When China Met Africa

It seemed a perfect match: A growing country looking for markets and influence meets a continent with plenty of resources but few investors. Now that China has moved in, though, its African partners are beginning to resent their aggressive new patron. What happens when the world's most ambitious developing power meets the poverty, corruption, and fragility of Africa? China is just beginning to find out.

"Ni hao, ni hao." I had been walking along a street in Brazzaville only 10 minutes when a merry band of Congolese kids interrupted their ballplaying to greet me. In Africa, white visitors usually hear greetings like "hello, mista" or "hey, whitey," but these smiling kids lined along the street have expanded their repertoire. They yell "hello" in Chinese, and then they start up their game again. To them, all foreigners are Chinese. And there's good reason for that.

In Brazzaville, everything new appears to have come from China: the stadium, the airport, the televisions, the roads, the apartment buildings, the fake Nikes, the telephones, even the aphrodisiacs. Walking through this poor capital city in West Africa, a visitor could be forgiven for assuming he was in some colonial Chinese outpost.

No one knows more about China's reach in Congo than Claude Alphonse N'Silou, the Congolese minister for construction and housing. In fact, in Brazzaville, the Chinese are building more than a thousand units of housing designed by N'Silou, who is also an architect. They are also building the minister's house, a Greco-Roman palace that makes the U.S. Embassy next door look like a small bunker. I meet the minister at nightfall in the habitable part of his construction site, while, outside, Chinese workers from the international construction company WIETC have turned on spotlights so they can keep making concrete and hammering in scaffolding.

"Have you seen how they work?" N'Silou says jovially, gripping the arms of his leather chair while a servant serving French sparkling water glides along the marble floor in slippers.

"They built the Alphonse Massamba Stadium for us, the foreign ministry, the television company's headquarters. Now they are building a dam in Imboulou. They have redone the entire water system of Brazzaville. They built us an airport. They are going to build the Pointe-Noire to Brazzaville highway. They are constructing apartment buildings for us. They are going to build an amusement park on the river. All of it has been decided. Settled! It's win-win! Too bad for you, in the West, but the Chinese are fantastic."

The story of China's quick and spectacular conquest of Africa has captured the imagination of Europeans and Americans who long ago considered the continent more charity case than investment opportunity. From 2000 to 2007, trade between China and Africa jumped from $10 billion to $70 billion, and China has now surpassed Britain and France to become Africa's second-largest trading partner after the United States. By 2010, it will likely overtake the United States as well. The Export-Import Bank of China, the Chinese government's main source of foreign-investment funds, is planning to spend $20 billion in Africa in the next three years -- roughly equal to the amount the entire World Bank expects to spend there in the same period. For the Chinese and the Africans, the partnership does seem to be "win-win": China gains access to the oil, copper, uranium, cobalt, and wood that will fuel its booming industrial revolution at home, and Africa finally sees the completion of the roads, schools, and other keys to development it desperately needs. Most analysts think it is only the beginning. With its basic but reliable technology, its ability to mobilize thousands of workers to building sites anywhere, and its phenomenally large foreign-cash reserves, China has the opportunity to assume a leadership position in Africa and to transform the continent profoundly. And why not? The Chinese have created a true economic miracle at home, so they more than anyone should be able to pull off the same magic in a place where the rest of the world has failed.

And yet, there are cracks in the facade. China's profits and influence may be on the upswing in Africa, but China is beginning to run into the same obstacles the West has faced for years: financial and political corruption, political instability, lack of interest -- even resistance -- from the local population, and sometimes a simply miserable climate. Several of the head-spinning contracts the Chinese signed throughout the continent have been canceled. Those cheap sneakers the Chinese are sending in by the shipload are infuriating the local manufacturers and storeowners they undercut. And the Chinese, with their laissez-faire attitude toward workers' rights, may be earning themselves more enemies than they realize. What's more, China, unlike its Western counterparts, is attempting to operate in a region that is, by and large, more democratic than it is. What happens when the world's most enterprising business people run up against the hard truths of a continent that has known more poverty than profits? Might China be just another mortal investor, subject to the same problems, inefficiencies, and frustrations every other global power has faced in Africa? If so, it may mean that, for Africa, the Chinese "miracle" is nothing more than another lost opportunity.


