CORRUPTION VARIES ACROSS COUNTRIES
Soon after the disintegration of the former Soviet Union, residents of the Baltic countries observed that the level of corruption was lower in Estonia than in neighboring Latvia and Lithuania. A commonly asked question was whether the Estonian culture was less conducive to corrupt behavior than those in Latvia and Lithuania. A prominent Estonian leader denied relevant cultural differences in favor of an economic explanation.
Estonia had taken the profit out of corruption. In the case of customs employees , no one offered bribes to officials because Estonia adopted radical free trade. Why offer a bribe for the right to import if it can be obtained for nothing? Officials who might be inclined to demand bribes would be powerless to extract them. Ironically, later when the three countries joined the EU, Estonia was obliged to adopt the common external tariff of the European Union. In 1994 Estonia also adopted the model of partial financing of political parties from the state budget, being a pioneer in this respect among Baltic countries, thereby greatly reducing the incentive of political parties to turn to wealthy businesspeople for funding in return for political favors. Arguably, this even facilitated the formation of popular parties with larger membership as compared to parties financed and controlled by narrow groups of individuals as in neighboring Latvia.
The level of corruption varies across countries, and a common measure is the Index of Corruption Perceptions published by Transparency International. In general, the high income countries have the least corruption and low income countries have the most. In the 2013 ranking of 175 countries, Denmark and New Zealand were the least corrupt, and the United State was 19th. Russia was 127 and Ukraine was 144. Iraq was 171 and Afghanistan was tied with North Korea and Somalia for most corrupt at 175. Haiti, a U.S. neighbor, was 163
SOURCES OF CORRUPTION: CULTURE VS. INTRUSIVE GOVERNMENTS
If cultural differences explain differences in corruption, why are ethnic Chinese highly corrupt when they live in mainland China but among the least corrupt in the world when they live in Hong Kong or Singapore? Why are South Koreans among the least corrupt and neighboring North Koreas tied for the most corrupt in the world? An alternative explanation is that people are more corrupt when they face incentives that reward corrupt actions. Government officials are more corrupt if they are empowered to provide benefits to private agents who would not otherwise qualify for them, or if they are able to exempt private agents from obligations for which they would otherwise be responsible. Intrusive governments are those that give government officials extensive power over potentially profitable private transactions. The power to disallow imports and the power to grant government contracts are two sources of intrusive government power. A new study by the OECD identifies bribing customs officials and officers who grant government contracts as the two most common sources of corruption. Not all government rules are intrusive. A policy of free trade would remove the power of customs officials to extract bribes. An open and competitive bidding process would reduce the power of contracting officers to demand bribes. Ogilvie and Carus (2014) have studied the evolution of government institutions since the Middle Ages, and they have found that when government institutions were less intrusive, they contributed to faster economic growth. England and the Netherlands were early developers of less intrusive governments. Today the Nordic countries have demonstrated an ability to have large government sectors without rewarding bribery or sacrificing prosperity.
MEASURING GOVERNMENT INTRUSIVENESS
The World Bank Doing Business Index is a common way to measure government intrusiveness. It is based on 10 factors related to the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.The general pattern is that the ease of Doing Business is inversely related to income per capita of a country.
In low income countries, laws, regulations, and traditional practices give government officials greater power to determine who receives government services and under what conditions. In some cases people are obliged to bribe policemen, doctors, and teachers to do their assigned jobs. The power to threaten to withhold services induces private agents to offer bribes, and the result is a high level of corruption. Thus, the Transparency International Corruptions Perceptions Index and the World Bank Doing Business index are highly positively correlated (correlation coefficient approximately +0.8). Countries with more intrusive governments have higher levels of corruption and lower incomes. Changing incentives within government could reduce the level of corruption and increase prosperity. A study of foreign direct investment indicates that raising the level of corruption from the low level in Singapore to the higher level in Mexico is equivalent to raising the corporate tax rate by 21 to 24 percentage points (Lopez-Claros).
DIVERGENCE IN CORRUPTION AMONG FORMER SOVIET REPUBLICS
Former Soviet Republics inherited a culture of corruption. Instead of rationing scarce goods by using prices, government officials were allowed to use their own discretion to distribute goods, and this power enabled them to collect bribes. After the disintegration of the USSR, the Baltic countries reformed their economies and changed their incentives much more than in Russia or Ukraine. Consequently, corruption remains more severe in the non-reforming countries. The Transparency International Corruptions Index ranked Estonia the 28th least corrupt country, Lithuania ranked 47, and Latvia 54 . Russia (rank 127), and Ukraine (rank 144) remain more corrupt in 2013. Revulsion against corruption was a factor in the ousting of the Yanukovich regime in 2014. The new Poroshenko administration has promised to deal with corruption, but it must change incentives, as well as personnel in the administration (Poroshenko).
