American Enterprise Institute

January 31, 2008

[Edited transcript from audio tapes]

11:45 a.m.	Registration and Luncheon
12:00 p.m.	Presenter:	Rafael Di Tella, Harvard Business School
	Discussant:	William Easterly, New York University
	Moderator:	Nicholas Eberstadt, AEI
2:00	Adjournment

Proceedings:

Nicholas Eberstadt [Moderator]:  Ladies and gentlemen, can I have your attention, please?  I think we will get our session started now.  Welcome to the American Enterprise Institute this sunny and chilly afternoon.  I’m Nick Eberstadt, Henry Wendt Chair in Political Economy here at AEI.  It is my pleasure to be the moderator for this well-attended session.

The theme is, as you may see, “Why does capitalism not flow to poor countries?”  We are privileged today to have with us both the presenter Professor Rafael Di Tella from Harvard Business School and Professor Bill Easterly who is a migrant from NYU, currently encamped at Brookings.

Professor Di Tella’s work, I first came across some years ago, some of the work that he was doing on the economics of subjective well-being or the economics of happiness.  He has also got a considerable amount of work under his belt on the economics of corruption.  I think this presentation brings these two themes and your work into confluence.  We are expecting a very interesting session.

I think that many of you will also be familiar with Professor Easterly’s works with his well regarded books, The Elusive Quest for Growth and The White Man’s Burden, in addition to his other more peer-reviewed publications.

We will start off, I think, maybe, with Rafael’s presentation, and then we will follow with some words for Bill.  Bill, let me advise you to choose your words wisely.  As I recall, among his other accomplishments, Rafael is an expert fencer, and I believe, in fact, he was a South American champion at one point.  So without further ado, Rafael, why do you not take the show away?

Rafael Di Tella:  All right.  Thank you very much for the invitation.  I’m going to be talking about, “Why does capitalism not flow to poor countries?”  It is a lot about capitalism and beliefs, and it is a joint work with Robert MacCulloch at Imperial College.  This is a paper that is very dear to me.  We always, in academia, do things that are opportunistic or we cover one aspect of a particular literature, et cetera, to try to get published.  This time, I said, “Okay.  I’m going to write a paper that I truly believe in.  It does not matter if it gets published or not.”  Well, I accomplished both objectives here in that I believe what I’m going to be telling you about; although, publication is harder with this type of work.

So first of all, the paper is very simple.  I’ll give you a three-point summary of what this is about.  I’m going to make three points.  Number one, capitalism does not flow to poor countries.  I’ll try to convince you of that.  I will try to provide one explanation for it.  There may be others.  I’m not going to say this is the one.  This is just one explanation.  I’m going to do it both empirically saying corruption causes socialism, and theoretically.

As luck has it, when I started this, this is a project about why capitalism does not flow.  It never occurred to me that I had to prove that capitalism did not flow, but unbelievably enough, for me, political scientists have not documented this fact and they dispute it, and economists also dispute it.  So I just want to acknowledge from moment zero that I do not have compelling evidence for you, on that capitalism does not flow.  The paper is not about that.  I know it is true.  I’ll show you something which is intuitive about that, but if you do not believe me, I’m not going to convince you here.

Then, it is all about the explanation.  I think, what I’m going to try to argue is that there is this concept that political scientists use called “legitimacy.”  It usually applies to the state.  The legitimacy of the state having authority over us to put us in jail or whatever is a fantastically interesting concept for economists that we should apply to business.  It is all about the legitimacy of business.  I think that is what is lacking in the Third World.

So just to give you an anecdote or an illustration, there are a lot of people who go around in limousines, white limousines here in America, and people think, “Fair enough.  They go around in limousines.  Who are they?”  I do not know -- some person who has done something good or invented some product or something.”  Well, try going around in a white limousine in Argentina.  People say, “Who the hell do you think you are?  Where did you get your money?  In which contract with the states did you get your money?”  So it is all about that.

I have more examples we can talk about.  So let me start.  So remember, I’ll illustrate the idea of capitalism does not flow, then I’ll try to talk a little bit about the explanation, and then I’m going to get warned when there is five minutes to go, so that I have some time to wrap up.

Well, capitalism does not flow.  I think it is obvious.  You can see a lot by just looking, and I urge political scientists to watch TV, and by that, it is anecdotal.  I admit it is anecdotal, but I think it is evidence.  You put on TV here and you get a right-wing candidate and a left-wing candidate.  Then, you do the same in Eastern Europe or Africa or Latin America or some Asian countries, and look at the right-wing candidate.  They talk about regulation, redistribution, public hospitals.  You think, “This is the right-wing candidate?”  So the right-wing candidate in the developing countries and poor countries are certainly more to the left than the left-wing candidate here in America.  It is obvious.  You just write down what they say, what they verbalize - the rhetoric.  So that is my first scientific piece of evidence for you.

Remember, we started off saying we thought this was obvious.  We did not want to do a paper on it, but then, luckily, the World Bank produced for other purposes a new dataset by Beck, etal, et cetera - where they codified the names of parties and what they stood for, their platforms.  You know that we usually rig regressions so that we obtain what we want.

This is the first pass of the data.  I did nothing to this.  These are rich countries.  This is one country, 1997 - rich countries.  This is the name of platforms of the chief executive officer, chief political officer of the country.  It could be -- you can do it with the three largest parties, the opposition party.  You slice the salami whichever way you want, I tell you capitalism does not flow.  Here are rich countries, 1997.  Poor countries, 1997, they are more to the left - dramatically so.  The difference is just -- we can do it for the whole period for which the data is available, ‘75 to ‘97.  These are rich countries, 38 percent left, almost 50 to the right.  Even split in the middle income, and poor countries, much more to the left.

Let me give you one false explanation.  It must be inequality.  People say, “These poor countries, what they are trying to do, they are voting for socialism to redistribute the little income there is.”  Let’s try that one.  Equal and poor countries, they are both left.  The more unequal countries, it is less so.  So actually it does not go in the direction of that it is inequality driving this propensity for the left.

Of course, it is the same pattern that you observe between Europe and America.  The U.S. is more unequal than France, and they want to distribute less, not more.  De Tocqueville observed this, et cetera, and Lipset wrote these fantastic, famous work [sounds like].  Well, it is mobility and then when the evidence which is coming in that is of similar mobility levels, it does not matter.  It is beliefs about mobility.  It is the American Dream.

There is this fantastic pattern in the data that Americans think that the poor are lazy rather than unlucky.  Sixty-two percent of Americans, you ask them about the poor, they say, “What?  They are lazy people.”  You ask the French about that, and they say, “No, they are unlucky.  The society treats them unfair.”  Sixty percent of them are exactly the opposite way.  So that justifies a little bit what I have just said.

That is between U.S. and France, but what we are trying to do is all between France and the U.S., and the poor countries.  So what is the relevant belief to explain patterns from rich to poor countries?  Is it about where the poor pattern -- characteristics of the poor?  Well, I do not think that is the case.  I think that what matters, the belief that matters to explain differences across rich and poor countries are beliefs about the rich.  How did they make their money?

I think it is striking about America is how much you guys like your rich.  You love your rich.  You idolize them.  You think, “Bill Gates is great,” et cetera.

Get a Latin American here, ask them to name the top five rich people in their country, they cannot stand them.  Ask them if they want their daughters to get married to them, or maybe one will say, “yes,” but the truth of the matter is that there is no empathy.