It isn't hard to see why Chinese immigrants would be attracted to Africa. With wages rarely exceeding $150 a month on the farms and in the factories of China's remote provinces -- and with the eastern cities becoming overrun with migrant labor -- Africa looks like a promised land. According to Huang Zequan, vice chairman of the Chinese-African People's Friendship Association, there are now 550,000 Chinese nationals in Africa, compared with 100,000 French citizens, and 70,000 Americans. Beijing sent some of them to build dams, roads, and railroads. Other Chinese simply hope to get rich in some of the poorest countries on the planet.

For many African governments, China's interest in the continent is most welcome. African leaders have not hesitated to hand over the responsibilities of public office to China. It's China that these leaders turn to when they want schools, housing, or hospitals -- often just before elections in order to gain as much profit as possible from these projects. They rely on the efficiency and ambition of the Chinese in hopes of having their own shortcomings forgotten.

"The Chinese are incredible," says Omar Oukil, an advisor to the Algerian Ministry of Public Works. "They work round the clock, seven days a week. It would be good for us if a little bit of their rigorous work culture rubbed off on us." I was politely shown the door when his workday came to a close at 4 p.m. The hallways of the ministry were empty when I left. At the same time, on the Mitija plain in southern Algeria, Chinese workers from the Chinese construction firms CITIC and CRCC were putting night crews in place. They would have a little more than 3 years to build a large portion of a 750-mile highway full of tunnels and viaducts. To do so, they had to bring 12,878 workers from China to Algeria.

But these immense projects also highlight the competing interests of Chinese-African cooperation. Take, for example, the dam being built at Imboulou in Congo. Officially, it's a huge success: It's expected to help double national electricity production by 2009. Ten years ago, the World Bank had deemed the country too indebted to warrant financing of the project. China, however, dedicated $280 million to it in 2002. Congo plans to pay that sum back in oil.

"The Chinese drive me crazy," says an engineer from Fichtner, the German company that oversees the work. They are building the dam at a discount, and he worries it might not hold up very long. He claims that the quality of the cement being used is sub-standard, that the Congolese workers are so poorly paid that none of them stays longer than a few months, and, above all, that the drilling has been so poorly done that half of the dam sits on a huge pocket of water that continually floods the site and could cause it to collapse one day.

It's difficult for Wang Wei, the Chinese engineer in charge, to respond to these accusations, and not only because he's been knocked out by a bout of malaria. "It is my first trip to Africa," he says, his eyes shimmering with fever. It is also the first time that his company, CMEC, has built a dam. Its previous business had only involved importing and exporting construction vehicles. Wang blames the company's problems on the sub-Saharan climate. "The rainy season is too long here," he says. "We have gotten a little behind, but we will emerge victorious from our battle with nature." The Chinese boss is particularly angry with the workers he pays three to four dollars a day. "They treat the site like a school. They have hardly learned something before they go somewhere else to use it." He would like to ask the Congolese government to make some prisoners available to him so he could be sure his workers wouldn't flee.

Angola, long held up as China's most spectacular success in Africa, is also beginning to question China's commitment to the country. In 2002, after 27 years of civil war that brought the country to its knees, Western countries refused to organize a conference of donors, citing a lack of transparency and the disappearance of billions of dollars in oil revenues. The government turned to China, which offered between $8 billion and $12 billion of credit to rebuild the country (and to make Angola its main supplier of oil, ahead of Saudi Arabia and Iran). At least, that was the plan. But you have to expect some surprises when you attempt to rebuild a railway connecting the coastal city of Lobito with the inland border of the country formerly known as Zaire. This vital artery of colonial Angola was entirely destroyed during the war. The Chinese promised to rebuild it by September 2007. By November, however, they had abruptly dismantled their base camps along the line.

"The Chinese spent months getting their camp together and bringing in brand-new bulldozers," says a security guard at Alto Catumbela, an old industrial center in the Angolan plateau that was devastated by the war. "Then, instead of beginning to repair the line, they dismantled it all, ate their dogs, and left." You can still see the spot in the middle of the big field where the sheds used to be. The vegetable plots where the Chinese cooks grew cabbage and other vegetables are still visible. But, except for a few antimalarial tablets on the ground, everything has vanished.

