A program implemented by a nongovernment organization called ICS Africa in Kenya suggests that when headmasters implement incentives, the incentives might lose their power. ICS Africa introduced an incentive program for preprimary school teachers. The headmaster was entrusted with monitoring the presence of the preprimary school teacher. At the end of the term, a prize (a bicycle) was offered to teachers with a good attendance record. If a teacher did not have a good attendance record, the money would remain with the school and could be used on whatever the headmaster and the school committee preferred. Kremer and Chen (2001) report on the results of this experiment. In all treatment schools, the headmasters marked the preschool teachers present a sufficient number of times for them to receive the prize (and they therefore all got it). However, when the research team independently verified absence through unannounced visits in both treatment and comparison schools, they found that the absence rate was actually at exactly the same high level in treatment and in comparison schools. Either to avoid the unpleasantness of a personal confrontation, or out of compassion for the preschool teachers, headmasters apparently cheated to make sure that the preschool teachers could get the prizes.
While the whole of our European leadership is engaged in talking about centralizing banking supervision without worrying about the risks of increased regulatory capture if such supervision is built without a strong accountability framework, I am thinking that corruption works in a different way.
Corruption in Europe is more fragmented than banking. But it is more concetrated locally. Mafia is strong in Italy, weaker in Europe taken as a whole. Corruption is also on the rise in Southern Europe vs. Northern Europe (see below), affecting heavily the competitive divide and the euro crisis.
So now I propose to you the following. Forget about centralizing banking supervision, dangerous and rather secondary compared to a reform that leads to better accountability of the current supervisory structure. Focus on something else.
Focus on centralizing the anti-corruption fight. Italy will never be able to fight corruption on its own, too high are the riks of the new national anti-corruption authority being captuted by local interests. Create a European Anti Corruption Agency and fund it well, very well. Economies of scale can be large.
And then send German inspectors in Italy. Now that would work. That would make Germans beloved in our country. That would make the Italian industry able to compete again on a fair ground with German firms. That would unite Europe.
In Italy we have a say that says something of the kind: “you wanted the bike? now pedal.” It is time Germany and Italy start pedaling in tandem with the euro bike.