So this is a paper all about this empathy, this thing that you think, “Okay.  This guy actually deserves what they have.”  This is a piece of evidence coming from -- well, this is a well-known [indiscernible] words.  Belief is the luck you ever think of -- this belief is correlated with redistribution much more than anything.

This is social spending, a certain percent of GDP.  This is the belief that luck determines income, and it casts this nice -- at the individual level, we checked what he thinks and what I think, and then we checked our differences in income or education, et cetera and that does not predict why we differ now in what we want to do with government.  What really predicts the difference is differences in beliefs, what we think is the root cause of -- so these beliefs are much more important in size than anything else that the government is focused on.

This admission of beliefs around the world is extremely interesting, and we should look at it.  This is what I just said.  Sixty percent of the Americans believe that the poor are lazy.  The Asians, in general, tend to have the beliefs of the Americans.  Latin Americans are here close to the former communists.  The transition countries are very heterogenous in beliefs.  It is quite interesting.  That is -- I do not want to talk about that.

So I said capitalism does not flow.  I tried to argue that beliefs have this very big role.  So the question that you should ask is, “What drives these beliefs?”  One possibility is that - I do not know - the immigrants that came here or whatever was fixed.  There is nothing we can do about it, or it is the Catholics going to Latin America and Protestants, whatever.  Cultural differences are fixed.  I think that is a mistake.  I think beliefs move.  There is evidence about that.

One of the papers that I have written with Sebastian Galiani and Ernesto Schargrodsky, it is all about looking for causal effects.  So we go into a shantytown in the outskirts of Buenos Aires, and we looked for -- it is a natural experiment.  I can go to details if you want afterwards, but you get two persons who are living in a shantytown, one next to each other.  One is given property, the other one is not.  Exogenously, nothing to do with them, and the person who receives property starts thinking in a completely different way than the person who does not have property.

So the question is:  What drives these beliefs that the American dream of effort pays, the poor are lazy, or other types of beliefs?  One is shocks - reality.  Some countries are different than others.  For example, if you live in a country that is dominated by oil or that has recessions all the time or matter of instability or crisis, et cetera, what happens is you turn left.  I have evidence of that.

I think that is one of the most dramatic things about the recurrent macroeconomic [sounds like] crisis in our countries is that it makes people think that the poor are not lazy, the poor are unlucky.  Do you know why?  Because it is true.  It is true obviously.  The poverty rate in Argentina after a dozen and one crises went up from 20 percent to 70 percent.  You cannot seriously tell me that was because we turned lazy from one year to the next.  What happened was that, it is a roulette living in Argentina.  Oil - it is the same.  You are in a casino, sometimes oil is up - you put effort.  That has nothing to do how much income you get from the effort you put in.  It depends on this other thing - the macroeconomic instability, inflation, the oil discoveries or whatever - oil price.  There is some evidence of that.

Another story is property rights giving people titles, turns people to the right.  I can talk about that.  I have part of the slide there.

Then, the topic of my talk today is emotions - legitimacy.  Corruption turn people left.  Let me show you some evidence for the idea that corruption moves people to the left.

So this is a talk for a second about this piece of work by La Porta, Lopez de Silanes, Shleifer and Vishny which is a very famous paper.  This is standard rhetoric in economics.  They observed that regulation is higher in countries where there is a lot of corruption, and they think, “Well, it is regulation causing corruption.”  Obviously, it is like the right-wing bias that we all have.  The interpretation is that regulation causes corruption.  It is called the “tollbooth” theory.

The whole point of my paper today is that this is wrong.  This is obviously wrong.  There is another obvious interpretation, which is the other way around - that corruption causes regulation.  You see corruption, you get nervous.  You dislike your capitalists, you want to regulate them.  I come to you and I tell you this is not going to get into -- we are going to become poorer.  This is a bad economic system.  You say, “Well, I do not care.  I just do not like these people, the way they are behaving, and I would rather be poor.”  There is unbelievable evidence in something called the ultimatum game.  If you guys want, I can talk about that in a little while where people burn money all the time.

So one mistake, I think, of the standard economic model is that it assumes that people decide always in their material interests, and there is overwhelming evidence that is incorrect - overwhelming evidence.  People, of course, they want money, but they also want to have the perception that they are living in a fair society and that you have more money than I because you have worked more or because you have done things that I appreciate, not because you are in cahoots with somebody who is robbing from me. 

I’ll show you a bit of evidence now which is going to be the key evidence.  So this is a survey asking people, “In political matters, people talk of the left and the right.  How would you place your views on the scale, generally speaking?”  Left, right - okay.  People say some number within a country.  Let’s do it within this group.  So he writes a 10, an eight, a nine, a four, whatever.

Then, you do to this same group, “How widespread do you think bribe taking and corruption is in this country?”  Then, almost no public officials are engaged in it, a few, most, or almost all public officials are engaged in corruption.

Then, we do a simple correlation.  Here it is.  These are just some regressions.  We do not need to get into the details.  There are 51,000 people in 48 countries, and you can control for other things, whatever.  That is neither here nor there.  Look at this.  Corruption moves the electorate to the left.  Let’s start in a country where there is almost no corruption.  I’m going to derive the type coefficients for you, guys, 50-50.  Let’s move to a country where almost all are corrupt.  What do the bad coefficients tell you?  Well, that the left will win 56 to 44.  It is a very big increase.

So these corruption stories that get printed on the press all the time are not neutral, ideologically.  They end up having this effect. 

Take note why we have already rejected the Shleifer, etal story.  This is one small victory [indiscernible] says, it contradicts his theory.  It is fair enough because it does, which is, “How could it possibly be that regulation is causing corruption when the people who observe corruption want more regulation?”  That is inconsistent, right?  They have to have some other mole [sounds like] in their head.  If all there is -- remember, this causality is rejected by that.  It becomes bigger if in corrupt countries run by right-wing [sounds like] parties, the separation is bigger.

It is even more extreme, this pattern, if we condition on the belief that countries run for a few big interests.  The idea is that you can separate corruption into two types of corruption.  One is petty corruption - bureaucratic corruption.  The other one is capture, high-level corruption - ministers, presidents, and all that.  What is the big difference there?  Well, there are many differences, but one of them is that they think the small corruption is typically more of an extortion variety.  There is a nice businessperson doing their own job, minding their own business, and suddenly, this bureaucrat with authority comes and wants to extract money from them.  It is extortion - a tax authority, a regulator, whatever.

Capture is exactly the opposite.  There is a politician, a high-level bureaucrat or a minister doing their work, and then a businessperson comes and captures them.  He tells them to change the laws to favor them.

So the active party is very different in the two.  My point is that when corruption is perceived to be of the capture variety which is originating in the businesspeople, then the reaction, when you observe that type of corruption, you become much more left-wing.

So one interesting implication is that, I think, there is an ideological fight when there is all this discussion about corruption, to explain what type of corruption we have in each country.  This country has terrible corruption, yeah, but what do you mean?  We mean that there is all these private sectors doing great things and the parasites from the bureaucracy are coming to take the money out of them.  That is one type of corruption.  That is extortion.  Or we could have -- when politicians are trying to get organized and these rapacious businesspeople going in after them, so those two are very different.  It is a battle to impress upon voters which one of the two corruptions we have because they have different implications.

One factoid is that both move people to the left.  Of course, the capture variety, we expected that was going to move people to the left.  But why does the extortion variety move people to the left?  Well, it is a hard question.  I do not have the good answers.  I have built a model there with my friend where we -- the point is that when a bureaucrat decides to get corrupted, it is not as informative about their level of altruism as when a rich businessperson becomes corrupt.

