Invest in Chicago, you'll make out like a bandit.
Illinois awaits you with open palms.
For years, marketing efforts to lure investment and business here have focused on our standing as a global crossroads, our quality of life and so on. Alas, we've neglected a selling point that may be more enticing than we ever suspected:
Our corruption.
It's demonstrably better to be clean and beyond reproach, but an academic study of how corruption affects investment, market liquidity and capital costs in a variety of nations has revealed "a perverse level playing field." Highly corrupt countries, like Venezuela, turn out to be more reliable bets for investors than those that are merely moderately corrupt, like Mexico. It's not pretty, but it's true.
"And what we found can also work at the state level," said Texas A&M's Emre Kuvvet, who worked on the study with fellow professors Michael Pagano of Villanova and Pankaj Jain of the University of Memphis. "Your question is whether a state like Illinois with a high corruption rate makes a better investment than a state with a moderate corruption rate, and my short answer is yes. The reason is that the return for your bribe is more certain in a highly corrupt environment."
It turns out that a very corrupt state offers its own kind of transparency. You apparently can bank on honor among thieves.
"Everybody knows who to pay and how much to pay for the system to work," Kuvvet said. "The problem in moderately corrupt states is that the return on bribery is not certain. You don't know who to bribe. You might have to bribe several people, and you don't know the outcome."
Former Obama White House Chief of Staff William Daley and World Business Chicago Vice Chairman Michael Sacks surely aren't touting it as they sing the praises of city and state this week in meetings in China with business and government bigwigs, but Chicago just last year was deemed the nation's most corrupt city and Illinois the third-most corrupt state in a well-publicized analysis.
That finding by the University of Illinois at Chicago's political science department and the Illinois Integrity Initiative of the University of Illinois' Institute for Government and Public Affairs put the price to taxpayers for our corruption at north of half a billion dollars a year. "Corruption is not funny and it is not free," the report said.
It would be nice to know we at least were getting some kind of return on investment. But before we move to replace "Land of Lincoln" with "Where Payoffs Pay Off" on our license plates, it's worth pointing out that those dubious distinctions vis-a-vis other U.S. cities and states almost certainly don't make us anywhere near as suspect as Venezuela is compared with other nations as indexed by Transparency International.
"If your (country is) pretty far down on that list, there's a good chance that if you're bought, you're going to stay bought, whereas in the United States, perhaps the gradations aren't that severe," Pagano, who wrote about his group's international investment findings in a New York Times blog post, explained by phone.
Jain cautioned by email that "we have not empirically tested" the international findings at the "state or city level yet," although that is on their agenda. Also on tap, Pagano said, is a look at the effect operating in a corrupt environment has on companies. Not surprisingly, Pagano said early findings show that getting caught doing something illegal or unethical ups costs and upsets investors who might otherwise look at such transgressions as the cost of doing business.
Some simply find it easier to think of corruption as a hidden tax. But if it is, it's a costly one. Crime only pays so much.
Raymond Fisman of Columbia Business School and Jakob Svensson of Stockholm University a few years ago examined bribe payments, taxes and business growth for companies in Uganda. They found a 1 percent increase in bribery cost firms 3 percent growth, or three times more harmful than a tax increase.
"The reason is, the bribery is secret, and in the secrecy is uncertainty," Kuvvet said.
Uncertainty makes risk assessment exceedingly difficult and everything tightens, which is the appeal of the very clean and the very dirty.
"If it's really clean and transparent, you attract a lot of investment, the cost of capital goes down, trading costs go down and all that, because it's a safe environment," Pagano said. "If you're moderately corrupt, you're better off trying to move in the clean direction. But if you are pretty far down in the ratings and you can't move up, moving down, ironically, does help you a little bit. I wouldn't advocate it in terms of a national (state or municipal) strategy, but that's what the statistics show."
There are more than half a billion reasons to want and need Chicago and Illinois to clean up their respective acts.
In the meantime, we're Chicago, Illinois. Let us fix something for you.
Twitter @phil_rosenthal
