Weekly, it seems, major news breaks about new corruption scandals or allegations. A few days ago, news came out about a U.S. government investigation into JPMorgan Chase JPM -0.24%and its hiring practices in China. At the same time, Chinese newspapers confirmed the date and location of a trial for a powerful former minister of commerce accused of corruption. Bo Xilai’s trial begins today. Bo, a former communist party leader, member of the “princeling” class, and a son of one who fought side by side with Mao Zedong, has garnered major attention inside and outside China.
An interesting question develops: Do the frequency of these news stories reveal that corruption is on the rise? Prosecutions and media reports are not sufficient to answer that question. For almost two decadesTransparency International (TI) has been leading the effort to measure corruption. TI began compiling its Corruption Perceptions Index a few years after the fall of the Berlin Wall and, in 1991, it began compiling a Bribe Payers Index.
Last month, it released another edition of its Global Corruption Barometer which is based on a survey of more than 114,000 people from 107 countries. Gallup International and WIN (Worldwide Independent Network of Market Research) collaborated with TI in this effort that shows a troubling picture: Corruption is on the rise and is affecting several of the institutions essential to building the rule of law of a free society.
Political parties rank as the worst offenders and are closely followed by law enforcement. The judiciary, the legislature, and government bureaucrats rank almost as badly. Over half (53 percent) the respondents believe that corruption increased over the past two years. In the U.S. 59 percent of the respondents believe corruption increased. All the major European countries also report an increase, including the U.K., where 65 percent of those surveyed answered that corruption increased or increased significantly.
Corruption, as any moral evil, or as a crime, has many causes. Economic freedom and capitalism are not among them. Unfortunately, those who fight and study corruption seldom focus on economic freedom as the best antidote.
Soon after Transparency International published its first index, three leading think tanks, Freedom House, Fraser Institute, and The Heritage Foundation, released the first economic freedom indices. Faced with competition, Freedom House abandoned the project. The appearance of these indices made it possible to compare them with TI’s Corruption Perception Index.
I began working with Eugenio Guzmán, a social scientist with training in statistical analysis, to review the literature and prepare an econometric study. Guzmán, at the time, was a recent graduate of the London School of Economics and is currently the dean of government studies at the Universidad del Desarrollo (Chile).
The correlations from the study showed that as economic freedom increased, corruption decreased. The first paper was published in 1997 by the Centro de Estúdios Públicos, a leading Chilean think tank, and showed a positive correlation coefficient of 0.72. The most recent correlation, using 2010-2012 data, shows a 0.63 for the combined 2010 Fraser-Heritage Index, and 0.59 for the 2012 Heritage index (see graph).
Our analysis showed that proliferation of economic regulations, arbitrary and discretionary enforcement, wide divergence between market and government prices, and other economic factors were major incentives to corruption. Anticorruption efforts that do not take economics into account are bound to fail.
After the 2008 crisis many governments answered with more regulation. Not surprisingly, TI’s Global Corruption Barometer showed an increase in corruption. If our analysis is correct, corruption will continue to increase. In the U.S., the proliferation of laws and regulations, such as the ones mandated by Obamacare, create the perfect breeding ground for corruption.
Also troubling is the top-down immigration reform being discussed at the moment, with over 1,000 pages and more than 400 waivers. The discretionary power of the Consumer Financial Protection Bureau, in a field so regulated as banking, could also lead to arbitrary enforcement.
F.A. Hayek warned us that fashionable statist policies were leading us to a “road to serfdom.” It is now unlikely that the new roads to serfdom will come from a return to the communism, or the fascism, of the past. They will likely come preceded by the road to corruption, where the morass of the regulatory web will be used to shackle enemies and reward friends.
ALEJANDRO CHAFUEN – FORBES
Derek Carter, an economics, mathematics and finance major at the University of Alabama, conducted research for this article.