the availability of medicines, all that makes sense because you’re talking about the health budget and how public procurement is really in the health system work. What I didn’t understand was the relationship with the access to piped water and as well to the waste treatment so how do you connect those two elements? Because if I get it correctly, is the audit then to the whole municipality or just to the Health Department?

So these audits look at overall expenses, it’s just that within health and education they look at the whole set of transfers whereas in other areas they look at a sample of the transfers. But the thing is, there are some health programmes (in Brazil at least) that are targeted to improving the connection to piped water, the quality of water and sanitation, and so when we choose indicators we look at what indicators the Health Ministry uses for monitoring and evaluation.

 

No, that makes sense now, it’s just that I wasn’t seeing the connection right immediately because the other ones are obvious and that one I knew that there must be a reason there, I couldn’t just find it. In terms of your analysis, you’ve done something that I find very interesting, is that you decide to separate the analysis in accordance with different procurement intensity so you’ve looked both at procurement intensive processes and procurements not intensive processes if it makes sense, why did you do that?

So you know the program involves random audits. So one might think that you could just look at the effect of the audits themselves on corruption and on these health outcomes to understand whether the mechanism we propose makes sense. Now, one problem with this is that, although we can indeed do exactly what I just said, most of the effects of procurement might perhaps have happened at the announcement of the program, even before any audits actually took place. So to understand the overall effect of the program we have to resort to a differences in differences strategy. We can compare (because we have the retrospective data), municipalities before and after both the Mayor and the local procurement staff learned they could be audited – so that’s one dimension of comparison. But if we just did these over time comparisons, many other things changed in 2003, so this is not enough to really pin down the effect of the program. So the idea is to look within municipalities, to different sets of transfers: those that involve a lot of procurement, and those that do not. The idea is that, first, the program should have had a differential effect across these transfers. Because most of corruption is linked to procurement problems, it should have had a higher effect on those transfers that involve a lot of procurement. And second, any differential in corruption across these two sets of transfers should have remained constant otherwise. That’s the assumption for relying on this strategy to try to pin down the effects of the program. We also use recent nearby audits as a complementary strategy (because they are random) for trying to assess the same mechanism. Roughly, the effects that we find are consistent. So both the overall effect of the program and those of audits themselves are in the direction of decreasing corruption, but also of decreasing spending by so much the health indictors actually become worse.

 

Yes, okay. Speaking about the audits, are they really random, i.e., is really a lottery or is this that the official claim from the system for the outside world is internally they pick who they want to do the audit to?

That’s a good question. This program is a joint venture with the National Lottery, so the draws are in television. Every two months or so (at least in principle), about sixty municipalities were supposed to be drawn. The first papers to exploit variation from this programme were by Claudio Ferraz (PUC-Rio) and Frederico Finan (Stanford). They try to understand if these audits are indeed random, so they look at a broad range of variables, political parties included, and they don’t find significant differences. Each municipality has a 1% probability of being drawn, they do it in this way every draw. What we had to do involved an extra step: to show that not only audits are random, but also that conditionally on municipality’s characteristics, recent audits that happened nearby are also random, so that we can exploit not only if a municipality itself is audited, but also if a neighbour is audited, it this raises the perceived probability of you being audited in the future – out of a behavioural mechanism – to look at the effects of interest.

 

Yes, the reason I was asking this is because in Portugal theoretically you are selected randomly to provide evidence about your tax situation and it was claimed originally to be a lottery but I mean the same people were getting the letters from the IRS, the Portuguese IRS, every year so it was very clear quite quickly that there was no lottery involved. What I did not know is that in Brazil actually it’s really a lottery and it’s done at least apparently above board.

 

Right. So there are many oversight programs in place, some of which are not based on random audits. The state tribunals do a bunch of audits which are motivated by either some event or even by a private investigation, so it’s an overlay of different institutions. This program specifically is based on random audits, and that’s what makes it nice at least for the investigation in this paper.

 

Yes, it makes perfect sense because if it’s random it’s one less variable or one less bias slash problem you may have with the data that could be influencing you.

Exactly.

 

Very well, moving onto another topic which is how transferable is this finding or these findings to other areas of public sector that are also subject to procurement analysis of expenditure, particularly areas that are very procurement intensive like say, for example, public works which is always usually the one that comes to mind? 

