The effect of coca and FDI on the level of corruption in Bolivia

Bojanic, Antonio N. Article The effect of coca and FDI on the level of corruption in Bolivia Latin American Economic Review Provided in Cooperation with: Centro de Investigación y Docencia Económica (CIDE), Mexico City Suggested Citation: Bojanic, Antonio N. (2014) : The effect of coca and FDI on the level of corruption in Bolivia, Latin American Economic Review, ISSN 2196-436X, Springer, Heidelberg, Vol. 23, Iss. 1, pp. 1-23, https://doi.org/10.1007/s40503-014-0011-5 This Version is available at: https://hdl.handle.net/10419/108960 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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This article is published with open access at Springerlink.com Abstract This paper analyzes the causes of corruption in contemporary Bolivia. It argues that, along with the well-documented observation that richer countries tend, on average, to be less corrupt than poorer ones, corruption is directly dependent on FDI inflows, with higher levels of FDI associated with lower levels of corruption and vice versa. Additionally, the findings reveal that a less controlled, more permissive market for coca leaves actually reduces the level of corruption in the country, supporting the hypothesis that the way to a less corrupt Bolivia is by lowering government intervention into this controversial market. Keywords Latin America Bolivia Corruption Foreign Direct Investment Coca JEL Classification D60 D73 H10 O54 A. N. Bojanic (&) Department of Economics, Tulane University, Tilton Hall, New Orleans, LA 70118, USA e-mail: [email protected].bo 123 Lat Am Econ Rev (2014) 23:11 DOI 10.1007/s40503-014-0011-5 1 Introduction A significant amount of research has been devoted to studying the consequences and determinants of corruption, 1 particularly in developing countries. High levels of corruption have been associated with lower rates of economic growth, lower exposure with international markets, and lower private investment rates. However, no formal analysis has been done on the effect that foreign investment and the market for coca leaves have on the level of corruption in individual countries. In this paper I estimate the impact that FDI inflows and the price of coca leaves have on the level of corruption in Bolivia. Since both foreign investment and the market for coca leaves have a significant impact on the economic performance of this country, quantifying the effect that these variables have on its level of corruption should aid in directing public policy towards a more realistic and pragmatic approach. The contribution of this paper is twofold: it highlights the existence of a causal link between corruption-FDI and corruption-coca, and it shows that an open, less criminalized coca market does not necessarily have a pervasive effect on the level of corruption. The paper is organized as follows: Section 2reviews the relevant literature and presents the hypothesized link between the coca market and corruption. Section 3 introduces the data and the empirical model. The methodology is presented in Sect. 4. Section 5analyzes the results, and Sect. 6concludes. 2 Corruption, coca, and Foreign Direct Investment Several studies have shown that certain environments are more conducive to higher levels of corruption. Rose-Ackerman (1975) and Tanzi (1994) argue that corruption is associated with the discretionary power of public officials, and hence it can be contained by scaling down public sector activities that stimulate its growth; Van Rijckeghem and Weder (1997) show that civil service wages are an important determinant of corruption, with lower wages associated with higher levels of corruption; Ades and Di Tella (1999) argue that less competition is likely to generate greater incentives for corruption; Leite and Weidmann (1999) show that in countries with an abundance of natural resources, the opportunities for rent-seeking behavior are greater; Blackburn et al. (2006), analyzing economic development and bureaucratic corruption in a dynamic, general equilibrium model of growth, find that corruption and development are negatively related; Alexeev and Habodaszova 1 Throughout this study, corruption refers to corruption within the political system. It results in the misuse of public power for private benefit, and it manifests itself in extrajudicial payments and bribes to public officials to obtain—for instance—import and export licenses, compliance certificates, and to avoid exchange rate controls and tax assessments. It is also at work when public power is utilized to obtain privileged access to things as varied as police protection and loans. Excessive patronage, nepotism, job reservations, ‘favor-for-favor’, secret party funding, and suspiciously close ties between politics and business or other special interest groups—such are coca producers—are all examples of types of behaviors that fall under the definition of corruption. The corruption index utilized here accounts for