In Lobito, the assistant director of the Benguela Railway Company confirms that 16 Chinese camps were dismantled and reveals that the $2 billion contract has been canceled. "I don’t know anything else about it; the negotiations are taking place at a very high level," he says.

This very high level, on the Chinese side, is a mysterious holding company in Hong Kong called the China International Fund (CIF). Its job is to coordinate funds and projects in Angola, as well as deal with reimbursements in oil. Its Internet site boasts about 30 gigantic projects, none of which appears to have broken ground. On the Angolan side, the very high level is the National Reconstruction Office, headed by Gen. Manuel Helder Vieira Dias. He is considered a possible successor to the president. Neither side agreed to respond to questions, but there are numerous signs of a major crisis brewing between the two countries: A $3 billion contract for an oil refinery in Lobito was canceled by the Angolans, and $2 billion allegedly disappeared into Chinese accounts.

It all brings a smile to the faces of the 20 or so Western diplomats in Luanda who send cryptic messages to their capitals detailing the Chinese-Angolan dispute, even as they try to make up ground in a country thought to have been lost to China.

"The Chinese promised an awful lot, [and] the Angolans demanded an awful lot," says a Western diplomat. They were both "out of kilter with reality." Says another: "The Chinese do not have enough experience in Africa. They did not realize that the kickbacks in Angola would be so high." A European diplomat sticks the knife in deeper: "We say to our Angolan friends, 'It's great that you're taking a little walk with the Chinese. Enjoy yourself. But when you're ready to play in the big leagues, pay your debts and come and see us.'"


Despite the arrogance and condescension in such words, they do reflect some hard truths. China may be a willing partner to many of the regimes and countries the rest of the world won't touch, but that hardly means Africans are always satisfied with their arrangements. In a country like Angola, which has raked in $100 billion in five years and has posted one of the highest growth rates in the world since 2002, newfound economic success often means they can begin to dictate the terms of their own deals. And often, those new deals don't include the Chinese. Ironically, because of early help from the Chinese, Luanda may now have the means to avoid getting trapped in a relationship with a partner as voracious and demanding as China. The oil refinery in Lobito is expected to be awarded to the American firm KBR, and the regime of José Eduardo dos Santos has just reconciled with France after an eight-year tiff.

And Angola isn't the only country beginning to feel comfortable saying no to China. In Nigeria, an April 2006 agreement in which China would have paid $2 billion for first access to four oil blocks was canceled. A similar agreement that involved CNOOC, the state-owned Chinese oil company, fizzled out. In Guinea, a billion-dollar financial package involving a bauxite mine, an aluminum refinery, and a hydroelectric dam was called off.

In some cases, such contracts have been canceled or failed to materialize as a result of a deliberate strategy on the part of African rulers. Spectacular announcements of Chinese contracts have been made with the intention of frightening Western partners into offering better terms. In meeting after meeting with African officials, I heard the following plea: "Write in your magazine that the Chinese do not have a monopoly here, and we would love to have the French or anybody else doing work here, if they make a competitive offer." Niger, for instance, dangled uranium rights in front of Chinese companies and even went so far as to expel an official from the French nuclear concern Areva in an apparent effort to persuade it to increase its bid for a mine in Imouraren, which has one of the world's largest untapped deposits of uranium in the world. Areva signed the contract in January 2008, and it was considered a triumph for the regime of President Mamadou Tandja.

When China feels betrayed by African governments, it can't easily fall back on public opinion. Despite all its talk of brotherhood and lack of a colonial past, China remains unpopular. From Congo to Angola, taxi drivers, street sellers, even locals working on Chinese construction sites complain about the influx of Chinese. "They are like the devil," "They do not respect us," "They are here to take everything from us" are the common refrains. Perhaps the relationship is too recent -- and one that really only exists between officials -- to have given personal ties the chance to form. It's rare to see Chinese and African workers at the same construction site go and drink a beer together at the end of the day.

Grass-roots resistance to the Chinese has sprung up. In 2004, in Dakar, Senegal, the powerful lobby of Senegalese and Lebanese shopkeepersorganized several protests against the Chinese boutiques, whose prices they said were undercutting them. Shops were set on fire. President Abdoulaye Wade was given an ultimatum by the shopkeepers' union to kick all Chinese nationals out of the country. Although he didn't go that far, he forced through a near total moratorium on visas issued to Chinese citizens from his country's embassy in Beijing. He then finagled a more open policy toward visas from the Chinese Embassy in Dakar. This enabled Senegalese storeowners to establish connections in China and maximize their profit margin on Chinese imports to Senegal. In October 2007, China's state-owned news agency had to admit that "the Senegalese doing business in China far exceeds the number of Chinese doing business in Senegal."

