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December 14, 2010

Bureaucracy, Corruption and Incompetence

Bureaucracy, corruption and incompetence in government and in the processes of a nations system are closely related to the overall effectiveness and efficiency of a nation.

What costs more bureaucracy or corruption or incompetence ?

Depending upon the situation they can all be the dominant cost and they work together to increase costs to society and to projects.

Bureaucracy and incompetence increased costs by 700% (from $780 million to over $6.3 billion) on the San Francisco Bay Bridge repair. If China levels of corruption increases costs by 30%, then the US should considering trading bureaucracy and incompetence for corruption. The Bay Bridge had a 10+ year delay in getting started had resulted in the project running into commodity inflation in steel and concrete which would not have been a problem 10 years earlier. There were ongoing delays and cost increases. There were continuing delays from bureaucratic flip-flopping on what was to built.

Political lobbying is also a systemic inefficiency.

Corruption means that people give money to politicians to make them do something.

Lobbying means that people spend money to convince politicians to make them do something

Lobbying/election fund raising are just less efficient corruption.

Incompetence means that success costs a lot more or success is impossible.



There is a 46 page paper that looks at "The Effect of Bureaucracy on Corruption: Evidence from the Regions of the Russian Federation"

Bureaucracy and corruption have long been considered to be intrinsically connected. Bureaucrats are stereotyped as greedy, corrupt drains on the economy, siphoning away public funds and extracting bribes for their own personal gain. While bureaucrats are often in a unique position to abuse their governmental powers, the connection between bureaucracy and corruption is not as simple as it initially appears.

The presence of corruption can undermine the legitimacy of a government, and inhibit the growth of efficient and equitable markets. If left unchecked, it can incite crime and destabilize formal legal institutions.

In addition to extensive corruption, Russia also has an expansive bureaucracy. The country’s vast size and considerable population have historically necessitated a large government with a dense bureaucracy that has carried over into modern times. Combined with the high prevalence of corruption, Russia provides an opportunity to study the connection between bureaucracy and corruption in a controlled manner.

Contrary to common assumptions about bureaucracy, this paper finds that larger bureaucracies tend to be associated with less corruption than smaller bureaucracies. This may be because in areas with a larger pool of bureaucrats to choose from, it is easier to find bureaucrats who will perform their duties without demanding additional payments.

This is an analysis of corruption as bribes, but more bureaucracy can also become legitimized corruption and waste. More bureaucracy can mean more delays and more time is a cost on business. Legal yet wasteful and unnecessary jobs and payoffs become part of the system.

Bureaucracy or corruption? Two sides of the same coin

US, India and China cases

Corruption threatens China's future and has a 3% cost

Corruption poses one of the most lethal threats to China’s future economic development and political stability. Illicit activities such as bribery, kickbacks, theft, and misspending of public funds cost at least 3 percent of GDP. To estimate roughly the direct cost of corruption, we can suppose that 10 percent of government spending, contracts, and trans- actions is used as kickbacks and bribes or is simply stolen. The Chinese government’s procurement budget in 2005 was 300 billion yuan. The so-called administrative spending in China’s official budget, about 20 percent of the total spending (470 billion yuan in 2003), is another juicy target. If 10 percent of the procurement budget and administrative spending is stolen or misused, this would amount to 0.65 percent of gross domestic product. Sales of land user rights by the government generated 580 billion yuan in 2005. Bribes to local officials could easily amount to 10–20 percent of the revenues generated (58–116 billion yuan, or 0.5–1.0 percent of GDP). In 2003, the state-owned entities spent 2.1 trillion yuan (19 percent of the GDP) on fixed- asset investments. If 10 percent were stolen, it would cost nearly 2 percent of GDP. The odds of a corrupt official going to jail are less than 3 out of 100—corruption is a high-return, low-risk activity.

3% of GDP is a relatively tiny amount of waste. It should still be fixed or reduced. However, it seems there are higher levels of waste in bureaucracy and incompetence and more subtle corruption.

Bureaucracy and corruption are major problems for India

A 2005 study done by Transparency International (TI) in India found that more than 75% of the people had firsthand experience of paying bribe or peddling influence to get any type of job done in a public office. Taxes and bribes are a daily life fact, common between state borders; Transparency International estimates that truckers pay annually US$5 billion in bribes. For 2010, India was ranked 178th of 191th countries in Transparency International's Corruption Perceptions Index, which was a huge setback from the preceding year.

The original cost of the San Francisco bay bridge was $77 million and was built from 1933 to 1936.

The repair to the bridge from the 1989 earthquake will cost over $6.3 billion (from 2002 to 2013 or longer) Construction began in 2002 and could run to 2013 or longer. The delay to get started had an economic cost to the area because of traffic problems.

The initial proposal for the eastern span involved the construction of substantial concrete pylons to replace or supplement the existing supports. There would also be modifications to the lattice beams as is now complete for the western span. The original cost estimate for this refit was $200 million. The overall appearance would be little changed. Owing to the retention of the original structure the bridge's ongoing maintenance costs would continue to be high compared to a replacement span.

Engineering and economic analysis in 1999 suggested that a simple replacement bridge would cost a few hundred million dollars more than a retrofit of the existing eastern span and that a replacement would have a far longer expected useful life — perhaps 75 to 100 years rather than 30 — and would require far less maintenance. Rather than retrofit the existing bridge the authorities decided to replace the entire eastern span.

The authorities were shocked when they opened the bids on the proposed tower portion, as there was only a single bid and it was considerably more expensive (US$1.4 billion) than their estimate ($780 million), partially because of a recent and unexpected rise both in the cost of steel and of concrete

The 10+ year delay in getting started had resulted in the project running into commodity inflation in steel and concrete which would not have been a problem 10 years earlier.

Lobbying in the United States in 2009 was a $3.5 billion activity The 2010 election had $4 billion in costs.

The increasing problems in the United States to complete large projects in a timely and affordable fashion is an indicator of bureaucracy, corruption and incompetence levels that are afflicting the nation.

On corruption in China from Newsweek

One chairman of a large European firm, who has worked in a number of developing markets, makes this comparison: "In Russia, if there's $100 in the bridge-building pot, the official takes $90. In China, they take $30, and at least you know the bridge will eventually get built."

What will happen with the California high speed rail project? A tiny (not commercially usable) 65 mile section will start construction in central valley with $4.3 billion in funds. Construction in the Central Valley is expected to start in 2012 and finish in 2017.

The Beijing–Tianjin Intercity Railway cost ¥20.42 billion (US$3 billion) to build and was financed by China’s Ministry of Railways and the governments of Beijing and Tianjin. (73 miles). The costs include all of the high speed trains as well as the track.

The highlight of China's high-speed rail network will be the 1,318-km Beijing-Shanghai line. Currently under construction, the 220.9 billion yuan (33.1 billion U.S. dollars) line is scheduled to open in 2012. The 819 mile long trip will take 5 hours.

There is a 37 page paper that suggests creating competitive systems among bureaucrats. If firms are granted the option of obtaining licenses and other services from many mostly independent sources in a bureaucracy there could be an effect of reducing inefficiency and waste.

FURTHER READING
Bureaucracy at wikipedia

Construction costs in Europe (uses index to compare across time in the same places)- 4 pages

Highway construction costs in the USA.


A parity/index for comparing building construction costs between the USA and China.

Building in China is approximately 40 percent less expensive than in the US. This uses the exchange rate from the Parities/Index table. It is possible to use a different exchange rate.

World construction review



This page explains how to use the parity index to estimate project costs



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