this specific form of corruption and the methodology for its construction can be found at http://prsgroup.com/ ICRG_Methodology.aspx. 11 Page 2 of 23 Lat Am Econ Rev (2014) 23:11 123 (2007) demonstrate that decentralization of responsibilities may decrease the size of bribes for entrepreneurs depending on the type and quality of public goods offered by the local government; Toke et al. (2008), studying the role of political accountability as a determinant of corruption and growth, find that in regimes with high quality of political institutions, corruption has a substantial negative impact on growth, while in regimes with low-quality institutions, corruption has no impact on growth; Toke (2009) argues that while corruption may have little average effect on the growth rate of GDP per capita, it is a likely source of unsustainable development. In the same line, Gupta et al. (1998) demonstrate that high and rising corruption increases income inequality and poverty by reducing economic growth, the progressivity of the tax system, the level and effectiveness of social spending, and the formation of human capital, and by perpetuating an unequal distribution of asset ownership and an unequal access to education; and Meon and Weill (2010), studying the efficiency of corruption in an otherwise deficient institutional framework, find that corruption is less detrimental in countries where institutions are less effective and may even be positively associated with efficiency in countries where institutions are extremely ineffective. Additionally, there is a well-established link between the openness of a country and its level of corruption, with the more open economies being less prone to acts that would be characterized as corrupt. Krueger (1974), Bhagwati and Srinivasan (1980), Sandholtz and Koetzle (2000), Wei (2000a), Gerring and Thacker (2005), and Neeman et al. (2008) are a sample of authors presenting evidence that supports the notion that countries that are more open to trade and investment are also less corrupt. Knack and Azfar (2003), however, offer evidence suggesting that for smaller nations the link between greater integration with world markets and less corruption may not be as obvious. Despite substantial empirical work on corruption and its impact in a number of variables, little has been done on the effect that FDI has on corruption levels in individual countries, and no systematic work has been done on the effect that the market of coca leaves has on this variable. As far as I can tell, this is the first time that corruption is explained in terms of FDI inflows and the workings of the coca market in a particular country. 2.1 Coca and corruption Bolivia is the third largest producer of coca leaves in the world. Coca leaves are the raw material needed for production of cocaine, an illicit drug. A central thesis of this work is that a direct link exists between the level of corruption in the country and the price for coca leaves. Before digging deeper into the arguments behind this proposition, it is interesting to note that the vast majority of the analysis conducted so far on the influence of coca in Bolivia has tended to focus on the historical dimension of coca use in the country 2 and on the evolution of the so-called ‘War on 2 Representative works of this kind are Hallums (1997), who explores the history of coca production in Bolivia and recounts the involvement of the country in the cocaine trade, and Le ´ons and Sanabria (1997) who survey the historical and political linkages between coca and cocaine. Lat Am Econ Rev (2014) 23:11 Page 3 of 23 11 123 Drugs’ that the United States officially instituted during the presidency of Ronald Reagan back in the 1980s. 3 Additionally, most of the work undertaken on the subject is overwhelmingly descriptive 4 and tends to assume that coca production is synonymous with corruption in producing countries such as Bolivia. While this assertion might be true, the literature on the subject fails to demonstrate the ways in which the coca market generates incentives for corruption. It should be noted, however, that despite the lack of specific studies analyzing the ways in which the market for a critical input (i.e., coca) for an illegal drug affects corruption in the producing country, the notion that ‘legalization’ of drugs will reduce corruption in that country is not new. A number of economists (Thornton (1991), Dennis (1990), and more recently Miron (2005), to mention a few) have long advocated for the legalization of drugs as a way to reduce corruption, crime, violence and a cohort of other negative externalities. Though the scope of the present study is limited to how coca leaves affect corruption and does not directly address the issue of legalizing cocaine, it does illustrate that during the period of analysis a more permissive approach to coca production did lead to less corruption, as has long been advocated by those who have analyzed similar situations in different geographic settings. An important contribution of this paper is to register the experiences of a developing country like Bolivia that produces the key input for a widely utilized illegal drug and how different policy approaches to this input have affected corruption in that country. An initial appraisal of the market for coca leaves in Bolivia is shown on Fig. 1, where yearly production and average price levels for coca leaves are presented for the period 1990–2012. 