Let’s do this in a silly extreme example.  We have a bureaucrat who is dying of hunger.  I tell you he has now become corrupt, and I ask you, “Is this is a bad person?”  You tell me, “Well, I do not know.  He was dying of hunger, so maybe yes, maybe no.”  Compare with other alternative.  There was a super rich businessperson who became corrupt in that same scenario.  What do you think of this person?  What is the derived level of altruism -- much lower, right?  So even in the extortion variety, the fact that you have gotten into this transaction when you were on a higher level of income is more informative.  All I’m saying is that our model delivers also that prediction.

So there is a discussion about whether it is causal or not.  A lot of people look at the correlation that people who see a lot of corruption is more left-wing and they want to know:  Is that causal?  Was that caused by corruption or is it that corruption is just the way these left-wingers talk?  Left-wingers like see corruption everywhere.  Corruption - “Easterly got paid from me.”  So they see all these sequences of intention all the time.  That is one characteristic of left-wing ideology but whatever.

So my point is that, it is neither here nor there from the point of the paper.  I do not need this to be causal or it is a fixed trait [sounds like].  So the reason for that is the former.  If it is causal, it is simple, right?  Move people to the left.  What about if my regressions are picking up a fixed trait?  Well, it is still the same.

Imagine that there is a debate between a left-winger and a right-winger.  The right-winger will talk about the things that right-wingers talk about - opportunity, equality, whatever.  Then, the left-winger will talk about the usual things that they talk about - solidarity, et cetera, and corruption.  They are equally split, 50-50, the electorate in the intention of vote for these two candidates.  Let’s imagine now that there is a sharp [sounds like] corruption to a country.  Who do you think is right?  Well, the left-wing candidate, right, because he was talking about corruption all the time.  So the fact that, there is more corruption in the country makes the left-wing guy more appealing.

So I do not need a causal story luckily enough.  Although, it is interesting to explore it a bit further, so I’ll show you a couple more things about this.  This is a strategy.  The strategy is I have showed you a correlation with observing corruption and self-placement left, right.  But you can do the following.  You can also check for economic and political dimensions of your ideology.  Economic is, “Do you think the poor are lazy or not?”  Another one is, “Should businesspeople run their own businesses or should we have workers run their own business?”  Political ones are, “Do you think homosexuality is acceptable or not?  Do you think we should preserve the environment?”  So those are other questions that these political scientists ask to determine ideology.

Well, the quick answer is this.  Corruption is correlated with economic traits of ideology but not with the other ones.  Sometimes, it has the opposite, so it does not look like a fixed trait of left-wingers.  It does not look like a fixed                  trait.

So these are the questions.  I’ll show you the results.  So this is perception of corruption.  Again, this is an individual regression here with 37,000 observations.  This is the perception of more corruption.  It is correlated with a bigger tendency of people to say that, the poor are not lazy.  They are just unlucky, which is also correlated with the desire to redistribute as I explained before.  This is mostly correlated to answers saying that, there is no chance of escaping from poverty in this country.

This one is socially [sounds like] large.  It says that, people who say that there is more corruption tends to say that the government should do more to help the poor.  There should be more taxes in the economy.

This one is that people who see that there is more corruption tends to say that, businesses in this country should not be managed by the owners.  They should be managed by the workers, or by the workers and the owner.

Fair pay - this is another one which says there are two secretaries.  One is very efficient and works very diligently and does everything well, et cetera.  Do you think it is fair that it gets more money than the other person?  So it is a question about meritocracy.  Corruption is correlated with the standard left-wing answer for that.

What is this?  This is more evidence showing that within a country, when the country becomes more corrupt by some measures that we have, there is more perception of corruption, there are more left-wing governments coming in the future.  This is a right-wing [indiscernible].  That is whatever the definition you use.

Let me focus now on the explanations.  One explanation that will not do is a rational explanation.  So this is the rational explanation.  The rational explanation is this.  It is called, the geese with the golden eggs versus the copper eggs.  So the economists say KPG [sounds like] and I suspect you guys in this place also say the same.  Well, do not touch business too much because they are the geese with the golden eggs.  They are going to give us more money in the future.  You are going to bring down incentives.  People will work less.  We do not want to tax firms too high because there would be less investment, and we will then have fewer tax collections.  Do not kill the geese with the golden egg.  That is part of one class of models - the measure of richer model [indiscernible].

There is another -- so the result of corruption, “Why in this world would corruption make you want to invest in taxation?”  Well, it is just telling you the people have copper eggs.  If they are corrupt, it means that when we want to tax them, we bribe the inspectors and we do not get the taxes anyway, as if the geese had copper eggs.  So the standard reaction of this model is tax them more.  It does not matter.  There must be some fixed assets in there that you can tax away.

So this is not an explanation because it does not pass one test that we call in the paper called the Vargas Llosa test, which is there are many credible anti-corruption candidates that lose in the Third World.  So you get these people who are very credible in many dimensions.  They say, “Well, I’m going to be clean.”  Vargas Llosa - do we believe him?  Yes.  From now on, let’s have a capitalist economy.  These people do not win.  Why is that?  So our model has to deliver an explanation for that.

Why is it that even when a guy who is a credible anti-corruption person comes in, we still do not want to elect him?  The hypothesis is a legitimacy of business.  So the problem is that, we do not want to elect Vargas Llosa because he is not going to punish the capitalists who have misbehaved and have accumulated the money by doing bad things that we do not like.

Let me give you some elements of the model, and then we can discuss it afterwards if you want.  One is the visibility of some bad businesspeople gives a bad name to all capitalists.  So that is standard.  I think it has been completely under-researched.  Of course, the businesspeople who want to be visible in the -- go to Brazil or a small country, a poor country - and the people who want to be visible are the people who have a bigger stake, a bigger interest in obtaining favors.  The people who are -- lots of honest businesspeople in the Third World, but they are minding their own business working.  They do not make advertising for capitalism.  That is not their business.  So the fact that you have a couple of very visible bad businesspeople who are not punished gives a bad name to all capitalists.

Of course, in the model, you do not have an instrument as a voter.  What happens in America when you have somebody who is misbehaving?  Well, you have somebody like Eliot Spitzer or variations of this who -- Teddy Roosevelt.  There are many instances, where there is punishment of bad capitalists is a service to capitalism.  It avoids taxation.  Yes, the mistakes were made.  So that person made those mistakes is now being punished.  They are now in jail.  The system is okay.  So the fact that you have a system of justice that works helps reduce the desire for taxation.  Again, the point was that Vargas Llosa does not punish these people who are misbehaving.

An interesting episode is General Park who led a coup in Korea and passed the Illicit Wealth Accumulation Act and then, arrested prominent businesspeople and paraded into the streets of Seoul with placards that said, “I am a corrupt swine.”  That is a very famous episode, in particular, because afterwards, something that looked like capitalism on many dimensions - on others it is different - was able to develop in Korea.  So the punishment allowed for a system that was very pro-business on many dimensions.

I mentioned the idea of white limousines, so we can get into details of that if you want, but I want to discuss this one and then conclude.  I am going to get very close to my allotted time.

There is a trap.  So look at this one.  There is a potential for ideological traps, where all the regulations and taxes that you have in one of these countries means that all entrepreneurs, the good and the bad, end up evading taxes and misbehaving.  It is so heavy the amount of regulations that you face in some of these countries that, of course, a lot of people end up misbehaving, even when they are good.  But then, of course, the public sees misbehaviors and then votes for even more taxes.

