Laws Create Thieves and Bandits

Published on 13th December 2005

Part Two

Measuring and Comparing Corruption

Scientists can always learn a lot, and give better advice, when the phenomena about which they theorize can be quantified. This also applies to the nexus between economic growth, economic freedom and corruption.

The measurement of national incomes and products (GDP/GNP) can rely on a well-established methodology and accepted standards, which have been refined by international organizations over many decades. International comparisons of per-capita incomes may be based on exchange rates or estimates of purchasing power parities, which for most purposes reflect reality more realistically. Of course, national accounts statistics come with a margin of error, but they have proven sturdy and are widely accepted.

The quality of the institutions that make for economic freedom is more difficult to measure and compare internationally, for of necessity it involves subjective judgments and relies on small samples. As more economists became aware during the 1980s that the institutions of economic freedom were of great importance, several efforts were initiated to estimate the quality of property rights and governance, the freedom of labour, capital and product markets and their openness to international competition. Since 1986, the Fraser Institute in Vancouver, Canada has coordinated a major international effort to develop an agreed methodology and gather relevant information about standards of economic freedom. The data has found wide acceptance and furnished valuable insights in support of free markets and personal choice. A similar effort has been carried out by the Heritage Foundation in Washington, DC in conjunction with the Wall Street Journal. Although the methodologies differ, the results of both undertakings tell virtually the same story: Economic freedom is good for growth and high living standards.

For a long time the degree of corruption in rule enforcement did not receive the same attention. This gap has been filled over the past decade by a project, the Corruption Perceptions Index (CorrPI), to estimate annually the levels of dishonest dealings in politics and administration. It is being compiled –­ in cooperation with Transparency International, a think tank which publishes annual Global Corruption Reports ­­– at the University of Passau in Germany under the direction of Prof. Johann Graf Lambsdorff. The Index –– in conjunction with the analyses and case studies in the annual Global Corruption Reports –– is intended to strengthen the resolve of the electorate and its political, judicial and administrative agents to fight corruption.

As of 2005, the information covers 159 countries, albeit on a rather uneven basis of primary surveys. For a considerable number of countries, the CorrPI scores go back to the early 1980s, so that some long-term trends can be gleaned from the database, as long as one keeps in mind that there have been changes in coverage and the quality of information over that time.

Because actual corruption is impossible to know and measure, the estimates of corruption are based on the perceptions of experienced businessmen and local analysts. Legal statistics, for example convictions for graft, cannot be used, because they may reflect standards of probity, the quality of surveillance or the commitment of courts to enforce the law. The \'Corruption Project\' has found, time and again that foreign and domestic business leaders and analysts tend to have an accurate perception of the standards of probity in a country\'s governance.

The Incidence of Corruption around the World

The 2005 Corruption Perception Index (CorrPI), published in late October, makes for most interesting reading and will offer policy makers numerous relevant insights. It certainly puts quantitative substance to the introductory considerations touched upon in the opening paragraphs of this paper.

The 2005 estimates of the CorrPI compared with averages for 1980-1985 highlight a number of issues:

  • The dominant impression is that the developed, affluent countries generally rate much better on the CorrPI than the less developed countries. The association between income levels and corruption levels does of course not tell us anything about causation, but it seems plausible that there is circular interaction: Countries are poor because their rulers are highly corrupt; and poor living standards invite corruption.
  • Nevertheless, standards of honesty in governance have in many instances changed over recent decades in rich and poor countries alike. Some have improved on early-1980s levels of corruption; others have let standards slip. Thus, corruption is perceived to have been on the rise in relatively well-governed countries such as the United States, France, Japan, South Africa and Malaysia, as well as in traditionally much more corrupt countries such as China, Russia, Turkey and Kenya. Other countries for example Australia, New Zealand, Finland, Chile, Hungary, and Indonesia have managed to improve their ratings.
  • Australia was ranked amongst the least corrupt nations (in eighth place in 2005), having improved its rating since the early 1980s. New Zealand ranks even better in 2005 (equal second after top-placed Iceland), having improved even more over time.
  • The well-placed Anglo-Saxon and North European countries have generally improved, though not the United States.
  • Some European countries, such as Germany and France, which have been plagued by economic stagnation and political discontent and which attain only middling corruption ratings, seem to be drifting towards serious problems governance.
  • The European Union project of welding governance cultures with widely differing honesty standards together is confronted with huge and sometimes widening gaps in the quality of governance. Divergent corruption standards will make it harder to meet the EU objective of income equality. The objective will probably require high and sustained transfer payments from the honest and affluent to the corrupt and poor. Perceived differences in corruption – and differences in the alacrity with which subsidy takers in different countries exploit the rules made in Brussels ­– have indeed begun to play a major role in the growing popular rejection of an \'ever closer and wider\' European Union.
  • The communist countries had very low standards of probity. Since the fall of communism, they have coped with endemic corruption in differing degrees: Hungary is a remarkable example of success; Estonia, Slovenia and Lithuania now rank among the less corrupt developed countries. On the other hand, perceived honesty standards in Russia, Poland and the Czech Republic have slipped badly. This probably reflects, at least in part, greater transparency of the apparatus of government. Yet, even if part of the deterioration is attributed to a growing recognition of the problem, these cases suggest that coercive central-command systems still linger or that the void, which the abandonment of central planning left behind, has not been filled by institutions and enforcement mechanisms that support an effective market economy and a free society. Constructing an effective order may prove to be even more difficult than undoing socialized ownership and pervasive regulation.
  • Developing countries in general suffer from high levels of corruption. The notable exceptions are now-affluent Singapore, Hong Kong, and Taiwan. South Korea – once considered one of the most corrupt regimes in the world – now targets a top rating on the Corruption Perception Index explicitly as a policy objective.

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