5 As is evident from Fig. 1, an inverse relationship between production levels and the price of coca leaves exists during the period under consideration. Figure 1also illustrates that the early part of the 1990s was the period of time of greatest production of the leaf, with a marked decline in production levels in the latter part of that century, as government efforts to curtail production—through eradication policies heavily influenced and financed by the United States—became more successful. 6 The past few years have seen a comeback of sorts, as production of 3 It can be argued that the ‘War on Drugs’ has been fought for over a 100 years, though it was Richard Nixon, in 1969, who first used this term explicitly. Ronald Reagan, in 1980, escalated Nixon’s rhetoric into an actual war by passing a series of bills to boost prison terms for consumers and dealers of illegal drugs and by making several agencies in the US government active participants in the war. 4 Farthing and Kohl (2012) is a clear representative of this line of work. 5 Figures for production levels and price of coca leaves utilized in this work reflect conditions in the Chapare region, one of two coca producing regions in Bolivia. According to the United Nations Office on Drugs and Crime (UNODC), coca leaves from Chapare are not conducive to traditional uses—i.e., chewing by mostly indigenous populations—as the leaves are bigger, rancid, and generally unfit for human consumption. UNODC estimates that most of the coca from Chapare is used in its alternative, illegal applications. On the other hand, coca leaves in the Yungas regio ´n—the other coca producing regio ´n in Bolivia—are believed to be mostly devoted to traditional uses as their chemical composition seem more amenable for chewing. 6 The key piece of legislation behind eradication efforts by the Bolivian government is Law 1008, enacted on July 19, 1988, by then president Victor Paz Estenssoro. While it recognizes coca’s traditional uses, it criminalizes the activities of the leaf in its ‘transformed state’. 11 Page 4 of 23 Lat Am Econ Rev (2014) 23:11 123 coca leaves has again rebounded, though not near the production levels experienced during the 1990s. It is interesting to note that the evolution of coca eradication efforts in Bolivia reflect the level of commitment of different administrations to this policy. As Mejı ´a and Restrepo (2011) demonstrate for the case of Colombia, government’s efforts to take that country out of the international cocaine circuit varied as a function of the incentives embedded in Plan Colombia, much like Plan Dignidad 7 in Bolivia, which also was designed to take Bolivia out of the illegal drug trade. Besides the divergence in results experienced by both countries with their eradication plans, the point that must be stressed is that eradication efforts are not constant over time, but rather change as different governments express different levels of commitment to a policy of—in the case of Bolivia—forceful eradication of coca leaves. As will be argued later, the commitment to forceful eradication diminished significantly during the 2000s, as the governments of the time realized the futility in trying to control production of a leaf with such deep historical ties to large segments of Bolivian society, and with such few substitutes in terms of economic returns. A telling popular account for the change in government commitment to coca eradication efforts is captured by Steve Boggan 8 from the Guardian newspaper, who ponders on the significance of coca for large segments of the Bolivian population. The purported link between coca and corruption presented here is fairly straightforward and is dependent on two key assumptions. First, it is assumed that the price for coca leaves is an appropriate indicator of the functioning of the coca 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 0 1 2 3 4 5 6 7 8 9 90 92 94 96 98 00 02 04 06 08 10 12 Average price coca leaves Production coca leaves Production coca leaves (metric tons) Price coca leaves ($/Kg) Source: UNODC Fig. 1 Yearly production and price coca leaves, Chapare Region, 1990–2012 7 See http://www.clarin.com/diario/2005/12/15/elmundo/i-02501.htm for a description of Plan Dignidad, instituted in 1998 by President Banzer, which aimed to drastically curtail illegal coca plantations throughout Bolivia. 