Undoubtedly, though, the country with the most intense anti-Chinese sentiment is Zambia. When an April 2005 explosion in a Chambishi copper mine killed at least 50 people, the Chinese owners were accused of ignoring basic safety regulations. The miners demonstrated against their employer, and their protests struck a chord in the capital, Lusaka. Opposition leader Michael Sata made the Chinese the focal point of his presidential campaign in September 2006 by accusing them of destroying the country. He even charged the Chinese Embassy with supporting his opponent, incumbent President Levy Mwanawasa. Although he briefly led in the polls, his bid was unsuccessful (and likely the result of voter fraud). Five months later, while touring the continent, Chinese President Hu Jintao was forced to abandon plans to visit the "Copper Belt" due to fears that the workers would revolt again. Never before had a Chinese leader experienced such an affront in Africa.

Generally, China seems to have difficulty maneuvering in countries more democratic than itself. Zambia is not a perfect democracy, but, unlike in China, its press is relatively free, unions exist, and public opinion matters. During a major China-Africa summit in Beijing in November 2006, organizers at the Chinese press center distributed the short book, China and Africa 1956-2006, by historian Yuan Wu. It presents democracy as a scourge because it "exacerbates" tensions inside African countries. "Fortunately," the author concludes, "the wave of democratization has started weakening."


For all the tensions between Africa's need for development and democracy and China's need for resources and riches, however, there is one sector where the interests of both Africa and China seem to be in sync: oil. It's the most important commodity that China wants from Africa, and the oil-producing countries in Africa also happen to be the ones that receive the most Chinese investment. So, many experts consider oil to be the principal indicator of whether China will have succeeded or failed on the continent. And it's not the African oil that China buys at market price, which makes up around 20 percent of its imports, that's so important, but the oil that it manages to produce there. Oil-producing African countries have lured most of the Chinese investment, which was supposed to create "goodwill." So far, the harvest has been thin.

It has been a major handicap for Chinese companies that they lack almost any expertise in deep offshore oil production. It has prevented them from participating in bidding on the most attractive fields in the Gulf of Guinea. These companies have used Africa’s east coast as a fallback location, though deposits there have turned out to be much less abundant than those in the west. Because four of CNOOC's six oil blocks proved too difficult to explore, the company returned them to the Kenyan government, which graciously took them back last July.

As a result, the only real success that the Chinese have had with oil in Africa has come in Sudan. International companies had to leave Sudan in the 1980s because of civil war and U.S. sanctions. China took advantage of the situation and invested massively, building oil wells, a refinery, and a huge pipeline to Port Sudan. Thanks to China, Sudan has been able to export oil, and Khartoum is experiencing an economic boom that makes it seem like an African Dubai.

Of course, this situation captures perfectly the problems inherent in China's approach in Africa. On one hand, China has an interest in convincing Khartoum to put a definitive end to the massacres occurring in Darfur, so as not to sully its reputation as a peaceful power. On the other hand, China wants to keep political risks high enough to ensure that Chevron, Total, and Shell -- companies that once had operations in Sudan -- do not jump back in. All this is not quite a failure, but it's hardly a "miracle," either. It's proof that what's good for China may not be good for Africa, and what's good for Africa may be something no foreign power, even one as ambitious as China, is able to deliver.


How Economics Can Defeat Corruption

What's the dirtiest secret about corruption? Just how little we know about it. Treasuries are plundered and kickbacks are paid, but the nature and scale of the world's shady transactions remain a mystery. Luckily, a little economic detective work is all that's needed to expose the smuggling, cheating, and bribing that is hiding in plain sight.