One interesting fact is that in countries where there are a lot of taxes and a lot of regulations, the observation of corruption is less damaging to capitalism because people justify that these businesspeople have to do what they have to do.  So this ideological trap, I think, is something that has an interesting possibility.

This is a remark by Khodorkovsky making his most extensive public remarks since his arrest in October.  Khodorkovsky also wrote that, “Russia’s largest companies needed to accept higher taxes on natural resources specifically in order to legitimize privatization deals of the 1990s.”  His remarks represented an important shift in his position on at least that significant issue.  Only a year ago, as chairman of Yukos, he lobbied extensively against higher oil taxes.  Of course, maybe it is calculated.  Maybe, he is also right.

I’m not going to go through the model right now, but the idea is that for the model to work, it only requires one thing.  It is that when I see somebody misbehaving from a particular class, I generalize to the whole class.  So people tend to do that.  Maybe, there is some evidence of that, but when you see one capitalist misbehaving; you think all of them do not care about us.  That is an assumption.  I need that, otherwise, the model does not work.

Then, the following propositions are possible in the model.  The observation of corruption increases desired taxes on account of fairness considerations as it reduces the belief that firms are altruistic toward workers.

Countries where firms are very productive and government is small have less corruption.

If the party of low taxes credibly promises to control corruption, its appeal may still be lower than that of the high tax party.  That is because there is no punishment.  So when people want -- it mixes very much with the judicial system.

There is a negative externality from corrupt entrepreneurs to honest entrepreneurs.  So the aura, the image that businesspeople are good people is a public good for the whole economy or for all entrepreneurs, in particular.  So preserving that is extremely important.  One tragedy that I think is that businesspeople are working.  So that is a tragedy.  They are doing the wrong thing, and they do not look around to see what the image is that, these other businesspeople are projecting on society which is so important.

Under high taxes, corruption leads to little updating.  It is more justifiable.  This is what I said before.  When there is a very highly regulated system, corruption is not informative already because everybody would do it.  So then, there is less movement towards the left in countries that are already heavily regulated.

So I can explain variations of the ultimatum experiment.  How much more time do I have?

Nicholas Eberstadt:  Five minutes.

Rafael Di Tella:  Okay.  I’ll finish with this ultimatum experiment - which is this.  So the ultimatum experiment is a class of experiments that are, in my opinion, revolutionizing economics for the last 20 years.  The ultimatum experiment is extremely simple.  This is the reason why I think it is -- so we are given one dollar and we have to split it.  I have to propose to you, a part of I’m keeping and a part I’m giving to you.  That is my action - only action.  He has only one thing to do.  He has to say, yes or no.  If he says, “No,” all the money goes back to his friend [sounds like].  But if you say, “Yes,” we can keep it.  So why is it an interesting experiment?  Because all the economic models have one very stark prediction for this - it says, I should propose 99 cents for me, and you should keep one.  So that is prediction number one.

Prediction number two is that, you should say yes to anything I tell you because what is the point in telling me no?  In particular, we meet [sounds like] only once.

So this game has been played all over the place for very high stakes.  Of course, the prediction that economists have fails dramatically.  Typically, people propose something that looks like 50 percent, a little bit more aggressive and become -- and then he says yes.  If I move away from the 50-50 split or the 60-40 split, he gets very nervous and rejects even when there are high stakes.

I’m telling you this experiment for one reason, because there is one variation of it.  Well, there are a lot of variations of course.  If you are playing against a computer, the computer generates the split.  He says, yes always.  He does not care.  He does not want to talk to a computer.

There is another variation which I am particularly interested in, which is the following.  When we come in to a room, we have to do a little quiz about - I do not know - the capitals of the American states or countries in Europe or additions, whatever.  Then, we get scored on this silly quiz.  Then, if I do better, I get to be the proposer, and then two things happen which are fascinating.  Number one, I become more aggressive.  I say, “Well, actually [background noise] 80 for me, you can keep the 20.”  The second thing that happens is that, he accepts more often.  It is that he has accepted the role because I have earned it.

Let me finish.  I have pushed this fact - there is some evidence that capitalism does not flow to poor countries.  I have argued that it is with some evidence on rhetoric and correlations of corrupt government.  I have given you an explanation based on corruption with some data.  People who perceive corruption to be high are also more left-wing.  So I think that is the key piece of evidence that anchors the paper.  Then there is a theoretical piece where we argued it is commercial legitimacy and the implications are that these externalities - how can we discipline bad firms - and there is this role for people who are very concerned about the [audio glitch].

Nicholas Eberstadt:  Let’s let Bill take the show away now.

William Easterly:  Well, like Rafael, I prefer to stand up while talking to you, but I’m from Ohio and I’m not as flamboyant a speaker as Rafael.  So I do not know if you can hear me in the back.  Can you hear me?  Fine?  Okay.

My main reaction to the paper is, first of all, I want to give you some contexts for how discussants react to papers.  Something that is not widely known outside of academia is that, if you think the free market is ruthless, academia is even more ruthless.  I’m a referee as all academics are, for a lot of good academic journals.  I usually, like most of my colleagues, have to reject 90 percent of all articles that get submitted.  They are just so bad they have to be rejected.  The categories are accept, revise and resubmit, reject, and please advise the author to consider another line of work.  The majority of papers just get rejected outright.  They are just so bad.

As a discussant, discussants are often also very negative for several reasons.  First of all, because a lot of papers that are presented are also - on average - bad, and also frankly, it is more entertaining to be negative than it is to be positive.  You can say lots of fun insulting things to the author and the audience will laugh, and who cares if you piss off the author?

So that is the contexts, in which I have really strong incentives to be negative, both because of my history as a discussant and as a referee.  But I really have bad luck with this paper, I really liked it.  This is just the luck of the draw that I had to wind up with a paper that was not only the upper 10 percent, probably in the upper one percent of articles that I have read in the last few years.  It is just a great paper.

So if I was really doing my job here as a discussant, I would just say, “This is a very creative exploration of data on attitudes toward capitalism and the link to corruption.  So just read the paper carefully and learn from it, and thank you very much for inviting me to come and discuss the paper.”  But I’m afraid if I stop there, you would think I was lazy and I was not doing my work as a discussant.  So I’m going to try desperately to come up with some criticisms of the paper, even though I love it.

So one criticism is that, right versus left is unfortunately a very fuzzy distinction, and there have been a lot of complaints about this in political science and some in economics.  This is not a fatal objection to the paper because Rafael uses not only right versus left, but he also uses other variables that directly measure attitudes toward capitalism.

What I want to just highlight is that, someone identifying themselves as right-wing is not necessarily a very good measure of attitude towards capitalism because being right-wing can mean lots of things.  It can mean that you want to preserve the status quo in tradition, both economic and non-economic status quo in tradition.  It could mean very aggressive nationalism and patriotism which is usually thought of as right-wing, and paradoxically, that could even lead to state ownership.  If you are very nationalistic, you might want the state to own a lot of firms, so that might actually be anti-capitalist right-wing nationalism.  It could be attitudes about religion or morality which Rafael does do some work on with his homosexuality variable, but I was not totally convinced that was enough.  It might be about your degree of compassion for the poor or how serious a problem you think poverty is.

