Democracy Lab

Misunderestimating Corruption

Why sleaze is so hard to calculate.

I have a recurring dream (or perhaps nightmare) about today's practices in social science research. In the dream, a conservative elder gentleman -- selected in a process of great complexity resting on decades of research on sampling -- is subjected to questioning by a highly professional interviewer from a polling firm of great repute. The interviewer is not of the same social class, generation, gender, or ethnic origin as the respondent, reducing the possibility of an empathetic connection. In the course of faithfully administering a questionnaire whose intricate structure has taken hundreds of hours to construct, the interviewer nonchalantly reads a question: "Have you ever committed heinous acts of bestiality? Please answer yes or no." The respondent sputters a "No." The interviewer thanks the respondent profusely for his candor. Later a researcher applies the highest-powered econometric techniques to analyze the data.

Despite the success of using survey data in my years of research, the above daydream reveals a persistent worry from which I cannot shake myself free. Economists, in general, extensively use data about embarrassing, immoral, or illegal acts obtained by directly questioning possible perpetrators of those acts. Highly reputable organizations such as the World Bank and Transparency International publicize country corruption scores based on self-reports of bribes paid. Development economics relies on surveys that touch upon issues like adherence to unpopular political opinions or participation in corruption. But all of these activities involve great dissonance between the sophistication of the statistical methodology employed and the naiveté implicit in assuming that those dishonest enough to bribe will be endearingly honest in answering the man or woman behind the clipboard.

We know that survey respondents are often not candid when responding to questions that bear on how others view them, or indeed on how they view themselves. In one of the more amusing examples, men systematically report a greater number of opposite-sex sexual partners than women do, even though simple mathematics tells us that the average values for male and female respondents must be equal. Even in matters of the mundane, people lie. In a classic study, 19 percent of survey respondents in Chicago were found to incorrectly claim possession of a library card.

I have been interested in how much this lack of candor affects data on corruption for some time. In early work, Omar Azfar, who sadly passed away four years ago, and I developed a technique, similar to the famous line from Hamlet, to detect which particular people were reticent to truthfully answering questions on corruption. The exact details are arcane, but the method effectively relied on cornering respondents so that if they were to remove even the remotest implication of guilt from their answers, they would also be claiming that a coin tossed seven times always came up tails. Since elementary probability theory shows that the chance of getting seven tails in a row is very tiny, a set of answers protesting too much the respondent's innocence necessarily implies that the respondent has not told the truth!

Managers of Romanian firms were the unfortunate subject of our experiment. Our results allowed us to identify 10 percent of respondents as reticent for sure, and our best estimate was that a further 32 percent were reticent but not identifiable by our methods. Corruption estimates were raised by 33 percent when we took reticence into account. Those identified as unwilling to tell the truth were only half as willing as other respondents to admit to lying in their own interest!

The methodology used in Romania was a crude test of an idea and therefore could be greatly improved upon. I have accomplished this in recent work with Aart Kraay of the World Bank. Again the methods are too arcane to describe here, but they depend upon the fact that being reticent implies different distortions in the responses to two different types of survey questions. The two types of questions are conventional ones -- have you paid a bribe? -- and random response questions -- answer yes if either your coin-toss came up heads or if you have paid a bribe. Although random response questions were originally proposed as a means of encouraging candor, in fact they do not do that well at all. Instead, they induce different patterns of responses than conventional questions.  We were able to mesh together the two different response patterns and estimate two different characteristics of respondents -- guilt on matters of bribery and reticence in answering survey questions. (With only one type of question, it is impossible to estimate two different characteristics. And that is the problem inherent in all existing surveys on sensitive topics.) 

Earning our undying gratitude, a World Bank team included our questions in a survey of Peruvian firms and the Gallup Organization fielded them in 10 Asian countries in its World Poll. Using conservative assumptions, we found that respondents in Peru answered conventional questions on corruption candidly only 50 percent of the time. Adjustment for this reticence doubled the estimate of the incidence of bribe-paying. With less conservative but still reasonable assumptions, the estimate of bribe-paying was triple the standard one. Across the Asian countries, the proportion of conventional questions answered candidly varied from a high of 79 percent in Indonesia to a low of 53 percent in India, meaning our estimates of corruption were 25 percent higher than standard estimates in Indonesia and 100 percent higher in India.