The observed differences in corruption levels are consistent with the more intrusive government regulation as measured by the Doing Business Index. Lithuania ranked 17th easiest to do business, Estonia 22, and Latvia ranked 24th easiest. The Baltic countries chose to join the European Union and accept the greater market orientation than Russia and Ukraine. For example, Germany ranked 21st in ease of doing business and Netherlands ranked 28. By contrast, Russia ranked 92 and Ukraine ranked 112 (just below Pakistan and just above Brazil). The greater power of government officials to influence business transactions in these countries makes bribery and favoritism a more profitable strategy.
CHINA AND ETHNIC CHINESE
If culture were an important determinant of corruption, one might expect ethnic Chinese to exhibit similar degrees of corruption in different geographical locations. However, the Corruption Index shows Singapore and Hong Kong to be among the least corrupt places in the world, and China to be among the more corrupt. Singapore ranks 5th among the least corrupt, Hong Kong ranks 15th, and China ranks 80th. The three share similar ethnicities, but they have had differences in recent institutions and incentives. In the ease of doing business index, Singapore ranked first, Hong Kong ranked second and China ranked 96th out of 189 countries. There is a similar relationship between North and South Korea. South Korea has a much higher income per capita, a less intrusive government, and a low level of corruption (rank 38). North Korea is one of the poorest countries in the world with a very intrusive government, and it is tied for the highest level of corruption in the world (175).
If China is so corrupt, why is its economy doing so well? China’s rank in corruption (80/195) and red tape (96/189) are consistent with its rank in income per capita (109/213). All three are near the middle of the rankings. China has had an extraordinarily high growth rate since 1977, but the growth rate over that period was enhanced by starting from a very low base. The radical reforms initiated by Deng Xiaoping were made possible by a disastrous economic experiment that included a completely closed economy and resulted in millions of deaths. Major reform and opening up to become one of the world’s biggest traders made it possible to do some catching up by borrowing what other countries had been doing for years. Recently Chinese growth has slowed, although it remains higher than the world average.
HIGH INCOME COUNTRIES
High income countries generally have low levels of corruption, and they also rank high in ease of doing business. Denmark and New Zealand ranked as the least corrupt in 2013, and high income Singapore (GDP per capita $77,000) ranked 5 and Hong Kong (GDP per capita $54,000) ranked 19. The United States ranked 19 (GDP per capita $54,000. In terms of ease of doing business, USA ranked 4, Denmark 5, Norway 9, Finland 12, and Sweden 14 out of 189 countries. Singapore and Hong Kong ranked 1 and 2 in ease of doing business. Some high income countries have large governments in terms of government spending relative to GDP, but their governments are generalized institutions that manage to avoid the intrusiveness that brings about corruption. The high income countries are generally democracies that follow the rule of law and apply it rather equally to all citizens. For example, the Nordic countries offer extensive public services that they make available to all citizens, who need not offer bribes to receive promised services. There is ample special interest politics in high income countries, but it tends to take the form of legal lobbying for laws and regulations that favor special interest groups.
CONCLUSION
Corruption varies among countries primarily because of differences in economic incentives. Culture plays a much less important role , if any, and in the case of ethnic Chinese, Koreans, and others, incentives clearly dominate culture. An implication is that corruption can be reduced by taking the profit out of corruption. Reducing the intrusiveness of governments makes bribery less rewarding. Ukraine can learn from economic reform in the Baltics, China can learn from Hong Kong and Singapore, and North Korea can learn from South Korea. Reform will not be easy, because it will be strongly resisted by the current beneficiaries who will lose their power to extract favors.
REFERENCES
Economist. 2014. “Graft Work”. December 6.
Lopez-Claros, Augusto. 2014. “What Are the Sources of Corruption?. http://blogs.worldbank.org/futuredevelopment/print/what-are-sources-corruptionwww.doingbusiness.org/rankings
Ogilvie, Sheilagh and A.W. Carus. 2014. “Institutions and Economic Growth in Historical Perspective. Philippe Aghion and Steve Durlauf eds. Handbook of Economic Growth, vol 2a.
http://www.econ.cam.ac.uk/people/faculty/sco2/full-texts/Ogilvie-Carus-2014-Handbook%20of%20Economic%20Growth.pdf
Poroshenko, Petro. 2014. “A Year Later, A New Ukraine”. Wall Street Journal, December 5.
Transparency International. 2014. “Corruption Perceptions Index 2013”. http://www.transparency.org/cpi2013/results
World Bank. 2014. http://www.doingbusiness.org/rankings