Lastly, here is one really fundamental distinction that I think is neglected a lot.  In economics, it is really the philosophical distinction between left and right or between liberals and conservatives, is that there is a big divide between optimism versus pessimism about human nature and society, and how rapidly changeable that is.  The conservatives tend to be more pessimistic about human nature and think it is not very changeable and society is not very changeable.  Liberals think that human nature is much more malleable and could be changed much more.

S, all of these things are really included in the definition of left versus right, not to mention the other thing, the last point down on the slide here that in any discussion of political attitudes, the disturbing thing to economists is really how little play economics gets in political discussions in general.  It is always astonishing to me in every election that life and death, economic, bread and butter issues that affect the well-being of everyone in the economy take -- it is a little different now with the fear of recession.  They seem to take a back burner to burning issues like the sexual behavior of the candidates, whether the candidate has used drugs, the candidate’s attitude towards gay marriage and flag burning, and things that really do not affect any of us very much in our daily lives.  Yet, these things dominate politics much more than economics is.  I think that is another puzzle that I hope Rafael will some day work on because that is an amazing puzzle - just how little role economics plays in politics.

Again, what that says is that right versus left may not be very much about economics at all or very much about capitalism at all.

So I guess the constructive recommendation is - this paper may already be accepted for publication.  Is that is too late?  But the constructive recommendation is to put a little less emphasis on the rightist variable and use the other variables that are more direct measures of attitudes toward capitalism.  Because I really do not thing right-wing is a very good measure of attitude toward capitalism.  So something like whether you favor private ownership, which Rafael has in the paper, is a much better measure than rightist.

Also, it would be interesting to see how much these measures correlate with de facto capitalism.  There are various people who run around the world trying to measure what they call economic freedom.  There is one index by the Fraser Institute and another by the Heritage Foundation, Wall Street Journal that measures economic freedom.  So to what extent is de facto capitalism correlated with attitudes toward capitalism?  I think that would teach us a lot.

The rest of the discussion, I’m just going to fall back on the discussant’s usual gripes.  Discussants are really just robots that you stand up and they just say the words, mumble the words causality and robustness, over and over again.

First of all, the good news is the paper really does a great job on robustness.  What is seldom appreciated - and I’m always scandalized by the way the press treats academic papers.  Because the press never seems to realize how fragile most statistical results are, and that slight changes in specifications that are equally plausible can make the results totally go away, and that never gets reported in the press, just the headline result gets reported in the press.  So it is really incumbent upon authors to do a lot of robustness check to see whether changes in variables and specification still make the results hold up.  And the good news is, in this paper, Rafael has worked really hard on that, and he has passed the test.  He has tried lots of robustness checks and everything is robust.  So the partial correlations that he shows here are very strong and very robust.

Causality - Rafael is admirably candid that they really do not have a good way to address causality.  It is just too hard when we have these three endogenous variables - the attitude towards capitalism, per capita income, and corruption - that we are all simultaneously analyzing the correlations between these three variables with each other.  It is just too hard to really resolve which is causing which.

So the good news is that the paper identifies some stylized facts that they admit are correlations and stylized facts, not causal relationships.  And then the paper can spend a lot of time offering explanations for those stylized facts, and the discussant can try to come up with other explanations.

So the stylized fact is anti-capitalist societies stay poor or that poor societies are anti-capitalists.  That is one big stylized fact.  That is really convincing, and it is very fresh and new in the paper.  He really uses some new data.  It is a great result.

Then, the second main result, and the real headline result is that the -- I’m reading my slide wrong.  This slide was supposed to be about other possible directions of causality.

The other possible direction of causality for the correlation between anti-capitalism and poverty may be just that, if you are against capitalism, you are condemned to stay poor because the only way you can get rich is through capitalism.  So anti-capitalist societies become poor, and the causality runs from being anti-capitalism to being poor, not from being poor to being anti-capitalist.  So the causality may be the reverse of what was discussed in the paper for that stylized fact.

And then, for the stylized fact that more corrupt societies is more anti-capitalist, that also may be reversed causation.  It may be that if society is anti-capitalist, then you have no possibility of getting rich through capitalism.  Your only way to get rich is through corruption.  So a society that is against capitalism, in effect, creates incentives for everyone in the economy to be corrupt.  So the causality really runs not from corruption to anti-capitalism, but from anti-capitalism to being corrupt.  You have no other choice, because the only way to get rich is to be corrupt.

So that is my duty as a discussant to suggest some way in which the results could be, the reverse direction of causality from what the paper argues.  You do not have to believe me more than the author.  It is just these are two alternatives, and we have to come up with some way of deciding which holds in the data.  Both are possible.

The intuition in the paper is that if corruption is prevalent, voters believe corrupt capitalists will get unfair advantages and so they punish them with more government constraints and taxes, more regulation on taxes.  They punish firms more than the bureaucrats, as Rafael explained very well, because the businessmen are showing themselves to be more greedy and selfish because they are rich and yet, they are bribing anyway, acting unethically anyway.  Whereas, the poor bureaucrats are poor and we can sympathize with them bribing themselves to get themselves a better income.

Actually, I want to give one piece of anecdotal evidence in favor of Rafael’s intuition on this.  One of the things that I have been forced to do in my career is read a lot of the rhetoric of the anti-globalization protesters who are really more like anti-capitalism protesters.  So I have read a lot of heated rhetoric of anti-capitalism protesters.  These are not papers that made it into the 90 percent of papers that get rejected.  These are papers that never even arrived at these journals.  They never even had a chance, but they are very emotional and not very good economic analysis, but they are interesting in what they show us about the psychology of anti-capitalism.

What you learn from reading a lot of anti-capitalist rhetoric is that, the thing that terrifies people who are against capitalism is that the capitalist will take over the society.  The capitalists are going to just take over and run everything and dominate society and order everyone around, and mold society according to the wishes of the rich capitalist.  So that is the fundamental tactic of anti-capitalist.  It is to play on that fear.  A small minority of rich capitalists is going to take over.

So of course, if that society, to begin with, is corrupt, it is going to be easier for the rich capitalist to take over because whoever is richer is going to be able to pay the bribes, and take over the government and the society.  So that really resonates with a lot of what you actually read in anti-capitalist rhetoric, and I think that supports the intuition of the paper.

Again, I’m yanked back to my obligation as a discussant to think of some other possible explanation.  There is another possible explanation that the anti-capitalist voters are actually being rational in saying, they do not like capitalism very much when the society is corrupt.  Because another thing that we know as economists is capitalism does not work very well when all the institutions are bad, not just corruption but bad property rights, bad contract enforcement, and corruption.  These things are much correlated with each other.

So the well-informed rational voters could know that capitalism is not going to work very well, if the society is corrupt.  So then, it is not so surprising they are not so much in favor of capitalism in a corrupt society, as they would be in a clean society because capitalism is just going to work a lot better in a clean society.  If they think capitalism is not going to work to increase the pie, then maybe it makes more sense to them to spend all the political energies just on debating on how to divide the pie which is what socialism is all about.  Socialism is just about fighting about how to divide the existing pie.  Maybe that is a rational political thing to do, if you have a totally dysfunctional system of capitalism because the institutions are so bad.  So that is another possible story behind the results in the paper.

Lastly, as someone who spent some time not only in academia but also in the World Bank and in think tanks, where you are never allowed to just give a pure academic result, you are always asked, “What is the policy recommendation?”  I used to hate that when I was in the research department at the World Bank.  You could tell the head of the research department it is raining outside, and he would say, “What is the policy recommendation?”  It just drove us crazy, but that is the way non-academic institutions use research.  They want to know what the policy cure is for anything you have discovered in your research.