It was the odd uniformity of the suitcase's contents that tipped off the baggage inspector: six thick, identical rectangles. They could have been books, but then again, they could have been six bundles of cocaine. And in August 2007, security was tight at the airport in Buenos Aires; the country was in the midst of a presidential election. It was worth taking a closer look. The suitcase's owner, a Venezuelan businessman just in from Caracas, hesitated briefly when asked to open his suspicious luggage. Out tumbled $800,000 in cash. It was, according to U.S. investigators, an illegal campaign contribution from Venezuelan President Hugo Chávez intended for Cristina Fernández de Kirchner, wife of Argentina's former president and a candidate for the presidency herself. What better to grease the countries' friendship, investigators alleged, than a suitcase full of cash?

Such tales of bribery and corruption are as old as politics. Try as we might to rid officialdom of crooks, however, extorting senators, vote-buying presidents, and judges for sale remain all too common. Whether it's the $90,000 in cold cash that turned up a few years ago in a U.S. congressman's freezer, the "Versailles in the jungle" built with the billions embezzled by Zaire's Mobutu Sese Seko, or the bank balances of oil autocrats in Central Asia, venality and excess remain the scourge of modern global politics.

But corruption is not simply a moral concern, warranting a collective finger wagging at political leaders. It's blamed -- perhaps rightly -- for many of the world's ills. Corruption is widely accused of being an endemic barrier to economic development, responsible for Africa's lasting poverty and Latin America's perennial stagnation. It is, says the conventional wisdom, what makes poor countries poor. It undermines the rule of law, distorts trade, and confers economic advantages on a privileged few. It prevents aid money from reaching disaster victims, topples buildings thanks to shoddy construction, and strangles business with the constant burden of bribes and payoffs.

Yet the truth is that we have very little idea about how corruption works or how pervasive it is. We have anecdotes about rotten individuals -- a Ferdinand Marcos, a Robert Mugabe, or a Charles Taylor -- but the thievery of a few thuggish rulers tells us almost nothing about the breadth and depth of global corruption. After all, when bribery and embezzlement is done right, it's invisible. Economists haven't even resolved if and when corruption is really a problem: East Asian economies have boomed in recent decades under reputedly corrupt regimes.

What little systematic evidence we do have about corruption comes from surveys administered by groups such as the World Bank and Transparency International. But we economists are skeptical of what people say about corruption (and most everything else, for that matter). It's called "cheap talk" for a reason. And we're especially suspicious of what people say when surveyed on sensitive topics such as bribery and embezzlement. There are obvious reasons to believe that responses to the question, "How much did you receive or pay last year in bribes?" are of questionable accuracy. And if we can't measure something, it's hard to know where it's really thriving, let alone figure out what to do about it.

But all is not lost. The hidden underworld of corruption often reveals itself in unexpected ways -- and in situations that allow us not only to measure actual corruption but to test different methods of preventing it. All that's required, it turns out, is a little economics and a dash of ingenuity. To truly understand corruption, we must watch what people do, rather than just listen to what they say. And as we'll see, damning evidence, like cash-filled suitcases, often leaves footprints in the data for those who know where to look.


Economics is fundamentally about how people respond to incentives. So, if we forensic economists want to unearth corruption, we must look for situations where incentives for crooked rewards somehow translate into actions that everyone can see. In other words, by looking in the right places, we can uncover evidence of corruption staring us in the face. Only then can we take up the much more difficult challenge of determining what to do about it.

The Price of Political Connections

Whether through hefty campaign contributions or cushy jobs for former politicians, corporations are constantly accused of trying to profit through political ties. (Just think Halliburton or Russia's Gazprom). But what's the real value of these companies' connections? If you ask politicians or investors, you're likely to hear a lot of denials. To get the truth, we could ask insiders to put some money where their mouths are, making them bet some of their own cash on whether particular companies are making back-alley deals with politicians to increase their profits. In this political betting pool, raw financial self-interest would lead bettors in the know to reveal their true beliefs about corruption.

This betting pool actually bears a remarkable resemblance to the stock market, where investors (including insiders) place bets on companies based on what they think they're worth. A stock price is a measure of a company's value, which can also include political ties: If connections buy tax breaks, valuable licenses, and advantages in bidding for government contracts, then strengthening political ties should boost profits. These higher profits translate directly into higher stock prices, and conversely, removing those ties should send profits -- and stock prices -- tumbling.

