Corruption and liberalization trigger human capital flight

Devesh Kapur, Professor of Government, Harvard University, Project Syndicate

Evict the state from direct economic activity, curb its discretionary powers, and both economic efficiency and governance will improve. Developing countries have been nagged about this for years. By opening economies to international competition and investment, governments will supposedly become disciplined because they will be watched over by international financial capital.

There is undoubtedly merit in shrinking the size of government and making it less intrusive. Uganda is a case in point that this can bring early benefits. Yet official corruption has clearly not declined in the way liberalization's promoters said it would, nor has governance improved markedly for the better in most countries. Why?

First, opening an economy bids up the price of talent. In India a decade ago, students who chose careers in public service could expect lifetime earnings of between a fifth to a third of their private sector counterparts. Today, they get less than 10 percent. The highest level civil servant or chief justice of the Supreme Court at the end of their careers is nowadays paid barely half the salary of graduates of India's elite educational institutions, who are snapped up by the global economy.

Of course, talent should go where it is most productive, and higher private-sector wages reflect the potential for higher productivity. But the lure of high private-sector wages has consequences for the quality of government, as South Africa is discovering.

Second, exposing the arrogance and venality of the state was no doubt necessary to enact liberal reforms. But these critiques became self-inflicted prophecies. Treating the state as a house of ill repute makes it difficult for governments to recruit honest, capable individuals. A well-educated person seeking a career in government can be seen not only as a fool, but as corrupt as well-hardly inspirational! The quality of any organization, private or public, depends on the quality of the individuals it attracts.

Third, although curtailing the state's role in allocating goods and services that can be provided more efficiently by markets may reduce corruption, it is unrealistic to think that the number of fields in which the state deploys its regulatory powers can be reduced greatly. In a modern economy the state is active in many non-economic areas, from food safety to building regulations. Although official corruption is greater when the state is involved in economic activities, shifting the focus of state regulation appears to change only the magnitude of corruption. The incidence of corruption could well increase.

But the weakest assumption about the benefits of a small state centers around the pace at which institutions develop. The centrality of institutions in fostering "good governance" is underscored almost everywhere.

Unfortunately, globalization/liberalization and institutional development often work at cross purposes because of their different time horizons. Indeed, the key factor distinguishing institutional development in the West from that in developing countries is time. The bedrock economic, social, and political institutions in Western societies took decades, if not centuries, to develop. Exceptions to this time frame exist-Singapore is one example-but exceptions prove a rule, they do not negate it.

Institution building is painful and laborious ("a slow boring of hard boards," as Max Weber called it), as evidenced in the recurrent crises faced by African countries from Nigeria to Botswana. Globalization accelerates the pace of economic and social change in developing countries, which means that new institutions must adapt even before they fully take root.

The temporal dimension of institution building and the issue of human capital are also linked. The reality of successful institution building is that key individuals are critical in the early stages, even if successful institutions may later make particular individuals less indispensable. But globalization makes it more difficult for developing countries to retain the talented individuals needed for institutional development, because the wages of talented people are set globally; many states, if not most, simply can't afford to pay what it takes to create the institutions they need.

In fact, data on emigration and inequality suggest that developing countries with lower levels of inequality are threatened by "human capital flight," as thousands of their most talented people remain abroad after studying at elite universities-a bane across Africa. So poor countries must either suffer the loss of people essential to their institutional development or tolerate higher levels of inequality, with the political and economic consequences that follow.

Some of these shortcomings may be improved by reducing the state even more through privatization and out-sourcing. States could, in theory, reinvent themselves as the political equivalent of Nike-minimizing in-house activities by contracting out ever more of their functions to providers in the global market.

Such out-sourcing may be possible and, to some degree, necessary. But there are limits to this. As beguiling as the reforms now being promoted by international organizations sound, countries must be wary of taking short cuts in constructing their institutions. The path to good governance is more painstaking and bumpier than anyone believed when globalization and liberalization became popular twenty years ago. Mimicking simplistic fashions is only likely to make the path longer.