Organizations that produce country data on such compelling subjects as corruption are fond of producing rankings, and the media is quick to convert plain vanilla estimates into startling comparisons. But our research shows that such comparisons might be off the mark because different samples of respondents have different propensities for reticence. For example, in Peru, conventional measurement indicates that very small firms are three times as likely to pay bribes as large firms, but this ratio increased to six-fold when using our new methods. Bribe-paying in the region of Arequipa looked quite similar to that in Lima until we applied our methods and then found three times as much in Arequipa as in Lima. The situation is similar for cross-country comparisons, with our methods making India look much worse and Indonesia much better, comparatively speaking.

Much rests on estimates of corruption -- for example, aid decisions by the World Bank, the Millennium Challenge Corporation, and USAID. Research on how to build policies and institutions to combat corruption is dependent on corruption data obtained from surveys. These are vital matters for economic development and they could be accomplished much more effectively if data were available that was free from the biases caused by the reticence of survey respondents. Perhaps researchers have given short shrift to this problem because they have downplayed the effect of reticence. Judging by our latest results these researchers have -- to borrow George W. Bush's evocative neologism -- misunderestimated the problem.



Crude Awakening

How the opening of Mexico's state oil monopoly could spell the end of Keystone XL.

If President Barack Obama wants a way to appease both sides of the controversy over the Keystone XL pipeline from Canada, he might want to look in the other direction -- south to Mexico.

The pipeline, furiously opposed by environmentalists yet coveted by oil companies, could simply be substituted by a new gusher of oil supply -- perhaps just as controversial, but for completely separate reasons -- from Mexico.

Mexico's recent decision to open its oilfields to foreign companies promises to pull the country's petroleum production out of what had been a terminal decline, thus allowing it to slake the ever-growing thirst of the petro-industrial complex along the U.S. Gulf Coast.

Last week's decision by Mexico's Congress to extend major concessions to foreign companies became unstoppable Monday, when the plan gained approval from a majority of the country's 31 state legislatures. The opening is being touted by analysts as a historic step that could stop the collapse of Mexico's oil industry and turn it into a global energy superstar. In Mexico, however, it has sparked a bitter political fight that is likely to get worse in coming months. But for U.S. environmentalists and oil companies alike, it might offer a conveniently Solomonic solution, in which Obama could forsake the highly polluting Canadian crude for a Mexican alternative.

Mexico's role in North American energy markets is contradictory. It is a circular importer and exporter of petroleum products, exporting more than 1 million barrels per day of crude to the Gulf region and re-importing nearly half that amount in refined products. And to an extent much greater than generally understood, Mexico's declining production has forced the American energy industry to look to the Keystone XL as an alternate supplier.

Since the decline of Mexico's oil industry began in 2004, total crude output has fallen by one-third. Formerly gargantuan oil fields have dried up, and Pemex, the state-owned oil monopoly, has proved unable to deploy advanced technologies to develop new production. As a result, the country is widely predicted to become a net oil importer by the end of the decade. This trend is of critical importance to Mexico -- if not arrested, it would deprive the government of more than one-third of its revenue and deal a body blow to the economy. But it is of equal importance to the U.S. petro-industrial complex.

U.S. oil imports from Mexico, most of which are heavy crude similar to the diluted bitumen, or dilbit, produced by Canada's tar sands, have fallen from 1.7 million barrels per day in 2004 to only 900,000 today. Mexico then re-imports more than half that amount in a variety of refined fuels and petrochemicals. It's just one example of the Gulf Coast's role as the world's dominant supplier of refined petroleum products and petrochemicals, with Canada and Mexico as both suppliers and customers.