8 ‘Coca is a Way of Life’, available at: http://theguardian.com/world/2006/feb/09/features11.g2. Lat Am Econ Rev (2014) 23:11 Page 5 of 23 11 123 market. Second, variations in production levels are closely aligned with the political cycles in the country. With these assumptions in mind, there are four possible scenarios in which the price of coca leaves and the level of corruption in Bolivia are intertwined: A. Due to successful eradication efforts, production levels are reduced, price of coca increases and corruption levels decrease. This scenario represents the ideal situation in which eradication achieves its goal without increasing levels of corruption. B. Due to successful eradication efforts, production levels are reduced, price of coca increases, and so do corruption levels in the country. As eradication policies involve the forceful curtailment of coca plantations, they create incentives for greater corruption in the form of payoffs—i.e., bribes—to public officials for crafting erroneous, inaccurate reports, and generally to all actors within the political system who could benefit from the illegal trade of coca leaves. C. Due to unsuccessful eradication efforts, production levels increase, price of coca decreases, and corruption levels increase. This represents the worst-case scenario where not only eradication policies fail but also corruption levels increase. D. Due to unsuccessful eradication efforts, production levels increase, price of coca increases, and corruption levels decrease. Here, unsuccessful eradication policies produce benign negative results in that an out-on-the-surface, lessregulated, more-permissive market for coca leaves results in less corruption. A graphical illustration of the evolution of the price of coca leaves and corruption levels as a share of GDP—both expressed in terms of January 2000 values—during three key political periods in Bolivia’s recent history is presented in Fig. 2. The three distinct political periods shown on Fig. 2are characterized by different sets of economic and political principles and are arbitrarily referred to in this work as ‘neoliberal period’, running from the early 1990s to around December 2001; the ‘decomposition period’, which is estimated to have occurred between January 2002 through October 2003; and the current ‘populist period’ which encompasses the decomposition period and has yet to find a clear ending point. Loosely, the neoliberal 9 period is characterized by market-friendly policies, which, ironically, ran in parallel with the most inflexible and rigorous eradication policies—reflected in Plan Dignidad—pursued by democratic governments during this time. The decomposition term refers to the period of time during which a decentralized, market-friendly Bolivia began to give way to more government intervention in all areas of economic life, and the populist term refers to the period of time during which the country explicitly moved away from a market-led economy towards a government-led type of economic system. 9 In Bolivia, as in most of Latin America, the term ‘neoliberal’ is only generally associated with the economic liberalism advocated by classical and neoclassical theories of economics. Its meaning goes beyond the realm of economics and it is often used in a pejorative manner. 11 Page 6 of 23 Lat Am Econ Rev (2014) 23:11 123 Successful eradication policies—measured in terms of net reduction in the amount of cultivated coca leaves—ended with the last neoliberal government in 2001, when Plan Dignidad was for all practical purposes put to rest. Since then, and as the amount of cultivated coca leaves has consistently increased due to a reduction in the level of commitment of the new governments to the policy of coca eradication, the success of this policy has come into question. This paper argues that since around the end of 2001, but particularly during the years of Evo Morales’ presidency (2006—present), the market for coca leaves has become less controlled, more permissive to market forces than to government action. This fact is reflected in production levels, which, according to United Nations Office on Drugs and Crime, have increased substantially in the past decade, with an approximately 60 % increment between 2001 and 2012. Production levels have not, however, reached the levels of the early and mid 1990s, when Bolivia accounted for about a quarter of the global production of coca leaves. Demand has also increased considerably during the same years—also a sign of a less controlled coca market—as the price of coca leaves has increased by 130 % only between 2006 and 2012. Despite the greater permissiveness of the coca market during the past decade, however, Fig. 2shows that the ratio of corruption to GDP—expressed in 2000 values—declined the most during the 2000s, as the country moved from a marketfriendly economic environment to its current state of greater government intervention. Understanding the reasons behind this seemingly contradictory pattern of behavior of corruption is a key objective of this paper. 