So is there a policy cure for aversion to capitalism?  Well, I think that Rafael has identified one policy cure for aversion to capitalism - eliminate corruption.  So now we have, yet another reason, why we want to get rid of corruption.  Because if you get rid of corruption, you will enable the society to become more pro-capitalist, and then it will get richer because we know capitalist societies get rich.  Unfortunately, I suspect anti-capitalism would still survive even if you eliminated corruption.  I’m afraid it may have other deeper roots besides corruption perceptions.

The other thing that you learned from reading the anti-globalization, anti-capitalist rhetoric is that, the big thing that people are really upset about is the very high inequality in the world today, between extremely poor people and extremely rich people, and they blame that on capitalism.  That is just the gut instinct of people.  It is that they see a capitalist economic system and they see some extremely poor people and some extremely rich people, and they blame it on capitalism.  Economists may want to try to argue that the poor people are unlucky to live in a society that is anti-capitalist, as Rafael has documented, and so it cannot be blamed on capitalism.  But we have a really tough job explaining that to the protesters who have this very strong visceral reaction to capitalism that it is the fault of capitalism that it creates so much inequality - both within societies and across the world as a whole.

The final policy recommendation is economists need to do a lot better job explaining theoretical intuition and empirical evidence that in fact, capitalism does seem to be the solution that works both for the rich and the poor.  So I think that is something that is under recognized, and in the economics profession a part of our job is to just explain theoretical and empirical results that really affect the well-being of lots of people of their chances of escaping poverty as being due to capitalism.  That is incumbent on us as economists if we are convinced by those arguments to share those arguments with the general public and convince them that being anti-capitalist is not such a rational strategy.  Thank you very much.

Nicholas Eberstadt:  Rafael, would you like to make any comment to Bill before we start off?  Can I have hands out there of the people who want to make comments?  Before going to some comments and questions from the floor, I want to abuse my prerogative as moderator to ask a question.  Rafael, a question about a possible application of your theory in real life, and this would have to do with the famous resource curse.

All other things being equal, we imagine that low-income countries that have big natural resource endowments are more likely to have capture problems, more likely to have rent seeking problems, trappings associated with your definition of corruption.  If that is the case, would you expect resource-rich countries to be more likely to have more left-leaning polities that resource-poor countries, and define all that?

Rafael Di Tella:  So the answer to that one is, yes.  Although, I would love to claim it is the effect through corruption, but I should point out that when you have more dependency on oil, then the economy is much more of a casino, in some sense effort matters less.  And then, even if you are super orthodox, taxes in this world are less distortionary so you want more of them, so even a Chicago person would say, if it is all driven by resources, tax more, so there are variables, of course.

So my point is that, we observe that is the case, that in countries that are more dependent more than on oil are more left, even within the U.S.  So across the world is very big effect, right?  But even within the U.S., states that have more dependence on oil even within those states, when there is more volatility, they become more left-wing.  So Texas, which is very right-wing, when they become very volatile, the prices of oil -- or they have a big impact on the economy relative to their high right-wing level, that becomes more left-wing, but the effect is smaller within the U.S.

So the answer is, yes, although, I’m not sure if it is the channel that I’m discovering in this one.

Nicholas Eberstadt:  I see we have questions out in the audience.  AEI house rules - please wait to be called upon.  Please identify yourself.  Please end your question with a question mark.  Yes, please?

Martin Piontkovsky:  Thank you.  Martin Piontkovsky [phonetic] from the IMF.  My question is about the perception of corruption and how reliable that measure is?  Because again, it is one of these fuzzy concepts that we, economists, use but do not always pan out, and I could provide one piece of anecdotal evidence.  When you talk to Central Europeans from former transition economies and you ask them, “What is your perception of corruption in your home country?”  The vast majority will say, “It is very high.  The whole public sector is totally corrupt.”  But when you ask them the second question, “When was the last time you witnessed an act of corruption or you have a strong evidence that corruption has happened,” then this proportion goes down dramatically to a small minority.

So while this is a very nice paper, I wonder whether this fuzziness around the perception changes the conclusions of your paper in any way.  Thank you.

Rafael Di Tella:  So the answer is, not at all.  The whole paper is all about perceptions.  Of course, we are interested in reality, but in a sense, we do not care about reality.  What matters are the perception, and these perceptions -- you are totally right, I have worked on that a lot, and they are fuzzy and they are work in weird directions.  You are totally right about what you are saying about, whether it is correlated with facts or with other perceptions.  So I have documented in another paper that these perceptions of corruption go together with other perceptions rather than with the facts, when you correlate them together.

So I agree with you that they are fuzzy, but that does not matter for the paper.  The paper is about the perceptions.  What matters is what people think, not what reality is going on.

Nicholas Eberstadt:  Leon, please?

Leon Aaron:  Thank you very much.  Leon Aaron, AEI.  Thank you very much for a very interesting paper.  Before I ask my question, I just wanted to make a suggestion that a good friend of mine, Professor Timothy Fry at Columbia University, has done very good empirical work on the acceptance of the results of privatization in Russia.  If you want to move in that direction and see how that affects their attitudes toward capitalism in general.

As I was listening to you, I kept remembering of a very good writer and philosopher, Isaiah Berlin, and one of the many things that he was so insightful about was that public goods or values clash.  Even the most desirable things clash periodically in public life, as well as in private life.  One of the examples he used is, of course, fairness versus liberty or fairness versus justice.  What is shown through your paper is that people apparently are more inclined towards the reaffirmation of fairness.

In other words, remember you talked about how you depend on luck rather than -- that is one of the determinants of the attitudes.  The white limo, “How did he get it?”  Incidentally, you said something very interesting along the way.  You said, “By which crooked contract with the state did he get that limo?”  You also correlated it with the justice system that is palpably unfair.  So I wonder if, in the end, what you are proving here is that people’s allegiance to fairness has overwhelmed their allegiance to liberty.  In a sense that, they would welcome government intervention, they would welcome certain amount of fettering of capitalism because they perceived that it is unfair.

Rafael Di Tella:  So I would agree with that.  I think part of the results of the ultimatum experiment suggest that in a very abstract way, and here, we see it again, and I think I have done some -- I have not done like anthropologists do.  But I have gone to a lot to extremely poor people in this squatter settlement that I have visited in the south of Buenos Aires and then, also with militant trade unions.  So having discussions exactly what is it that they have in mind, and it is totally about that.  They do not see how it is going to overwhelm their freedom.  They do not see that.  What they see is that here, there is the possibility of harming somebody who has harmed them, who has shown little affection towards them.  I think that is an unbelievably powerful thing, and it is all personal.

So one thing I find interesting is that when it is a general thing, there is less movement.  But when there is -- it is that capitalist who did that particular -- so it is all about the images of the physical image of the person who they think represents capitalism to them.

So taking this metaphor further, you guys should do a monument to Bill Gates, in a sense, because we know Bill Gates is super rich, the richest person.  He occupies the fantasies of lots of people, and then we can track him to something concrete he has done for us, that we are now all slaves to computers or whatever.  So we like them.  But when we see a super rich person in Latin America, we do not know which product.  What did this guy do for us?

Nicholas Eberstadt:  We have had some questions from the right.  Let’s get some questions from the left.

Female Voice:  Thank you.  This question from the left will be very much in the right.  Congratulations for the paper, Rafael.  We need much more study about this issue because it is brand new, and in order to develop countries, we need to help countries, and you are doing something for that. 

