Here's some of what Milanovic has to say in his essay, Globalization and the Corrupt States:
Intensified trade and travel have enabled the rise of corrupt states that thrive on illegal businesses. Only by changing the rules of the same global trade that has allowed corrupt states to grow can one hope to remove this blot on globalization.
"Corrupt states" are different from a more commonly used category of "failed states." The distinguishing characteristic of a failed state is its inability to exercise control over its national territory; a key feature of a corrupt state is its weak governance structure, lawlessness and inability to move toward self-sustained development. While failed states have existed in the past - think of the Ottoman Empire in its last century - the spread of corrupt or criminalized states is a recent phenomenon, almost non-existent before the current wave of globalization. Is this a coincidence?
Globalization influences the relative profitability of different activities. In the US, globalization reduced profitability of steel production and increased it for software. In corrupt states, profitability soars in the production of goods and services that are internationally illegal: drugs, sex trafficking, contraband weapons or cigarettes, or counterfeit goods. . . .
Once organized crime and its supporters become the largest employers in the country, they play the same role that a more conventional business plays in other countries. They try to influence the political process. Moreover, they need to control the political arena - election of presidents and parliaments - even more tightly than "normal" business people because their very existence depends on having a government willing to tolerate violation of international rules as the country's main activity.
The government structure that emerges is "endogenous": It reflects domestic social and economic structure, which in turn is the outcome of greater international trade and economic incentives, much like other countries, except that the governance structure is, almost inevitably, more corrupt. The recent World Bank and International Monetary Fund's insistence on reforming governance in these countries is bound to fail because the cause is misdiagnosed.Governance is viewed by the international organizations as something "exogenous," something that a country just happens to have and which - through a better electoral process, more transparent laws and more honest lawmakers - can be improved. Thus the international organizations are in a permanent, and fruitless, search of an "honest" lawmaker, an Eliot Ness who will bust corruption and illegality. They fail to notice that governance structures respond to underlying incentives, and to expect an honest person to rise to power in a corrupt state is akin to expecting a person with no financial backing from big business to be elected president of the US. In both cases, the outcome of a political process reflects the country's underlying economic conditions.
A different approach is necessary: legalize the currently illegal activities like prostitution and drug use and modify the often draconian US and European immigration laws that stimulate human trafficking. If prostitution and drugs indeed became like haircuts and candies, their production would obey the same rules: Countries that export beauty services and confectionary products are not notably more corrupt than others. Some of the current entrepreneurs would remain in these activities, others would move to others. In either case, there would be a general "normalization" akin to what was observed after prohibition on alcohol sales was lifted in the US. Thousands of "bootleggers" became normal producers of alcohol, alcohol-linked criminality decreased, and only a minority of those with preference for high risk and crime moved to other illegal activities. . . .
The key is that meaningful reforms do not begin in the corrupt states themselves, but in the rich world that is the main consumer of illegal goods and services. This requires a total overhaul in our thinking about the root cause of a corrupt state. Many of the most corrupt states are "corrupt" because they specialize in goods and services that are deemed illegal. But what is illegal today is not necessarily illegal tomorrow. "Illegality" is a historical category, as the long history of accepted prostitution and drug use shows. Thus if illegality is the main cause of corrupt governments, then the best way to root out corruption is to remove illegality.
The way to help corrupt countries does not lie in hectoring them about the virtue of good governance, but in pushing for the legalization of their main exports. The target constituency of the international organizations' advocacy thus becomes the rich, not the poor, world.