Corrupted Politicians Do Not Want To Be Constrained by Their Bureaucracy

In an interview with Giancarlo Grignaschi, Mihaly Fazekas argues that political appointees in federal agencies exercise pressure to create conditions for individual tenders and contracts that can be exploited for politically convenient purposes.

Mihály Fazekas is Assistant Professor at the Central European University, School of Public Policy. He is also the scientific director of the Government Transparency Institute, while serving as a non-resident research fellow at the University of Cambridge. His research and policy interests revolve around corruption, favoritism, private sector collusion, and government spending efficiency. He regularly consults the European Commission, Council of Europe, EBRD, OECD, World Bank, and range of national governments and NGOs across the globe. In 2020, he won the IMF’s Anti-Corruption Challenge leading an interdisciplinary team from across government and academia.

Giancarlo Grignaschi: Your article Partisan Procurement: Contracting with the United States Federal Government” is about the relationship between agency design and favoritism. How do you describe such a relationship and why is it relevant?

Mihaly Fazekas: The article talks about US government spending on government contracts, and this is crucial for understanding how a federal government functions, for spending is about providing several essential services – such as schools, roads, or the technology required by the latter. Also, 

government spending is highly relevant because of its scale and the amount of money involved, as well as the particular areas or companies that can be targeted. 

For these reasons, we believe that government spending has wide-ranging political implications. In particular, by looking at federal contracting, within a ten-year period which spams over different US Presidents, the aim is to measure how – and to what degree – the independence of federal agencies influences favoritism in contracting.

In the light of what you have just explained, it would be interesting to learn more about the core concepts of the paper, namely favoritism – the dependent variable,  and politicization – the independent variable. Also, can you tell us more about their measurement?

This is, indeed, a crucial point, for we believe that one of the strong suits of the article is measurement and the use of data. In this regard, the article goes beyond most previous studies in the field, which rely on experts’ assessment or outsiders’ view on favoritism and insulation. We do not, nor should we rely on surveys or self-reported experiences. Instead, our focus is on behavioural data coming from a number of different reports from both sides of the equation. 

When we look at the dependent variable, favoritism, measurement employs public procurement data and is run at the level of contracts, therefore being very detailed. The total number of contracts examined is over half a million. The likelihood of favoritism is captured by the concurrent occurrence of two factors: one is on the outcome side of the tendering process, when this is non-competitive in relation to otherwise competitive markets; the other one is the input side of the potential favoritism, which is about the choice of the agencies’ staff to run non-competitive procedures rather than the default competitive process. When we observe these two things together, we believe there is a high risk of favoritism. Also, we investigate another potential instance of favoritism looming when there is a change in the presidency. 

A new presidency may imply a change in the suppliers’ composition which, in turn, is another sign of favoritism.

On the independent variable side, we have a number of measures for the design of agency insulation. On the one hand, these measures look at formal insulation, such as the degree to which the president can nominate political appointees or can influence budget and policy considerations. However, we also look at de facto politicization, where we measure the number of political appointees at different hierarchical levels, in order to compare this value with the total number of supervisors (the high-ranking official). A higher share of political appointees opens up more chances of political pressure upon the specific agency under examination.

An important part of the article refers to the relationship between the political appointee, his/her political party, and the firm which does business with the government – a dynamic already investigated by the literature. Can you tell us how does it work?

Indeed, in setting out the causal mechanism we rely on a rich scientific literature – specifically on the US, but also on other countries. What we have in mind is a cycle of influence flowing from the political party (and the President) through the political appointees in federal agencies and the contracts they award to particular firms, which then 

return the favor via donations or by providing employment and visible benefits in the battleground states. 

But let us see that at length.

The US President has a power to appoint heads or other senior bureaucrats in federal agencies. This power is assumed to be limited as well as depending on the agency. Also, senior leadership is only rarely, if at all, involved in the minute details of the tendering process – such as writing the terms of the tender or choosing the degree of competitiveness. Nevertheless, our impact mechanism puts forward the argument that political appointees, either through hierarchical channels or themselves, exercise pressure to create conditions for individual tenders and contracts that can be exploited for politically convenient purposes. For instance, political appointees influence the tendering terms and tailor the tender in favour of a certain company, thereby killing competition or making it much easier for a specific company.

Importantly, we observe that 

firms benefiting from this process will then have the power to enact certain strategies on quality and quantity, 

such as overpricing, which make for extra profits. Such profits can flow back to the political party, in order to support campaigning, or back to the community – which is relevant for the voters in battleground states.

In the light of the tremendous relevance of such dynamics, I would like to ask you about the implications of your findings, one example being which contracts will be concluded in so-called swing states after President Biden took over on January 20th; also, I would like to learn more about the implications beyond the US, for instance for CEE countries.

Our paper joins a long-standing literature which does not only focus on the US. Picking just a few important points from our findings and their implications, we notice the following. On the one hand, 

there is some degree of tension between democracy, specifically voters’ will, and permanent bureaucracy. 

This is because of the argument that politicians represent the people, therefore they have to implement peoples’ preferences. On the other hand, different considerations maintain that we have long-term goals and regulations which are designed to ensure that public money is spent in both an impartial and efficient way. 

The tension between the two views is particularly important. On the one hand, we could argue that politics should be able to channel money to whichever state is politically relevant; on the other hand, it is logical to maintain that government should be impartial. That is exactly why we argue that there should be a balance between political independence – and agency insulation – and responsiveness to democratic demands. In this regard, we point out that it is possible to measure accurately that fine balance, whereby there is not too much political pressure and sufficient demand of insulation. Our argument is that, 

in order to safeguard the long-term polity’s interest (the common good), as well as principles of efficiency and impartiality, we need bureaucracy to operate at a certain degree of insulation.

Of course, the above has wide implications in moments of transition, for instance from President Trump to President Biden. At the same time, when we think of CEE countries such as Hungary and Poland, we can observe that political leaders do exercise  favouristism that encourages favoured companies to make donations to political campaigns. Importantly, one of the first things these politicians do, either gradually or rapidly, is to roll back civil servants’ protection and a number of other safeguards against politicization. I believe such dynamics provide additional confirmation to our theory, in that corrupted polticians do not want to be contrained by their bureauracy which is over-seen by impartial laws.

Collaboration: Robert Nemeth, Karen Culver

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