2.2 FDI inflows and corruption With respect to FDI, the usual practice has been to analyze how corruption affects FDI inflows, the exact opposite of what is attempted here. Some authors show that there is a strong positive correlation between FDI and corruption, while others 0 40 80 120 160 0 40 80 120 160 200 240 280 320 94 96 98 00 02 04 06 08 10 12 Price coca leaves Corruption on GDP Price coca leaves Corruption on GDP Source: UNODC, PRS Neoliberal Period Decomposition Period Populist Period Fig. 2 Corruption, coca and political cycles, 1993–2012 Lat Am Econ Rev (2014) 23:11 Page 7 of 23 11 123 argue—Mauro (1995) is a case in point—that FDI is reduced as the level of corruption in the host country increases. The latter finding has become particularly important in the past decades as several governments and multilateral bodies have enacted laws explicitly outlawing the practice of bribing officials in host countries. 10 Hines (1995) demonstrates that ‘US multinationals’ routine engagement in bribery’ changed dramatically in 1977, when the Foreign Corrupt Practices Act (FCPA) was enacted and outlawed the bribing of foreign officials. Wei (2000b), adding further to the consequences of FCPA, found that US investors are averse to corruption in host countries, though not necessarily more so than the average OECD investor. Kaufmann and Wei (1999) find that firms that pay more in bribes are also likely to spend more—not less—management time with bureaucrats negotiating regulations, implying that the business community can benefit from laws and collective initiatives strengthening its ability to say no to bribery. In a similar study, Wei (1997) concludes that corruption-induced uncertainty is more detrimental to FDI than taxes. Despite the effect of anti-bribery laws, several other studies have found that FDI inflows and corruption levels go hand in hand, particularly in cases where host countries do not possess appropriate institutional and regulatory frameworks. Additionally, with large infrastructure projects and privatization programs and when the size of potential economic rents is considerable, the incentives for corrupt activities increase. Tanzi and Davoodi (1997) offer evidence of a positive association between corruption levels and the provision of infrastructure; Schleifer and Vishny (1993) suggest that large-size projects offer more opportunities for corruption, especially if their value is difficult to monitor; and in a more recent paper, Egger and Winner (2005), analyzing a sample of 73 developed and less developed countries during the 1995–1999 period, find a clear and positive relationship between corruption and FDI, concluding that corruption is indeed a stimulus for FDI. In these studies, there seems to be a concurrence of factors that facilitate the emergence of corruption in FDI projects, such are market power of the industries that attract private investment, discretionary decision-making processes in host countries, and poorly accountable public officials. Among the few studies that analyze the effect of FDI inflows on corruption, Larraı ´n and Tavares (2004), considering a cross section of countries, find support for the hypothesis that FDI as a share of GDP is significantly associated with lower corruption levels. The study, however, only covers the period 1970–1994, and hence misses the period of time—1990s and 2000s—during which levels of FDI in Latin America in general, and in Bolivia in particular, reached record levels. Other similar, more recent studies are Gueorguiev and Malesky (2012), who find no association between the prevalence of corruption and FDI inflows in Vietnam, and 10 In the Americas, on March 29, 1996, the Inter-American Convention against Corruption (IACAC) was adopted by all member countries of the Organization of American States. It came into force on March 6, 1997, and its two main objectives are (i) to promote and strengthen the development by all member nations of the mechanisms needed to prevent, detect, punish and eradicate corruption; and (ii) promote cooperation among member states in the enforcement of the Convention’s goals. A similar undertaking was achieved on a global scale by the United Nations Convention against Corruption (UNCAC), signed by most member nations in December 9, 2003, and made effective on December 14, 2005. 11 Page 8 of 23 Lat Am Econ Rev (2014) 23:11 123 5.2 Instrumental variable estimates 23 Table 3presents instrumental variable estimates for three sets of equations. Each set contains two specifications: one for the whole period (January 1993– December 2012) and another for the Neoliberal period (January 1993– December 2001). In all cases, the dependent variable is the share of corruption on GDP and all specifications include real GDP per capita as a control variable since it is expected that, regardless of other factors, higher levels of income will lead to lower levels of corruption. 