Corruption is a bad thing. It unfairly rewards those that break the rules,
favour people who already have resources at their disposal, and it undermines the
collective prosperity that can be enjoyed when people work on building a society together.
That should hopefully go without saying, at least in theory.
But we all live in the real world where corruption at all levels is not only an inevitability,
but something that according to some economists might even be an instrument for the greater good.
A basic check of the different countries around the world
might be all that some people need to totally dismiss this idea.
Generally, it's easy to think that the richest and most advanced economies tend to have very
minimal corruption, or at the very least impose harsh punishments on those that are caught engaging
in corruption, while poor underdeveloped countries with systemic economic problems
tend to be plagued by corruption at all levels. That would be a pretty sound assumption based on
a lot of the countries we've explored on this very channel, but the data might disagree.
This is a very interesting intersection of econometrics, regular economics, and policy,
and we want to jump right into it, so as always we need to answer a few basic questions.
Do more corrupt countries achieve better economic results? If they do, why do they
achieve those better economic results? And finally, if they don't, why might the data suggest otherwise?
Intro Add
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Before we jump into it, we as always need to give the big disclaimer when covering these
kinds of issues. Reliable data around things like corruption is notoriously hard to collect,
because, well, even in countries where it's commonplace, it's still illegal.
So people are still going to try and conceal this behaviour.
This fact might even impact the data of advanced economies more than the
economies that people typically associate with corruption,
because in advanced democratic countries with strong institutions,
there is less societal acceptance of corruption and harsher punishments when it's discovered.
So people conducting this crime will try even harder to be discreet about it.
With that out of the way, finding the relationship between corruption and economic growth
should theoretically be as simple as plotting economic growth,
or preferably economic growth per capita on one axis,
and the international country risk guide corruption rating on the other,
and plotting their relationship.
The international country risk guide, or ICRG,
is probably the best-recognized measurement of metrics like corruption.
It also collects data on all of these other variables,
and uses them to create a report that is used by governments, businesses, and other institutions
to find out how risky it is to do business with or otherwise operate in a given country.
Just using the metric on corruption, the ICRG ranks countries between 0 and 6,
with 0 being the most corrupt, and 6 being the least corrupt.
The most corrupt country in the most recent release of the report was the Republic of the Congo,
and the least corrupt country was, perhaps unsurprisingly,
Finland, followed closely by those other goody-two-shoes Scandinavian countries, Denmark,
and Sweden.
So plotting these two data points against one another for a broad selection of countries
should show if there's any relationship between corruption and economic growth.
Thankfully, a report written and edited by these two economists has already done
exactly that and found an interesting result.
Corruption does have a positive correlation with per capita economic growth,
meaning the higher the rate of corruption in a country, the higher the rate of growth,
up until a point where seemingly too much corruption becomes a problem again and reduces growth.
Interestingly, or perhaps sadly, even though the rate of growth compared to
corruption created something of a hump shape, with averagely corrupt countries
having the highest rates of per capita growth, the growth rate of the most corrupt countries
was still higher than the growth rate of the least corrupt countries.
So ok, this is a very interesting relationship,
but the next most important question to ask is, why is this happening?
One theory put forth by economists is the so-called grease the wheels hypothesis.
The idea is that a little bit of corruption can help an economy because it makes it easier
for businesses to get around things like red tape, environmental restrictions, and safety standards,
and just get stuff done with a comparatively cheap bribe given to the right person to look
the other way. For developing countries that compete in the global economy based on how
cheaply they can manufacture basic goods, this could be a huge advantage over an economy with
low levels of corruption that enforces things like safety standards and makes businesses pay
their employees a legal minimum wage. Being able to get stuff done quickly and
efficiently for a small bribe or two is also an attractive quality for some international
companies with lots of money looking to outsource operations.
Some economists have even suggested that the grease the wheels theory is self-correcting,
because when economies get to a certain level of wealth they stand to lose more than they gain
through corruption, but simultaneously advanced economies tend to have a slower growth rate
anyway because once an economy is developed there are fewer opportunities for massive increases in
output, like there are in economies that are going through a transition from being primarily
agriculture-based to primarily manufacturing-based. Paying a bribe or two to set up a factory where
once there was a park or a farm will help a developing country produce more output in the
next year which is economic growth. Paying a bribe to undermine financial controls at a major bank
will hurt a delicate system based on trust and mean less people use that bank next year which
is negative growth. The grease the wheels hypothesis also theorises that if corruption
is done to avoid things like tax, then more money can be put back into the economy through
local businesses or investments which boost growth at the expense of public funding.
This is often a worthwhile trade-off in certain developing economies where that money may or may
not have been corruptly stolen by the government anyway and basic investments into modernising
industries can have very high returns. Again a basic farmer skipping out on their taxes so that
they can upgrade from hand tools to a tractor will massively increase their economic output.
Someone in a wealthy economy skipping out on their taxes so they can buy more stocks in a
share portfolio is not going to have such a large effect. But before we go out to undermine our
system of governance with bribes in the name of economic prosperity it's important to remember
one of the most important lessons when dealing with any data, correlation is not causation.
The classic example of this is that regional ice cream sales and regional drownings are very
strongly correlated, but eating ice cream does not cause people to drown unless they eat a lot,
presumably. And people drowning does not somehow magically boost ice cream sales,
it's just that both of these variables are correlated with how hot it is outside.
On hot days more people go swimming and more people buy ice cream.
The same thing may be happening with corruption and economic growth.
The actual data points for this correlation show that for starters the relationship is
not clear at best and it needs a computer modelling to map out its non-linear regression.
The whole thing also potentially has something that is the equivalent variable of hot weather
to drownings and ice creams, and that's how wealthy an economy is.
Wealthy developed economies tend to have low corruption and low growth.
Totally undeveloped economies tend to have high levels of corruption
and also have low levels of growth.
But developing economies are normally building out robust economic systems at the same time
that they are trying to improve or are being forced to improve their government functions.
This study also only examined 65 countries,
which is roughly 1 third of the total number of countries that exist in the world.
So while we almost wish there was more to this story and that we may have
miraculously found a secret to accelerating economic growth,
the logical conclusion that corruption is bad probably holds true.
If anything this was a great case study in never taking
even very well-researched statistics and correlations at face value,
especially for something as important as the good governance of our economies.
Now we have avoided mentioning any countries in particular here in this video,
but there are many examples where good old-fashioned
corruption has been an economy's complete undoing.
And to prove this point we have made an entire playlist of our in-depth
exploration of those economies that you should be able to click to on your screen now.
Also let us know in the comments if you enjoyed this shorter style of
explanation for niche economic theories,
or if you'd prefer us to stay focused on the bigger issues that require more of a deep dive.
Thanks for watching mate, bye.