But the 800,000 barrels per day by which Mexican exports have declined is conveniently roughly the same as the 830,000 barrels per day that Keystone XL would carry southward from Canada. For the Gulf Coast refineries, most of which are configured to process heavy crude, the loss of Mexican crude cannot be easily substituted by the light, sweet crudes now pouring out of North Dakota and Texas oilfields. This lack of supply has been compounded by a somewhat smaller decline in heavy oil shipments from Venezuela, where the leftist government has gradually shifted its export focus from the United States to China. The result is what analysts have described as a "hunger for heavy," with Gulf refineries running at less than full capacity and straining to find replacement supplies on the world spot market.

All this formed the central logic behind the Keystone XL, at least from the U.S. perspective: So, it was adiós Mexico, hello Canada. The dilbit from the Keystone XL may be "game over" for the Earth's climate, as environmentalists like to say, but it would slake the thirst of the industrial beast.

Yet lo and behold -- if Mexico's oil production could be revived by foreign companies, the thirst for Canadian heavy crude could be substituted by new supplies from south of the border. Goodbye Canada, hola Mexico.

The key to this turnaround is the bugaboo of American environmentalists -- fracking.

Mexico has more than 10 billion barrels of proven oil reserves, Latin America's third largest after Venezuela and Brazil. Pemex engineers believe Mexico's portion of deepwater reserves in the Gulf of Mexico contains another 29 billion barrels. To extract that oil, Mexico needs advanced technologies that Pemex has been unable to master alone. But much of Mexico's potential also lies in Northeast Mexico's shale formations, including a cross-border portion of the Eagle Ford Shale, which as a result of the successful application of fracking has become Texas's most successful single oilfield ever.

For Mexico, the world's 10th largest oil producer, the opening to foreigners is a humiliating climb-down. The government nationalized the former U.S.-owned oilfields in 1938, and the slogan "the oil is ours" has been taught and dutifully repeated by generations of schoolchildren. Until now, Mexico's opposition to the oil opening has been based mainly on this deep-seated ideology. Leftist politicians now complain loudly that the national patrimony has been given away to foreigners by "traitors" and "sellouts." But the advent of fracking could add a litany of local conflicts to fuel the opposition.

Similar to U.S. shale plays, Mexico's shale formations will require thousands of densely spaced wells. But some of the most promising formations lie underneath areas of northern Veracruz, Hidalgo, and Puebla states that are environmentally sensitive and are inhabited by the indigenous Otomí people. Other shale formations are in the desert of Coahuila, where water supplies needed for fracking are already too little for fast-growing towns and farms.

Until now, there has been very little fracking in Mexico's oil industry, and the practice has received almost zero public attention. But that is likely to change fast. U.S. environmentalists are attempting to spread their concerns about the dangers of groundwater pollution and depletion from fracking, and have given assistance to a new Mexico City-based coalition, Mexican Alliance Against Fracking.

"The fine print of the energy reform is fracking," wrote columnist Ruben Martin in the Mexico City newspaper El Economista on Dec. 3, summing up a fast-growing point of view among Mexico's left.

There's little doubt that fracking and other advanced technologies are the Mexican government's desired goals. Some key details of the energy reform -- such as how much favored treatment Pemex will still receive -- will only be determined by implementing legislation early next year. But the plan approved by Congress specifies that foreign companies will get largely what they want. Production-sharing contracts will provide them a share of profits and allow them to "book" reserves on their corporate balance sheet -- but only for the shale formations and deep-water Gulf reserves that require fracking or other advanced extraction technologies that Pemex currently lacks. In areas where Pemex now controls production, the current system will be maintained -- flat fees for contracted work and no share of production or profits.

Mexico's energy opening may face opposition sooner than expected. On Dec. 9, leftist legislators submitted 1.7 million signatures requesting a national referendum to overturn the reform. If the signatures are accepted by election authorities, a political battle royale will be set for next year. At that point, "fracking" will become a much-used word in Mexico's political lexicon, almost certainly as an insult.

But across the continent, the economic pressures for additional petroleum supplies are overwhelming. Mexico's energy reforms and the Keystone XL are interchangeable parts of a regional energy infrastructure feeding the maw of an oil-dependent society. While Mexico's opening does not guarantee the demise of the Keystone XL, it does underline their mix-and-match nature. Develop one project, block the other, or vice versa. Or, perhaps eventually, do both. The demand is the same. More oil!