Shining light in dark corners

How an economist became interested in the murky world of corruption

By Paul Constance

Bill Savedoff, a senior economist in the Social Programs and Sustainable Development Department of the IDB, has devoted much of his career to studying why so many government services in Latin America fail to fulfill their mandate. “My research into health and education has always focused on what I have come to see as the major constraint to social development in the region: ineffective and inefficient public services,” he recently told IDBAmérica.

Not long ago, Savedoff focused primarily on “the kinds of inefficiency that occur when institutions provide the wrong incentives and signals to managers and staff, and deprive those same people of the tools and discretion they need to do a good job.” But when he was asked to coordinate a group of country studies on fraud in public hospitals, Savedoff discovered “a different source of ‘inefficiency,’ namely corruption, that I had not previously thought to be significant in the social sectors.” The studies led to Diagnosis Corruption, which Savedoff edited with Rafael Di Tella, an assistant professor of economics at the Harvard Business School.

Savedoff received a PhD in Economics from Boston University. He taught economics at several U.S. universities and worked as an associate researcher at the Instituto de Pesquisa Econômica Aplicada in Rio de Janeiro before joining the Bank in 1991. At the IDB Savedoff has worked as a project economist in water, sanitation, housing, and urban development programs. In 1994 he joined the Bank’s Office of the Chief Economist and began conducting research in the education and health sectors. He has coordinated mayor research projects on the institutional and management aspects of health care and water services, and was co-author of the IDB’s Strategy for the Delivery of Social Services.

Savedoff spoke to IDBAmérica from Geneva, where he is currently serving a one-year assignment to assist the World Health Organization in developing a policy toward the best way to finance health systems.

IDBAmérica: Why did you decide to examine corruption in public hospitals instead of in other sectors, such as customs or public works?

Savedoff: The project began as a request from the IDB’s Legal Department to the Office of the Chief Economist to conduct research on corruption. When Ricardo Hausmann, who was chief economist at the time, asked me to design a research project on corruption, I decided that it made little sense to do research in areas such as customs, public works, and judiciary that have been discussed more extensively by others. Given the Bank’s concern for social sectors, my own areas of expertise, and what I had heard about abuse in public hospitals, I decided to see if we could design a research project around this subject.

IDBAmérica: Why is impunity so pervasive? Is this a unique aspect of the public health system, or symptom of the general weakness of judicial systems?

Savedoff: Our research didn’t really look into these questions, but I don’t believe impunity is a unique aspect of health systems. It is a more general problem in Latin American public institutions that, unfortunately, has a long history. Part of the heritage of autocratic and authoritarian regimes has been impunity for the powerful when it comes to grand theft—and this erodes public institutions that would otherwise punish the “smaller fish” who take bribes or steal public supplies.

IDBAmérica: To what extent is secrecy a part of this problem? In other words, would corruption diminish if public hospitals were required to publish detailed financial and administrative reports?

Savedoff: Unfortunately, most public hospitals wouldn’t be able to publish detailed financial information because they don’t have it themselves. This is the result of public administration systems that lack basic accounting and accountability mechanisms. I think corruption would diminish, first, if public health systems improved their basic management information. Making that information public would help even more. In this regard, I have heard that Mexico and Chile are making public procurement information available on the web. That strikes me as a good beginning.

IDBAmérica: Some of the surveys indicate that people view payments of some sort as a normal part of obtaining health services—partly because they know that many public health workers are poorly paid. Would it make sense to simply legalize and regulate these payments?

Savedoff: Sometimes legalizing these payments would make sense. It improves public health workers’ incomes, gives them an incentive to be responsive, and, interestingly enough, research shows that when people pay for services, they tend to value them more. Nevertheless, such payments also will deter some people from seeking services that they need; and this is the main justification for providing free health services in the first place. The best solution is to improve personnel management along with improvements in pay. But in cases where this is impractical, legalizing such payments is worth considering.

IDBAmérica: If public hospitals had more financial autonomy and were required to be at least partially self-sustaining, would corruption decline?

Savedoff: That is an interesting question because it gets to the main point of the research. Someone in the system has to be interested in stopping the corruption. As long as staff and managers think of theft and abuse as someone else’s business, or being paid out of someone else’s pocket, it is difficult to imagine them making significant efforts to report and control corruption. Hospitals do not have to be financially autonomous to have such an interest in reducing abuse, but it is certainly one way, and a very strong one, too. When hospital directors know that they have to meet expenses out of a fixed budget, then theft and abuse are something they have to care about. The trick is to make sure that the budget constraint really is fixed, and that the hospital director has the tools necessary to manage the hospital. All too often, end-of-year deficits are simply covered by the government, and directors frequently lack the most basic ability to sanction their own staff for misconduct.

IDBAmérica: Is the phenomenon of local hospital boards gaining popularity in Latin American countries? Can such boards do a better job of ensuring financial and professional accountability that central government bodies?

Savedoff: Yes. More local involvement in the management of hospitals, and even primary care facilities, is becoming more and more common in Latin America. And there are many experiences that have been successful. But it is not a panacea. Experiences vary widely depending on local politics and capacities. And it also isn’t a replacement for central government bodies. It just changes the way the central government is involved in oversight.

IDBAmérica: Would it be useful to conduct a similar set of studies on public schools and universities in Latin America?

Savedoff: I don’t think that the issue will be quite as important in primary and secondary public schools because there is a lot less scope for these kinds of abuses. Universities might be worth looking into. But I think the next stage of research has to look into what happens “above” the facility level. We were only able to look at what happens inside the hospitals. But a lot of the corruption, and maybe the worst corruption, occurs at the managerial levels outside the hospitals in awarding contracts for construction, importing expensive equipment, allocating budgetary resources, etc. This would be much more difficult to research, but that is no excuse not to try.

Date posted: January 2002