Austerity (and inequality) in corrupt countries – a conference with Joe Stiglitz

Stiglitz made an excellent point that according to the efficient market hypothesis money should always flow to where it’s most productive. However because of asymmetric information this doesn’t always happen. Conclusion: markets are imperfect. This effect is even more profound when governments push money into the system. When the Croatian government increases public spending to build infrastructure projects, to subsidize public or private sector firms, or to boost investments, there is an immense adverse selection effect. Money flows to politically connected firms and individuals. This is something I prove empirically for Croatia: public procurement is highly subject to corruption, and the higher the corruption in public procurement, the greater the reelection chances of local politicians (up until a certain cut-off level). The interlink between corrupt politicians and quasi-entrepreneurs is just too big, and is creating a substantial drag on domestic growth. The same thing can be observed in Greece, Italy, or Spain. There is no substantial difference. Corruption is systemic. Conclusion: governments are imperfect.

via http://im-an-economist.blogspot.co.uk/2015/05/austerity-and-inequality-in-corrupt.html

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