To illustrate our approach in action, let's take a trip to Indonesia and turn the clock back to 1996. Former President Suharto, who by then had ruled the country with an iron fist for nearly 30 years, would be forced to step down a few years later. However, in 1996, Suharto's government still exercised tight control over the economy: The president decided who could get loans, log for timber, build toll roads, or import rice. In other words, he decided who would make money and how much. If ever there were a time or place where we'd expect the market to place a value on connections, this would be it.

But the aging dictator was in poor health. And because none of his kids or cronies was seen as a capable successor, any leader who followed Suharto would be unlikely to honor (or enforce) the cozy business relationships established under his rule. Any threat to Suharto would translate into a threat to the value of connections, and bets would be placed accordingly.

And indeed, Indonesian investors didn't disappoint. On July 4, 1996, the Indonesian government announced that Suharto was traveling to Germany for a health checkup. That may not sound like much, but who travels 10 time zones to get his pulse taken? Investors at the stock exchange were inundated with rumors that Suharto had already suffered a stroke or heart attack. The Jakarta composite index, an indicator of Indonesian stocks' overall performance, much like New York's Dow Jones Industrial Average, fell 2.3 percent on the day of the news.

What was merely bad for Indonesian stocks turned out to be devastating for well-connected companies. One such firm was Bimantara Citra, a media conglomerate run by Suharto's son, Bambang Trihatmodjo. In the weeks leading up to the July 4th announcement, both the Jakarta exchange and the price of Bimantara Citra bounced around a bit, not gaining or losing very much value. Then, with the market awash with rumors in the first week of July, Bimantara's stock price took a nose dive. The prospect of the company without its connections had shareholders dumping their stock and running for the exits, driving its price down more than 10 percent in just a few days, obliterating about $100 million of its value. (As the chart shows, Bimantara starts its steep slide even before the announcement, probably reflecting early selling by those with close ties to the Suharto family or his doctors.)

One can just imagine what would have happened to Bimantara shares if the 75-year-old Suharto had died suddenly. In fact, our estimates, based on stock returns during a number of Suharto health scares, suggest that a complete severing of Suharto connections would have resulted in a 25 percent loss for similarly well-connected companies. How much is 25 percent of a company's value? When Apple announced its iPhone to great fanfare in 2007, its shares went up 8 percent; when Pfizer was unexpectedly forced to withdraw its bestselling antibiotic Trovan in 1999, its shares fell 10 percent. So, connections in Indonesia were worth a lot more than a blockbuster new drug or the next big technology gadget -- or even both of them combined.

Of course, Suharto's government was considered one of the most corrupt dictatorships of its time, so we should not make generalizations based only on its extreme example. Luckily, researchers have since created market-based measures of political connections in many other countries. Mara Faccio, an economist at Purdue University, has measured the value of political connections for nearly every country with a well-functioning stock market. She has followed the political careers of business tycoons (and the business careers of politicians), traced bloodlines to detect family ties, and read the society columns of local newspapers to track who dines with whom. Her conclusion? Close political-corporate ties exist in nearly every country. In Russia, fully 87 percent of the Moscow stock exchange's value is in companies with close Kremlin connections. Maybe this isn't such a shock in the unruly capitalism of post-Soviet Russia. More surprisingly, nearly 40 percent of the London Stock Exchange is politically connected.

But Faccio found big differences from country to country in the actual value provided by these connections. Although business-government ties are very common in Britain, the stock prices of British companies don't budge when political ties are strengthened. For example, when Rolls-Royce Chairman John Moore was appointed to the House of Lords, there was no detectable effect on Rolls-Royce's stock price. Italy, however, is true to its stereotype; insider connections matter a great deal. When Fiat boss Giovanni Agnelli was appointed to the Italian Senate, his companies' stock prices soared 3.4 percent, adding hundreds of millions of dollars in value overnight.

Sadly, the United States appears to be more like Italy than Britain. Numerous studies have found that the economic fortunes of well-connected U.S. companies mirror the political fortunes of their connections. When U.S. Sen. Jim Jeffords defected from the Republican Party and handed Senate Democrats a slim majority in 2001, Democratically connected companies benefited in the immediate aftermath. Similarly, the stock value of companies with former Republican lawmakers on their boards increased an average of 4 percent when the Supreme Court handed the 2000 election to George W. Bush, while companies with former Democratic politicians on their boards declined.

