Sunday, June 05, 2005

It's the corruption, stupid!

All around the Islamic world, but particularly in the Arab part of the Islamic world, everyone has been talking about attracting foreign direct investment (or FDI, for short): the holy grail of developing coutries. Some have dreams of replicating the successes of Bangalore and Hyderabad, by developing silicon-valley satellites in Jordan, Egypt, etc., while others are content to capitalize on the remarkable consumerism of their societies by attracting the Unilevers and Vodafones of the world. Fortunes have been made in the region, no doubt, but dreams of attracting FDI at a scale that can make a dent in the viscious poverty cycles awaiting those societies have failed at a monumental scale. All those societies remain extremely poor, including the oil-rich gulf states, who have never gone beyond being exporters of primary goods. No matter how expensive oil may be, economic laws dictate that terms of trade will continue to shift against those countries, their oil reserves are not a renewable resource, and their population growth rates are unsustainable, even under the best of circumstances.

So, why can't those countries attract FDI? The simple answer is that there is nothing to buy in those countries, which is a true but superficial answer. A deeper answer (which explains why there is no innovation and nothing to buy in those countries) is that all "businessmen" in those societies seem to be excessively eager to make quick profits. This applies even more strongly for the class of "businessmen" who decide to engage in politics (whereas in the U.S. the best way to ensure political success is to make a fortune, in the Islamic world, the surest way to make a fortune is to get into politics). As a result, the region has developed a complicated web of profiteers who serve the interests of the elite class of "get rich fast" businessmen. In the short term, the existence of those cadres of "facilitators" seems to improve efficiency by circumventing arcane bureaucratic procedures. In the long term, however, it creates three classes of beneficiaries from the corrupt system that evolves: (1) corrupt bureaucrats on the take lie at the base of that pyramid, (2) facilitators with political and economic connections form the middle tiers, and (3) the political and economic elites are naturally at the top.

Foreign investors may indeed come into countries that have that structure, since corruption and over-consumption by elites and elite-wanna-be-s can create profitable opportunities. However, the type of FDI that is driven by such structures is far from the types that developing countries would like to invite: It is hot money, that makes profits by encouraging consumption patterns that far exceed the means of those societies. Moreover, the elite classes made by the inflow of funds from such sources rarely reinvest their money in their countries, preferring to invest their monies abroad -- where they feel that their wealth will be safe from the forms of corruption that they support domestically. In the meantime, established middle-tear facilitators, including not only business-type brokers, but also university professors and administrators, among others who help to maintain and perpetuate the current social structure, ensure that all indigenous economic initatives are aborted -- driving talented citizens either to leave for other countries (if opportunity presents itself), join the middle-tier of corruption-supporters in hopes of joining the elite classes someday, or turning to extremism of religious or other forms.

So, how do we break this vicious circle? The answer is easy: Stop corruption! That, of course, is a tall order. The short term costs of fighting corruption are very high, and may be hazardous to the health of those who attempt it. Moreover, the groups most likely to succeed in fighting corruption are the elites, who owe their current elite status to the very corrupt system they ostensibly would fight.

I don't claim to have an answer. Imam Muhammad `Abduh was quoted to have said: "لن ينقذ الشرق الا مستبد عادل" (only a benevolent dictator can save the Orient). Unfortunately, of course, there is no such thing as a benevolent dictator -- at least one cannot last for long (as the American saying goes: power corrupts, and absolute power corrupts absolutely). Many in the Islamic world seem to be awaiting the benevolent dictator, and many are positioning themselves to be such dictators.

The test is this: when a king, president or heir-apparent abdicates the throne of royalty or presidency voluntarily, that will be the day they prove their credentials as reformers.


Anonymous Anonymous said...

Mr. Elgamal,

At the incipience, I would like to admire that your writings are insightful and provide a new dimension for understanding Islam and Economics. For this piece of writing-It's the corruption, stupid- I find myself partially in disagreement with the following.

As it is the case in the Islamic world, the surest way to make an abundance of wealth in the U.S. is by expoliting your political position. An evident of this claim -if it should be called so- is the well known facilitation made by the American adminstration hawks to the companies they had connection with during the Afghan and Iraqi wars. That makes the democratic world advocates even with the Islamic world corrupters in improving thier standing in life, but by utilizing a more modernized style of theft.

2:30 AM  
Blogger Mahmoud El-Gamal said...

I agree, and the corrupt in Islamic countries have indeed learned a few tricks from their U.S. masters. No one can deny that large corporations make more profits by supporting various political candidates and exercising influence on legislation. However, the U.S. does have a genuine separation of powers, and for some executive posts has term limits that ensure a minimum level of competition and a ceiling on the socially destructive effects of corruption -- checks and balances that are absent in Muslim societies.

6:40 AM  

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