24 Additionally, all specifications include price of coca to determine the effect of the coca market on the dependent variable. Year dummies are included in the Neoliberal period specifications to capture the change in corruption over time due to possible omitted variables. For specifications covering the whole period, a dummy variable (Evo Dummy) is added to test for the impact of the Morales’ administration on the dependent variable (January 1993 to January 2006 =0; February 2006 to December 2012 =1). The selected instruments are one-period lagged values of all explanatory variables. The results show that, regardless of the specification, corruption levels are negatively and significantly affected by real GDP per capita, demonstrating that as Bolivia’s per capita income increases it becomes less corrupt. Furthermore, the share of FDI on GDP has the expected negative sign, though it is significant only when the whole period is considered. This finding implies that as FDI increases (decreases) the level of corruption decreases (increases). Formally, the size of the coefficient on this variable for the period January 1993–December 2012 indicates that an increase (decrease) in foreign investment inflows of 1 percent of GDP decreases (increases) the share of corruption on GDP by approximately 0.07 %. The investment climate hypothesis (H1) is then confirmed, at least when the whole period is analyzed. The effect of share of total trade on GDP, included to account for the degree to which corruption is affected by the openness of the Bolivian economy, is unclear, as its coefficient is positive and significant when analyzed with the control variable and the price of coca leaves in the specification covering the whole period, but insignificant for the Neoliberal period and when analyzed in conjunction with the other explanatory variables of interest. The openness hypothesis (H3) then cannot be confirmed. 23 The three set of regressions presented in this section were estimated with OLS and GLS in order to test the robustness of the IV estimates. Additionally, the basic specification was changed in various ways (i.e., expressing dependent and independent variables in terms of population instead of GDP, not expressing them in terms of other variables and simply utilizing nominal values) and in all cases the findings resemble the IV estimates. The results with the alternative estimation methods and specifications are available upon request. 24 Including GDP per capita as a control variable is based on the findings of several authors, ably summarized in Svensson’s (2005) survey on corruption, which demonstrates that, at least at the micro level, there is a well established inverse relation between levels of corruption and income for different countries. Lat Am Econ Rev (2014) 23:11 Page 15 of 23 11 123 Table 3 IV estimates (TSLS): determinants of corruption. Dependent variable: share of corruption on GDP (logs) Variable (1) (2) (3) Jan 93-Dec 2012 Jan 93-Dec 2001 Jan 93-Dec 2012 Jan 93-Dec 2001 Jan 93-Dec 2012 Jan 93-Dec 2001 Intercept 10.569** (51.87) 11.437** (11.48) 9.438** (33.10) 11.283** (8.66) 10.041** (24.32) 11.564** (8.23) Real GDP per capita -1.181** (-24.37) -1.509** (-6.02) -1.196** (-26.80) -1.416** (-9.70) -1.189** (-24.33) -1.514** (-6.11) Share of FDI on GDP -0.067** (-6.40) 0.023 (0.53) -0.061** (-5.13) 0.023 (0.52) Share of total trade on GDP 0.225** (4.08) -0.037 (-0.19) 0.127 (1.45) -0.022 (-0.11) Price of Coca -0.031** (-2.51) 0.097** (3.42) -0.059** (-4.39) 0.092** (2.74) -0.043** (-2.91) 0.095** (2.79) Evo dummy 0.066 (1.93) – 0.002 (0.06) – 0.015 (0.31) – Year dummies No Yes No Yes No Yes Instruments 5 5 5 5 6 6 Adj. R 2 0.94 0.85 0.94 0.85 0.94 0.85 # of observations 210 107 239 107 210 107 t-statistics in parenthesis ** indicates significance at the 5 % level of or above 11 Page 16 of 23 Lat Am Econ Rev (2014) 23:11 123 The results found for coca are very revealing. In all three sets of equations, when the whole period is taken into consideration, the coefficient for the price of coca is negative and statistically significant, implying that higher prices of coca leaves lead to lower levels of corruption in the country. Given the consistent increases in production and price levels throughout the 2000s, this finding reflects the current scenario of unsuccessful eradication policies which, remarkably, may have resulted in less corruption, not more (Scenario D,Sect. 2). Tellingly, when the same exercise is done for the Neoliberal period (January 1993–December 2001), the price of coca has a positive and significant association with the dependent variable, implying that during this period increases in the price of coca leaves actually increased corruption levels in the country. This result is even more striking considering that during the Neoliberal years successive government triedtotakeBolivia, unsuccessfully, out of the cocaine circuit by strict controls on the amount of coca plantations (through Plan Dignidad). The implication of this finding, aside from the obvious failure of eradication policies, is that those efforts increased the chances for corrupt activities in the country, and probably explain, at least in part, the current state of affairs in Bolivia. A second implication is that a lesscontrolled, less-penalizing