Sniffing out Smugglers

Well-connected companies may not gain much from being honest about their political ties, but when it comes to bribes, there are a few situations where people or companies do have reason to tell the truth. Before 1999, when the Organisation for Economic Co-operation and Development endorsed a global anticorruption agreement, firms in many nations, including Germany, the Netherlands, and Switzerland, were allowed to pay bribes, just as long as the money went to officials in other countries. Not only was this international bribery permitted by law, it was tax deductible as a business expense. If we could check these corporations' tax returns, their self-reported bribe payments might just be believable. But tax returns aren't the only place that candor on corruption makes an occasional appearance. Truthful reporting of misdeeds by other corporate rogues appears elsewhere in plain sight, thanks to the ready availability of international trade data.

Consider the global trade in antiques. If traders are being honest to customs officials, the value of antiques leaving other countries and bound for the United States should be the same as the value of antiques coming into American ports of entry. But they're not -- not by a long shot. A lot more antiques arrive on American shores than the world claims to be sending its way. Leaving aside the rather unlikely possibility of floating antiques factories, it appears there must be different incentives for antiques importers and exporters to report their dealings truthfully. It turns out there are, and by studying how these different incentives translate into gaps in the trade data, we can get a better handle on the nature of global smuggling.

A short lesson in the laws governing the antiques trade is in order. Most countries ban or severely restrict the export of antique art and other cultural goods. These restrictions include big-time antiquities such as Etruscan chariots and Greek statues that can fetch millions on the market, as well as cheaper trinkets like pre-Columbian pottery shards and old coins. Such objects can only be exported with special government permission, which is rarely forthcoming. So, exporters must either suffer through the bureaucratic hassle of filing for export permits, or simply take their chances with paying off a customs agent at the border. In short, the incentives to lie often outweigh the benefit of telling the truth.

Either way, there's no problem on the import side: You're probably free to bring your coins, pottery, statues, and chariots into the United States. The U.S. Department of Homeland Security explains in its handbook for art importers that violating a foreign country's export laws doesn't necessarily mean you're violating U.S. laws. So, while it's OK to bring illegally exported items into the United States, you do have to be honest about what you report to U.S. authorities -- or else. The penalties for dishonest reporting include fines and seizure of your merchandise. So on the import side, it pays to tell the truth. The mysterious gap between antiques sent and antiques received -- what we'll call the smuggling gap -- can be explained by these different reporting incentives. As one might expect, the smuggling gap for antiques is widest for those countries where it's easiest to bribe your way around export restrictions -- Nigeria, Russia, and Syria, to name a few. But smugglers of all kinds of products leave similar fingerprints in the data that are visible to economic detectives.

Not surprisingly, smuggling gaps aren't unique to antiques traders. We've looked closely at the prints left by Hong Kong exporters trying to avoid paying Chinese import tariffs. The principle is much the same as with antiques trading, but in reverse: The free-trading economy of Hong Kong puts few restrictions on exports, so there is no incentive to mislead customs agents about what you are shipping out. But because of high tariffs on certain goods entering China, there is a great deal of deception on the receiving end. For instance, in the late 1990s, Chinese tariffs on perfume were set at 55 percent, and for tobacco products, 70 percent. By contrast, raw steel and aluminum ore, key commodities for China's burgeoning economic machine, came into the country tariff free. You can probably guess where there was a bigger gap: lots of Hong Kong perfume and tobacco went "missing" before it reached China, but not much iron or aluminum.

By looking at the data, we have been able to identify the preferred methods that smugglers use to evade Chinese customs. Think about a smuggler who wants to bring in, say, chickens that face a 20 percent tariff. He could lie about the chicken count in his shipping container, or shave downward the value of each chicken. But what if inspectors counted his chickens by weighing his container or had ready access to the market price for chickens? Our smuggler would be easily caught and punished. But suppose the tariff rate on turkeys is only 10 percent. Our smuggler friend could simply relabel his chickens as turkeys; all the inspector would see if he opened the container is frozen poultry. In the data, this sleight of hand will show up as lots of disappearing chickens on the Chinese side, with turkeys appearing in their place. When we analyzed three years' worth of Hong Kong-China trade data, we found that similar chicken-to-turkey switches -- high-tariff wooden seats becoming lower-tariff wooden seat parts, manual drills becoming machine-controlled drills -- account for most of the smuggling gap.

