FYIl-Replace Sochi with “Spacepork” THE FINANCIAL PAGE ‘THE SOCHI EFFECT hatever happens on the ie and snow of Soci in the next couple of weeks, one thing is cerzin: this Winter ‘Olympics isthe greatest nancial boondogeein the history of. the Games. Back in 2007, Vladimir Putin said that Russia ‘would spend twelve billion dollars on the Games. The actual amountis more than fifybilion. (By comparison, Vancouvers ‘Games, n 2010, cost seven billion dolar) Exhaustive inves- tigations by the opposition figures Boris Nemtsoy, Leonid “Martynyuk, and Alexei Navalny reveal dubious cost overuns and outright embezzlement. And allthis lavish spending (largely paid for by Russian taxpayers) has been, as Nemtsov and Martynyuk write, “controlled largely by business people and companies cose to Putin.” Sochi is emblematic of Russia's economy: conflicts of interest and cro- nyism are endemic. But the link be~ ‘been conption and construction is a problem across the globe. Transparency International has long cited the con~ struction industry asthe worlds most corrupt, pointing tothe prevalence of bribery, bid sgging, and bill padding. . ‘And, while the sheer scale of graft in i Sochi is unusual, the practice of pli- cians using construction contracts to ” line their pockets and dole out favors isn't, Tn the past year alone, Quebec Jeamed about sytematic kickbacks and ‘Mob influence inthe awarding of city construction contracts. In Turkey, Prime Minister Recep Tayyip Erdogan has ‘become embroiled in a vast scandal involving f¥endly con- struetion tycoons who were given cheap loans and no-bid contracts. And a recent report from the accounting frm ‘Grant‘Thornton estimated that, by 2025, the cost of fraud in ‘the industry worldwide will have reached $1.5 wilion, ‘What makes construction so prone to shady dealings? ‘One reason is simply that governments are such huge play= cersin the industry. Notonl are they the biggest spenders on infrastructure; even private projects require government ap rovals, permits, worksite inspections, and the ike, The more rules you have, and the more people enforcing them, the more opportunities there are for corruption. And, in many counties, the process of awarding contacts and permits is ‘opaque. As Esk Lioy, forensic accountant and faud expert at Grant Thornton told me, “When it’ not lear how proj- ects get approved, people assume the worst, and that provides incentives todo a bribe or kickback” (On big government projects, additional factors kick in. Such projects are rare, and construction work is erratic, so polscians with contracts to award have immense leverage. ae For contractors, bribery wil always be ateactive, because the costofa brie is dwarfed by the value ofa contract—an effect known to economists as the Tullock ‘And, asastudy bby Nell Sensbury, the co-founder of the Global Infastruc~ ture Anti-Comuption Centre, putt, when a projects big itis easier to hide arg bribes.” Then, too, Lioy explains, “most big pojects involve building something unique, or at least something thats never been bail in that pace before, and that makes itharder to estimate if costs are reasonable” Corruption is obvious only when costs are completly al surd—which Nemtsov and Marynyuk have shown is the ‘ase with Soch’s ie arenas and ski jumps. Sochi is a monument to Putin’s Russia—a nationalist showeas, intended t demonstrate just how fur the country thas come in te past two decades. Ithas also given Russia its first world-class winter resort, and has significantly developed the infrastructure of the Caucasus. In that context, over- spending can become, perversely, a point of pide. The con- ‘tractors on the Pyramids almost cer~ tainly padded the bills too. Tes no surprise that graft-ridden grandiose projects are most common in countries where government isn't accountable. But even politicians who (aolike Putin) have to worry about being relected often see benefits ia unnecessary or wastefil construction spending, because i gives the economy 2 short-term boost. Turkeys construc- tion spre, for instance, has played a ‘major roe in ifs economic boom. Con- struction creates jobs, and often reason- ably well-paying ones. That's why, TF going back tothe days of Boss Tweed, pouring money into constction proj cctshas been a key part of what’ some- times known as populist lentes system thatallows politicians both to reward cronies and to appeal to voter. ‘Butan economic boost based on comupt spending isan i- lusion, the equivalent ofa sugar high, Paolo Mauro, an econ- omist at the LMLF,, says simply, “Corruption is bad for economic growth.” Ifs well documented that comuption dis- courages investment, because it makes businesses uncertain shout wht eakesto get ahead as one study putt, “Arbiteai- ness kills" Corruption ao skews goverment spending. The economists Vito Tanti and Hamid Davoodi found that cor- :uption leads politicians to overinvestin low-quality infrastruc- tre projects while skimping on maintaining existing project. (easier to collect bribes on new construction than on main~ tenanee) And, in pathbreaking study nearly twenty years ago, ‘Muro found that countries with high levels of eoeruption spent litle on education. In esonomist-speak, corrupt poiti- clans put too much money nto physical capital and not enough ‘nto human capital. Crony construction capitalism leaves us with too few teachers and too many si jp to nowhere. James Suroriecki 24 THENEW YOUEA FEBMLARY 10,204