I have one question.  I am from Chile.  The difference between left and right in Latin America is clearer than capitalism or [audio skips] point of view being from the nation.  Are you from Argentina, Rafael?  Okay.  So from our point of view, left and right are fine.

My question is:  What do you think should be done for the developed countries or rich countries, in order to help developing countries using your model?

Rafael Di Tella:  Thank you very much for your words.  The question which is the policy angle -- my paper is positive.  I do not know anything about normative economics.  So let me try to improvise something which is -- so I have been involved with an NGO, so I’m lying a little bit on that one.  My point is I think, what it tells you is that we -- so being very abstract, you want a second instrument.  If all they have is this ridiculous “capitalism, not capitalism, or taxes, not taxes,” then the answer is that unless the situation is catastrophic, people are willing to burn money as in the ultimatum experiment.  So they need a second instrument.

What is a second instrument?  Well, I think it is having something that looks like a normal judicial system that can say, “Well, this abuse by this particular very visible businessperson is going to be curbed.”  So that is that.  It is having that.  I say that with some trepidation because when, of course, what is going to happen is that there is going to be some crook president from some funny country who is going to say, “Yes, we are going to do that.”  They are going to set a special prosecution office with which they are going to prosecute political opponent.  So it is not going to be that easy.  So we want a better judicial system for that to work.

So if you want an advice for the rich countries, the rich countries have to help us with the judicial system which can be improved much more.  I have done some other stuff on the political use of judicial accusations, which I think is a dramatic problem that keeps a lot of good people away from politics.

Anyway, it is all about the judicial system, improving it and giving people the other option, having the Eliot Spitzers out there who -- regardless of what we think of Eliot Spitzer, that is not what I’m about.  I know he is not the favorite person for lots of people, but I think he serves an unbelievably useful role.  He preserves or he works on -- his activities are extremely important.  Preserving the perception that the system is fair in some sense, and he will not hesitate to go after some very famous people, and he says explicitly, “I think, it is not bad that we are going after some very important people, because part of the point of the judicial system is preserving the perception that we live in a fair society.”  So when they accused him that he is going after high profile cases, he says, “Yes, that is exactly what I’m doing.”

Nicholas Eberstadt:  Yes.  We have a question back there from Frank Lennox.

Frank Lennox:  My name is Frank Lennox at Meridian International Center.  I worked for some years in the Middle East dealing with semipublic organizations, and it was my experience that they believed that everything was corrupt.  And that all economic activity had an irrational basis of favoritism or tribalism, or some such thing. 

So my question is:  Have you considered that this perception of corruption is not based on perceptions about the economy but the level of primitiveness of an economy that, maybe, came from a tribal basis that does not know how to think differently?

Rafael Di Tella:  The short answer is, no.  I do not know much about that angle.  Let me just emphasize one aspect which is indirectly and vaguely related to the point you are making.  Maybe we can talk afterwards, but the point is this.  When you ask people who are even militants on the left who are practical in trade unions, et cetera, so it is not only ideology that they are interested in.  When you try to sell capitalism to them -- and this is an activity I strongly recommend you do.  This is going to be a life changing experience.  It is very easy to come here and talk about capitalism.  That is, we can all do.  Go and talk to -- in a very poor area, in a developing country, or with militant left-wingers who have -- try to choose some people who are like middle average brains, so I lost all the discussions I had - all - with everybody.  It is impossible.  They always come to the following line to which I do not have an answer to these days.  If you have one, please tell me.  This is it.  They say, “For sure, Rafael.  We would love to have American capitalism.  That, we would love but not this that we have here.  So how can we -- what, are you going to get us Bush to come here?”

So they do not think that we -- they want the American capitalism, but not what we have.  So there is a distinction there, that I think, is extremely important for what we are --

Nicholas Eberstadt:  We have a lot of questions.  Maybe in the interest of time, we should harvest two or three questions and then, ask our panelists to respond to them.  I think we have a couple of questions at this center table here.  Can we take a few of those, please?

Vinod Busjeet:  Vinod Busjeet of the Embassy of Mauritius.  In fact, my question is related to the reply that Rafael just gave.  Would your results or conclusions be different if somehow you made a distinction between monopolistic-oligopolistic capitalism and a capitalism that is operating in a competitive system - the U.S.?

Nicholas Eberstadt:  Jerry, did you have -- please, give it to Mr. Norris.

Jerry Norris:  Rafael, Jerry Norris with the Hudson Institute here in Washington.  I wondered if you had done any work on the perceptions of benign corruption.  Let me explain what I mean by that.  About two years ago, there was a comparative study done by the Washington Post of the differences between corruption in Washington and Chicago.  The only conclusion they could come up with was that in Chicago, you get something for it.  I wondered if you had looked at that issue.

Nicholas Eberstadt:  I saw Phil Levy over there had a question.  Let’s pass that and then, we will give you a chance to respond to all of those.  Phil?

Phil Levy:  Phil Levy, American Enterprise Institute.  This is actually related to the monopoly-oligopoly question and also, some of the points that came up in the discussion of whether this is really capitalism that we are against.  You clearly referred a lot of this in the Latin American instances, and it was striking you talked about sentiment towards the truly rich.  But the question is:  Why did someone get truly rich?  Was it because they were essentially granted a monopoly over the telephone service or over cement?  In which case, you are going to say, that is luck.  I very much like your distinction between what is luck and what is effort, and this also ties to the natural resource question and [indiscernible].  That is one thing.

I think for whatever one thinks of Bill Gates, it is not usually that it was somebody he knew in government who handed him this whole thing - we could start with antitrust and whatever.  But I think that may be some of this.  So you could have something that looks like a very capitalist system but still self-reinforcing things, and it also plays into the trap question because as soon you regulate more, then you get into the - again, perceptions of luck for succeeding, not because of great effort.

William Easterly:  Yeah.  I think this is a great point that gets really at the heart of it.  This is related to what Rafael just said.  That if a society is corrupt then is it really capitalism?  Is it even possible to have capitalism if the society is so thoroughly corrupt?  So what voters are reacting against are just people who got rich, not people who are following a capitalist means of production.

Rafael Di Tella:  On benign corruption, the answer to that one is, yes.  It is all about nuances on what exactly people understand by corruption and clientelism, et cetera.  So we have done some of that, but you are right.  It is what type of corruption people perceive?

Let me answer the other one which is you are all [indiscernible].  It is all on what people perceive to be the connection of the rich to merits or to a state.  So I have an anecdote for that.

One of my favorite episodes is there is a person called Douglas Tompkins.  He is an American billionaire.  He heads North Face, so he has bought some farms in Argentina, and there were picket lines outside and he was being harassed by people on the left because this American evil man was taking our water.  So it was a ploy because he was donating large tracks of land.  So he gets denounced.

He did something which is unheard of in Argentina.  He went to TV, so it was an unbelievable episode.  So you get this incredibly polite American going on TV with his lousy Spanish trying to defend himself.  You do not appreciate what I’m talking about.  This is unbelievable.  I have never seen that happen ever.  He thought, “Yes, sure, they want to see me, I’m here.”  It is collective embarrassment for the Argentinians.

The journalist says, “What is your connection with the American government?”  Tompkins says, “Perdón?  Puede repetir por favor?”  So he says, “Yes.  What is your connection with the American government?”  So then he says, “The American government - well, once, I went to an office and they gave me a passport.  Then they get taxes from me every year.”  So it was so refreshing.  So my paper is all about the lack of communication between those two characters.