Crucially, knowing smugglers' evasive techniques can help policymakers figure out the most effective ways of putting them out of business. Because most of the smuggling we uncovered was of the "chickens-turned-turkeys" variety, a good start would be to equate tariffs on goods that are similar enough to be mislabeled. Of course, Hong Kong smugglers will still surely come up with another way of getting their goods to the mainland. But by plugging up the easiest channel for tariff evasion, the Chinese government -- and others -- can force a reaction that makes smuggling less profitable and begins to chip away at this gritty underside of economic globalization.

Paving the Road to Corruption

Just as corrupt customs officials might look the other way for a slice of the action, crooked politicians and contractors have been siphoning cash from road-building projects for as long as there have been roads. Road construction requires materials such as sand and stones and lots of manual labor, all purchased locally by contractors. The Tony Sopranos of the world have figured out that there is good money to be made by over-invoicing these contracts: Double the budget for supplies, buy some cheap concrete, and split the leftover cash with your cronies in the roads ministry.

As with all other forms of corruption, we need data before we can investigate potential solutions. Here, we turn to Ben Olken, an economist at the Massachusetts Institute of Technology, who has devised an innovative method of measuring road-building corruption. Olken wanted to figure out how much money was being stolen from a World Bank construction program in Indonesia. Under the terms of the program, 600 villages received $9,000 each to build a local road. If Olken could determine how much was spent actually building each road, he could find out how much cash had "leaked out," most likely into the pockets of unscrupulous contractors and public officials. So, Olken sent teams of experienced engineers to all 600 villages to assess the quality of each road. The teams dug up road samples, measured pavement depth, and analyzed whether a road had been "watered down" by using cheap sand instead of expensive gravel.

As part of the study, Olken also built in metrics that tried to ensure the money was well spent. Some villages were informed ahead of time that their road project would be audited. Others were ordered to hold "town hall"-style meetings to allow villagers to discuss and monitor construction plans. (Community involvement of this kind has been held up as a cure-all in development in recent years, especially for governance woes like corruption.) There was also a third set of "control" villages, where nothing special was done at all.

In the villages with no special oversight, road funds disappeared at an average of nearly 30 percent, about $2,700. Nearly as much was stolen in the villages with town-hall meetings. In the villages where contractors were forewarned about audits, theft dropped below 20 percent -- still a sizeable loss, but a third less than appeared in the other two groups. From just this single innovative study, we can gain insights into the anticorruption efforts that will likely work best in other types of development projects.


So far, we've documented the kingly sums channeled to Suharto's buddies, uncovered the hidden tracks of antiques smugglers, and dug into the contract padding of unscrupulous road contractors. But there is a dizzying array of corrupt practices in the world and an even greater number of plausibly effective anticorruption policies beyond those we've examined. Is there any way to be more systematic in figuring out which policies will work in practice?

Economic principles, together with common sense, can be our most useful guides. We know that economic incentives matter, so a good starting point is to think about the carrots and sticks that motivate potentially corrupt officials. Can greater government financial transparency, perhaps through Web postings of highway contract announcements and more details on the winning bids, help curtail theft in Indonesian road building? Will lowering or linking tariffs on similar products dampen the incentives for bribe-paying traders? Or how about increasing the salaries of government officials to reduce the need to supplement their incomes with kickbacks?

We economists could wait around for the right kind of experiments to take place on their own. But governments tend to make lots of changes simultaneously: Salaries are doubled, enforcement increased, and governments made transparent all at the same time, making it hard to sort out which improvements are really the result of any specific policy. And even if changes are implemented one by one, it's a rare government that sets aside a group of employees or road contracts to serve as a bench mark, like the control villages in the Indonesian road study.

Perhaps the answer is that governments should become more experimental, quite literally, in how they deal with their corruption problems. Officials interested in rooting out corruption must think seriously about evaluating what does and does not work in the real world. Just as medical scientists experiment with different ways of treating human diseases, policymakers can experiment with different solutions to social problems. After all, abstract speculation can take us only so far. At some point, our economic theories must be tested in the chaos of real economies. And once we've understood which anticorruption approaches work -- whether higher salaries, government transparency, stricter punishments, or all of the above -- policymakers can start to work to end corruption systematically. If they do, they may just find that economics -- armed with a little creativity -- can make corruption a little less common.