coca market may be more conducive to lower levels of corruption in Bolivia, confirming the permissive coca market hypothesis (H2). As the head of the ‘Cocaleros Union’—a post Evo Morales has not renounced—the current head of state has explicitly allowed more legal coca plantations and has implicitly ignored the growth of illegal ones. 25 This laissez faire attitude towards coca growers has brought the coca market to the surface, and has, perhaps inadvertently, created a situation where the incentives and opportunities for corruption—that would abound when the coca market was heavily underground and regulated—have decreased substantially in the past few years. Finally, and with regard to the impact of the Morales’ administration on corruption levels in the country, the coefficient for the Evo Dummy variable has a (expected) positive sign, but it is statistically insignificant, implying that the impact of the current regime on the dependent variable is indeterminate. It is noteworthy that in all cases the impact of GDP per capita on the dependent variable is several times more important than the share of FDI on GDP and the price of coca leaves. Though this finding may seem curious, it is interesting to note that it is not at all unusual since other authors (especially Pinto and Zhu (2009), and Larraı ´nandTavares(2004), to some extent) have also found similar results, highlighting the importance of increasing wealth as the most important tool in reducing corruption. This observation also applies to the high determination coefficients (R 2 s) found in the estimated regressions, as 25 See http://www.state.gov/r/pa/ei/bgn/35751.htm for an appraisal by the US State Department on the Evo Morales’ new policy on coca cultivation. Also, refer to the yearly World Drug Report from UNODC for periodic reports on Bolivia’s efforts to eradicate illegal coca plantations. Lat Am Econ Rev (2014) 23:11 Page 17 of 23 11 123 Table 4 IV estimates (TSLS): determinants of corruption. Dependent variable: share of corruption on GDP (logs) Variable (1) (2) (3) Jan 93-Dec 2012 Jan 93-Dec 2001 Jan 93-Dec 2012 Jan 93-Dec 2001 Jan 93-Dec 2012 Jan 93-Dec 2001 Intercept 5.664** (28.77) 5.469** (26.52) 6.899** (10.55) 3.378** (4.12) 6.933** (9.36) 4.034** (5.52) Investment profile 0.094 (1.98) 0.005 (0.16) 0.143** (3.77) 0.089** (2.29) 0.093 (1.96) 0.029 (0.80) Risk for inflation -0.042** (-3.42) -0.004 (-0.26) -0.044** (-3.93) 0.013 (0.64) -0.040** (-3.19) –0.009 (-0.48) Share of FDI on GDP -0.085** (-3.72) -0.182** (-5.40) -0.082** (-3.55) -0.180** (-5.38) Share of imports on GDP -0.377** (-2.30) 0.267 (1.49) -0.314 (-1.78) 0.316** (2.05) Price of coca -0.140** (-4.07) 0.085** (2.18) -0.115** (-2.97) 0.148** (3.42) -0.106** (-2.70) 0.090** (2.32) Evo dummy -0.712** (-11.88) – -0.574** (-10.25) – -0.635** (-8.55) – Year dummies No Yes No Yes No Yes Instruments 6 6 6 6 7 7 Adj. R 2 0.79 0.75 0.77 0.67 0.79 0.76 # of observations 210 107 239 107 210 107 t-statistics in parenthesis ** indicates significance at the 5 % level of or above 11 Page 18 of 23 Lat Am Econ Rev (2014) 23:11 123 these estimates are also evident in other works (Pinto and Zhu (2009), for instance). 26 To test the robustness of the findings with the base specifications, the same set of regressions was estimated utilizing two alternative control variables (investment profile and risk for inflation) and an alternative trade openness indicator (the share of imports on GDP). These findings are reported in Table 4. As the findings in Table 4illustrate, the basic pattern of results does not change with alternative control and trade openness indicators. In all cases, the investment climate hypothesis is confirmed—i.e., the coefficient for the share of FDI on GDP is negative and significant—andthepermissivecocamarket hypothesis is confirmed as well, since the coefficient for the price of coca leaves is negative and significant for the whole period and positive and significant during the neoliberal period. The openness hypothesis, however, cannot be confirmed as the coefficient estimates for this variable behave in opposite direction to the base specifications reported in Table 3, hence demonstrating inconsistency and lack of clarity on the actual impact of alternative trade openness indicators on corruption. One distinct difference between the estimates observed with the base specifications (Table 3) and with the alternative control and trade openness indicators (Table 4), however, refers to the impact of the Evo Morales administration on the dependent variable. The findings with the alternative indicators show, unequivocally, that Evo has had a significant, decreasing impact on corruption, implying that since February 2006, when he assumed the presidency of the country, corruption levels have actually decreased. While interesting, this result should be taken with a grain of salt as the actual impact of his administration will only be clear—and more accurately assessed—with time (and more observations points). 