Nicholas Eberstadt:  Do we have some questions towards the back of the room?  Maybe we can harvest some questions from over back there.  I see three or four hands up there.

Elena Suhir:  Elena Suhir from the Center for International Private Enterprise.  By the way, I wanted to make a comment on the fact that you said, you are only interested in the perception of corruption.  I think the corruption perception index measures the perception, but basically says that the actual corruption generally is a little bit lower but correlates to the level of the perception.  I do not know if you can comment on that.

Also, there is abundant evidence that when there are campaigns to raise public awareness of where these rich people, be they capitalist or officials or whoever - businessmen or officials or whoever - if there is sufficient awareness raised in the population of where this [audio glitch].  It is possible, like in the case of Romania, the political party list were sufficiently reduced after there was an exposure of where some of the people who ran for parliament actually got their money.  I was wondering if you can comment on:  What is the timeframe?  Did you measure the perception of corruption over a specific timeframe?  Was there 10 years, five months?

Nicholas Eberstadt:  I see we have a few more hands that were up there.  Could you -- that young man, please.

Ricardo Verdugo:  Ricardo Verdugo [phonetic], also from Chile.  My question is:  Do you have any data for an alternative hypothesis to explain the aversion to capitalism, especially in Latin America that is not related to corruption but is related to the fear of privatization of the institution in state and the services?  It is something that happened in Latin America with more right-wing governments and there is no need for corruption to have large privatization.  So without taking it out of the equation in corruption and just, by nature, capitalism taking over the state companies and privatizing of that.  Maybe that will create some fear in the population that they are not so protected by these private companies from abroad instead of the state companies doing the services.

Nicholas Eberstadt:  Yes.  I see there is at least one more hand back there.

Radcliffe Lewis:  Hello.  Radcliffe Lewis of intellexae.org.  I’m a native of Jamaica as well.  I have not framed my question as well in my mind as I would like to, but here goes.  It is about the World Bank.  The World Bank is perceived by many as not a very credible organization.  Both the World Bank and the IMF have a tendency [audio glitch] foreign countries and give these micro loans or these weird loans and then, tell these countries that the emphasis should be on divestiture from social portfolios such as, education and more attention to debt servicing.

In fact, the prime minister of Jamaica the other day in Jamaica apparently accepting a measly little US$10 million loan from the World Bank indicated that 50 percent of the budget of Jamaica goes into debt servicing, and only 18 percent of the actual budget goes into addressing critical needs of the country.

The World Bank and the IMF have a tendency to condone this kind of activity.  If this occurs, and you are saying that the perception of corruption is harmful to capitalism, how do you explain then or what is the rationale that I should use to justify - even in my mind - that when the World Bank and the IMF gives out these micro loans that undercut the bond rating of the countries 10 or 20 years later, you will not have radical leftists who do not like your country?  How do I justify the national security interests of the United States when a third party such as the World Bank goes out and adjusts foreign policy in that regard?  Could you please comment?  Thank you.

Nicholas Eberstadt:  I think we have one more question in the back there, and then Bill and Rafael, let me ask you to take a crack at it.

Zaki Gul:  My name is Zaki Gul [phonetic].  The question is:  How do you avoid the aversion in corrupt countries to capitalism?  It seems it comes from the fact that people feel that they do not have an equal starting point, and what is the way to go to get around that?  Because it seems like ultimately, everyone would be for capitalism.  It is just that they would have to feel equal at the beginning and so, the left-wing seems like a period to establish that equality.  Thank you.

Nicholas Eberstadt:  Bill, do you want to start with responses and then, leave it to Rafael for the final word?

William Easterly:  I’ll just respond to the World Bank question from the gentleman from Jamaica.  I think there is another possible explanatory variable for aversion to capitalism, as previous World Bank and IMF involvement in a country.  Regardless of the details of what they do, which there is a lot of debate to exactly what they are doing, it is very clear that they are coming in to countries and coercively imposing conditions on countries, which is allied to what their vision of capitalism or free markets is, which is often an oversimplified dogmatic view of free markets and capitalism.  It is not necessarily tailor-made to each country’s starting place.

So what that causes, as you have pointed out in Jamaica is that it causes a big backlash.  You can hardly imagine doing a worse disservice to capitalism than having some kind of dogmatic capitalism imposed on you by foreigners that is going to lead to a xenophobic nationalist backlash, that I think, explains a lot of the capitalist backlash in places like Venezuela and Bolivia, and Ecuador.  That is a very unfortunate consequence of the IMF and World Bank behavior.

Nicholas Eberstadt:  Rafael, I think we will give you the final words.  Why do you not take it away?

Rafael Di Tella:  So let me answer.  Some of them are easier than others.  The question from the person from Center for Private Enterprise regarding to timeframe was over one year or five years.  My corruption question is, we do different robustness checks so the question is for any particular year, but there are different ways of doing it.  That does not change.

The gentleman from Chile, whether this is risk or not - we can control for that, and it does not seem to be that it is a fear of privatization that will make them lose their jobs because we can check for people who are retired.  So there are ways of doing it to get rid of that.

The question from the back asking, “Is this a transition period that will then lead to capitalism?”  Well, I do not know about that.  Maybe that is what they have in mind; although, once you get into these episodes with heavy regulation, with heavy taxation, et cetera, then people feel more justified in being corrupt, and then it would have to be a very extreme form of socialism.  So then, to take that logic to extreme, it is better that there is nationalization left, right, and center rather than this increase in taxes because that would change that.  That is a very complicated point.

Then, we go back to this issue that the gentleman from Jamaica mentioned, concerning the World Bank.  I want to answer it in two parts.  The first one is very broadly, yes, you can apply it to other things.  For example, when capitalism is associated with colonial powers, then there is aversion to capitalism.  Or when it is associated with military dictators, then there is aversion to it.  So it depends, of course, with what these associations - how they are created in the minds of people.

(Indiscernible) the fact of the World Bank and the IMF, and why is that the case?  So I have a tiny little thing to point out which is that the IMF used to be all about internal balance and external balance, and for that, is an unbelievable service to the world to have an IMF focused on that.  One could say, “Well, that was not enough.”  It is like a band-aid.  You go to a country all the time, they have a crisis; we need to give them a development strategy.  I think that is where we made the mistake, the mistake is when we start giving our opinions about things that are ideologically so sensitive and for which, we have so little evidence that they work.  Because a lot of people think that the way to grow is by planning and export promotion, and all that.

So my point is simply that at some point during the late ‘80s, the Washington Consensus was that over and above internal balance and external balance, the IMF and the World Bank and the American administrations which were giving these loans, were also going to ask to make them conditional on them privatizing, deregulating, all these things.  There was a growth plan, and I think that was the mistake, a catastrophic mistake because -- maybe, I am going to be -- I like them because I am a free market person and maybe he likes it, but a lot of people do not like that.  And there is still a role for the IMF to come and help countries when there is this systemic crisis of capitalism.

So I think that is the dramatic change when that happened.  I do not know.  But it has been dramatic because then it delegitimizes, of course, capitalism and all that.  So that is it.  Thank you very much.

Nicholas Eberstadt:  We are approaching the end of our allotted time.  I know there are some people in the audience who may want to see if they can have a word with Rafael and Bill, and if you have a moment or two, I hope you will be able to chat with some of the people in our audience.  But first, I would like everybody to join in thanking Rafael and Bill for a most original and, I think, very interesting presentation and discussion.  Thank you both very much.

[End of file]

[End of transcript]