Our thought is that there’s nothing really specific, it seems, about this program in Brazil that would prevent the findings from being extended elsewhere. First, this kind of bureaucratic politics through which the federal government transfers resources that would fund the provision of local public goods, with a local bureaucracy which is responsible for running procurement before these resources can reach their final users – citizens – in the form of these public services, is the modal workings of public bureaucracy in the developing world, it’s seems to us. And there is evidence from other settings that are very consistent with this findings. There is a paper, from 2015, in the American Economic Review, for instance, about a program in Nigeria, showing that when it monitored bureaucrats on several dimensions of bureaucratic performance then they exert less effort in those dimensions; they try to divert efforts to dimensions that are less subject to monitoring. This is consistent with this idea that whenever you have this layer – bureaucrats that must procure resources before they can actually reach citizens –, you are subject to this kind of tension between actually procuring / spending, on the one hand, and on the other hand, making proper use of public funds. So the only difference that I can foresee is when, in some settings, resources are directly transferred to the end users. There is a paper, from 2004, with data from Uganda, in which they tried to investigate the effects of a newspaper campaign aimed at ensuring that the federal resources would reach schools. They claimed that, in Uganda, before the campaign, basically the modal transfer to schools was zero. So most schools were getting basically nothing out of what they should actually get. After the newspaper campaign, then citizens put pressure on the federal government, these resources are really going to the schools and then educational outcomes improve. But there you see the difference: there is this layer of bureaucrats having to procure which is not present, so I think that explains the difference, in my opinion. In any case, wherever you have bureaucrats, the same logic should apply.

 

It’s very interesting for two reasons, the first one is that effectively its principal agent relationship issue that is at hand and one of the things that I have noticed that is mentioned on your paper is that because taxes are collected centrally but spent locally that there is less emphasis or less say pressure from the actual supposed beneficiaries and taxpayers in that local area to actually make sure that the money is well spent, which is the difference with Uganda, it’s a big difference.  

That’s right. I mean, in Uganda, perhaps, in this particular sense that it’s not raised locally so that citizens have a lesser incentive to pay attention to it, I think this part is exactly the same. It is just that when you put it on the newspaper, then citizens have a higher incentive to monitor. There, this makes resources get to the schools; and that is where they should get at the end, so you’ve already done the job. In Brazil, there are other papers that show that when you put these evidence of corruption in the newspapers, citizens punish politicians. There is a paper showing that the probability of re-election falls by about 30% after – comparing two municipalities that are equally corrupt, but one was exposed just by randomness before the election, and the other after it. So citizens do take this information into account in both cases. It’s just that, in the Brazilian case, this is not enough. In Brazil, the only way a bureaucrat can lose their job and go to jail or have to pay a fine out of their own pocket is through this program. So you can imagine how high the stakes are for making a mistake or actually capturing rents whereas the upside of doing your job right and making sure the resources are properly spent, currently, is very low. The rewards from doing a good job as local procurement staff are very low, there are no incentives for public service delivery but there are very high punishments for corruption now.

 

That’s very interesting and it makes perfect sense. Another point I picked up  was that you were talking about, from a developing world perspective, and saying “oh this is how we organise let’s say the health sector or the way that procurement is done in the development sector”. Having said that, I mean the same thing happens in developing nations, I mean, for example, here in the UK, thinking about the health sector in England you have a number of different authorities, Health Authorities, which are called Health Boards, each one responsible for one, two, three hospitals. In Wales you can have the same structure with different people. In Scotland as well, in Northern Ireland the same as well in an even smaller number and in the countries that I know, Portugal, Spain and to a certain extent France and Germany, there is also a big effort to try and put the decision, the decision making even in procurement as low down the chain as possible and as close to the citizens as possible as well. So, for example, in Spain you’ve got regions as you have the states in Brazil, and the regions have or are responsible for their own health sectors. So I think that if your findings are indeed transferable they can be transferable not only in a developing world setting but also on a developed world setting as well.

I don’t have much to say about this; what I can say is that what we find is consistent with an old discussion from the 1960s. For instance, Sam Huntington said that during the process of development of the US and the UK, corruption was one of the main drivers of development. Professor Steve Kelman, from the Harvard Kennedy School, very often in the media emphasises that perhaps we might be over-monitoring – paying too much attention to complying with too rigid procurement guidelines, versus you know, paying attention more broadly to the quality of public services. So, you know, from the paper, there is a limit to what we can learn about other settings, but I think it is consistent with the more general discussion here.

 

Yes, picking on that and moving to the next question, one of the things that came to mind as I was reading your paper is that the fact that the bureaucrats, the civil servants, know that they are being monitored or can be monitored and can be audited and hence the change of practice and corruption goes on but also the delivery goes down as well with it, it maybe that even if those agents are not corrupt by themselves the fact that they know they are subject to more scrutiny and more accountability actually raises the stakes for them so if they can avoid doing a procurement process that is deemed risky or could be risky, as you said, it’s a question about incentives, if they don’t have the incentive to provide a good service they might as well avoid the risk of getting the fallout from anything going wrong even if it’s not, you know, directly corruption.