6 Conclusions This paper makes a first systematic attempt to estimate the effect of FDI and coca on the level of corruption in Bolivia. It finds that FDI inflows and a more permissive market for coca significantly deter corruption. The significance of the coca findings suggests that a less-controlled, more flexible coca market is the principal avenue to reducing corruption levels in the country. The findings also point to the need to make Bolivia a more secure place for foreign investment. The impact of the openness of the Bolivian economy was found to be indeterminate, as was the impact of the Morales’ administration on corruption levels in the country. This study attempts to quantify the importance of the coca market as a possible source of corruption and suggests that efforts to curtail coca plantations are not the way to tackle the problem of drugs or of corruption in Bolivia. It points out to the need of a more pragmatic approach to the problem and the need to consider 26 High R 2 svalues are expected in time-series analysis, so the results that have been obtained are not that surprising either way. Lat Am Econ Rev (2014) 23:11 Page 19 of 23 11 123 alternative solutions to an issue that only seems to get worse with greater public intervention. A specific recommendation that would go far in demonstrating a more pragmatic understanding of the coca problem in countries like Bolivia would be the declassification of coca leaves as Schedule I drug under the Single Convention of Narcotics Drugs Treaty. 27 With this seemingly obvious—and rational—reform, the innocuous derivatives of coca leaves, such as coca tea, would gain a step on their harmful cousin, generating the conditions for a natural transition from cocaine to less harmful coca derivatives. Given the abject failure of the so-called war on drugs and the deep historical ties that Bolivia has with this leaf, it is difficult to understand the lack of interest that exists with the international community in even considering the amendment of a treaty that has proven to be futile in controlling either the production or consumption of cocaine anywhere in the world. Finally, and since corruption levels in Bolivia seem to decrease with less government control on the market for coca leafs, perhaps outright, unilateral formalization and legalization of all coca cultivations, regardless of their final destination, may produce the desired outcome of less corruption and more transparency in a country that certainly needs more accountability in every front. Acknowledgments The author wishes to thank Amparo Ballivia ´n for allowing access to valuable unpublished data; likewise to Benjamin Kohl for his helpful comments and suggestions. The author himself is solely responsible for any errors that may remain. Open Access This article is distributed under the terms of the Creative Commons Attribution License which permits any use, distribution, and reproduction in any medium, provided the original author(s) and the source are credited. Appendix See Table 5. 27 The Economic and Social Council of the United Nations, by resolution 689J (XXVI) of July 28 1958, decided to convene in accordance with Article 62, paragraph 4 of the Charter of the UN, and with the provisions of General Assembly, resolution 366 (IV) of December 3, 1949, a plenipotentiary conference for the adoption of a single convention on narcotics drugs to replace by a single instrument the then existing multilateral treaties in the field. The Single Convention on Narcotics Drug Treaty is the result of that conference and its conclusions still stand today. 11 Page 20 of 23 Lat Am Econ Rev (2014) 23:11 123 Table 5 Summary Statistics for the Period January 1993–December 2012 Variable Obs. Mean Std. Dev. Minimum Median Maximum Corruption 1 240 3.63 0.52 2.50 (2001:09–10) 4.00 4.50 (2012:07–12) Investment profile 2 240 5.08 2.41 1.00 (1997:08–1998:03) 6.00 9.00 (2006:05–2008:06) Risk for inflation 3 240 1.89 0.98 0.00 (1999: 07, 10–12; 2002:07–2003:09) 1.50 4.00 (1993:01–10; 1996:07; 2008:06–10) Price of coca ($/Kg) 240 4.29 1.98 0.80 (1994:02, 1995:03) 5.10 8.91 (2012:09) FDI ($) 240 42,059,958 36,625,671 -67,800,000 (2005:11–12) 40,366,666 134,000,000 (1999:11–12) Exports ?Imports ($) 240 535,000,000 428,000,000 153,000,000 (1993:01–03) 286,000,000 1,860,000,000 (2012:10–12) Imports ($) 240 235,000,000 172,000,000 64,730,000 (1994:01–03) 154,000,000 739,000,000 (2012: 07–12) GDP per capita ($) 240 103.61 40.31 64.42 (1994:06) 84.08 226.09 (2012:10–12) Dollar figures represent nominal values Numbers in parentheses reflect years, months of occurrence 1 Own scale (0lowest corruption, 6highest corruption) 2 Own scale (0very low risk of investment, 12 very high risk of investment) 3 Own scale (\2%=0; 2–2.9 % =0.50; 3–3.9 % =1.00; 4–5.9 % =1.50; 6–7.9 % =2.00; 8–9.9 % =2.50; above 130 % =10) Lat Am Econ Rev (2014) 23:11 Page 21 of 23 11 123 References Ades A, Di Tella R (1999) Rents, competition and corruption. 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