 

I think you may be perfectly right. We cannot fully attribute the results to the fact that local procurement staff can no longer capture rents to the same extent, such that there’s just less incentives to do everything else. In our paper, we are not able to separate between the two stories. Indeed, from speaking to both auditors and local bureaucrats, these procurement guidelines are so complex and, as I said, the quality of the local procurement staff is so low, in comparison, that it’s just easier not to spend and put the blame somewhere else for the lack of delivery than to run this risk of being mislabelled as corrupt from running into a procurement mistake. So the general message is that not only perhaps we should refine how to balance these incentives, as I’ve said before, but also try to raise the capacity of these local procurement staff. With any capacity building program, we shall see have positive effects on both spending and corruption, if it decreases the likelihood of these procurement mistakes. And also, perhaps, we could redesign the program to focus on larger transfers, because if you think about the rational decision to capture rents, the incentives are really there regardless of the probability of being caught for the really large transfers. And these are the ones for which the scare effect on spending from the risk of being audited is not going to matter much. Basically, if you think what the program is doing... if there is this component of being afraid of running into a procurement mistake that is scarring bureaucrats out of very small transfers – for which they probably wouldn’t have been corrupt anyway and, even if they were, the consequence of that for the public budget would be very small. So there is a question there of the actual design of the programme and also of capacity building at local level that I think these findings raise.

 

Yes, I think those issues are raised and raised a lot at the end of the paper and it’s certainly something that echoes what has been argued here in Europe and you think that in Europe procurement is very good and full of, people full of capacity, that is not the case. Even here in the UK there’s a huge distribution in terms of the quality of the contracting authorities and also the quality of the people that actually deal with procurement on a day-to-day basis and in fact here in the UK with the budget cuts over the last five years or so,  procurement capacity has probably gone down in most places because they’ve lost staff, senior staff, and they haven’t been able to replace that senior staff. So it’s very interesting because when people ask me “Where should they save money?” I say, “Well you should save money in procurement certainly”, but probably the best way in the long run to do it is to actually up-skill your staff to make sure your staff is competent and can deal with complex procurement guidelines which are always in Europe as probably as complex as the ones in Brazil. So it’s not only a problem in Brazil I would say.

Right, it makes sense. It always comes to mind to me, it’s not only about having higher-skilled people in your staff, but also about having models for basic projects and everything. For instance, one phenomenon we see there, just anecdotally (and I’d like to document this), is that when a capital city procures a complex public work, like a school or a big piece of urban infrastructure, a lot of the other cities copy, procure the same.

 

Really? 

Because they don’t really have the skill to write the terms of reference. This is a very complex thing. So this just comes to show that you could do more. Of course it comes out of not enough skill from these local procurement staff in these other municipalities to do the same on their own. But, also, if either the state level or the federal level provided these basic projects as a public good, then they could use as a basis for what they actually did. That’s also an easier way, and you have economies of scale in doing this. Of course, at the local level you cannot do it but that would be a huge contribution that the federal level, for instance, might do besides just trying to do small training programmes at the municipality level.

 

Well, speaking anecdotally as well here in Europe the same thing happens which is I talk with procurement officers very regularly and they will say to me, “Oh yes, we’ve been using this, let’s say, this template that we got from our colleagues in a Council down the road”, and I just say, “Okay, so what quality control have you done on that?” “They’ve used it so I suppose it’s good”, yeah, right, okay, so.

So imagine if the federal government provided this template? That could be a huge contribution.

 

Yes, I agree with you, it’s a good idea, I never thought about that in that sense, I mean there’s been some attempts to try to do stuff like that or a little bit like that but very much on an anatomised basis and not on a very centralised and very controlled basis which I think would be necessary. Another thing that I think it’s relevant for the discussion, some colleagues of mine who are in Wales at my previous employer, Bangor University, they looked into the procurement practice of three small Local Authorities, so three small municipalities here in Wales and they found 600 people with buying power so with the capacity to buy stuff and obviously they were subject to rules, some of them are internal to each municipality, some of them are national and some of them come from you know from the, what we call the premium directives but I just ask myself how will three small Local Authorities be able to up-skill all these people to make sure that they are good enough, they just, even if bringing into the level that they’re just average procurers. Or is it possible, it’s pretty much impossible and the only way I can see it, is that if you actually reduce the number of people that are involved in these processes and you increase to a certain extent the transparency and the monitoring to make sure that you are actually capturing the information.  

Right, that almost comes down to the organisational aspect of it.

 

Yes.  

It might involve a lot of people, because these municipality in Brazil might be very complex, with up to 20 different secretariats. And that makes sense, because they’re responsible for so many local services. But it’s true that it’s impossible that you would think that each of these secretariats are going to be equipped with the best procurement staff, so you should expect that perhaps the secretariat of planning might centralise all the best staff in procurement and everyone has to run procurement through them. But it comes down to systems, and retention, etc. And, you know, the discussion is usually not there.

 

I agree, I agree, I fully agree with you. Well our half an hour is over so I’d like to thank you for this very enjoyable conversation we had, it was great. As I said you’re the first one from economics that we’ve had here in the podcast and I hope you’re not the last one before we finish the series.

Great, my pleasure.

 

Thank you very much for coming Guilherme.

Thank you.