Corruption is stronger in autocratic countries.

Mar 11, 2020

Spoiler: Corruption is cancer. It incurs welfare losses by distorting households’ and firms’ consumption and investment decisions. It increases inequality and environmental damages. It reduces trust between people and between people and public authorities.

It is lower in democracies with a free press and an independent judiciary. It is and was higher in autocratic countries. It is lower in market economies. Socialist countries are and were also autocratic, and corruption is and was pervasive in these countries. Corruption is weaker in former socialist countries that have become more democratic.

EU makes a difference. Corruption is higher in non-EU former Soviet republics and East-European countries. But once inside EU, Member States can again turn autocratic and become more corrupt.

Corruption – what it is and what it does

Analyses of corruption mostly refer to the public sector and abuses of public office for private benefits. This involves for example the sale of government property by government officials, kickbacks in public procurement, bribery and embezzlement of government funds. As I will argue below, the extent of corruption in a country reflects the quality of country’s legal, economic, cultural and political institutions. For more precise definitions and more elaborate discussions, see here, here or here.

The costs of corruption are difficult to measure. They exceed the monetary values in terms of bribes, kickbacks and other deeds. Corruption leads to welfare losses due to too low production but may also incur welfare losses due to too much production, especially if the production is harmful for the environment. Welfare losses occur due to misallocation of resources, distortions of incentives and other inefficiencies. In corrupt societies, firms and households devote resources to non-productive activities that are necessary in order to make consumption and investment decisions. In countries where the state has been captured, as in Russia, the most corrupt country in Europe, corruption benefits state owned firms at the expense of private investments. Corruption also has adverse effects on the distributions of income and wealth.

Corruption also erodes trust in government authorities with repercussions on the behaviour of firms and households. Poor quality of public services and rampant corruption provide incentives to evade taxes. Uncertainty about framework conditions discourage entrepreneurship and investments.

In extreme cases when public services can be bought and in worst case scenarios, as during the Yanukovych presidency in Ukraine, the state can be captured, severe political and economic instability can occur.

Corruption will below be measured either by the World Bank’s indicator Control of corruption or Transparency International’s indicator Corruption perception index. The indicators are highly correlated, so it doesn’t matter which is used.

Corruption is weaker in rich countries

Empirical research shows that there is a strong and positive correlation between control of corruption and income per capita.[1] In countries with weak corruption there are less distortions leading to more savings and investment and higher income. Those countries have also in general institutions of higher quality which makes corruption more difficult and less profitable, c.f. Figure 1.

Figure 1. GDP per capita vs corruption

Source: Control of Corruption arefrom World Bank, Worldwide Governance Indicators Database, http://data.worldbank.org/data-catalog/worldwide-governance-indicators. GDP per capita is available for download at www.ggdc.net/pwt. "The Next Generation of the Penn World Table" American Economic Review, 105(10), 3150-3182 Note: GDP per capita is calculated relative US. GDP per capita. All variables are averages for 1996-2017.

Though one should be cautious of drawing conclusions about casual relationships from scatter plots, there is probably also a reverse causality meaning that richer countries have more resources to build and develop institutions of higher quality. In general, the former causal relationship is more supported by empirical analyses.

Corruption is weaker in countries with a free press and independent judiciary systems

I have above mentioned institutions without defining what I mean by that. As in this post I refer to economic institutions and political institutions. Economic institutionsprovide incentives for individuals to undertake educations, save and invest, innovate and reduce the uncertainty in economic actions by making information more available and the behaviour of others more predictable. Political institutions. These institutions determine how a country’s citizens can control its politicians and hold them responsible for their actions.

Political institutions guaranteeing a free press and an independent judiciary system is necessary for a country’s citizens to hold its government and politicians accountable. It appears that these conditions also tend to restrict the extent of corruption, c.f. Figure 2.

Figure 2. Freedom of the press and independence of the judiciary vs corruption

Source: Freedom of the press. https://freedomhouse.org/. Corruption. https://www.transparency.org/ Note:Press freedom data refers to 2016 and corruption data to 2018.

Other indicators, of media freedom or suppression of media and judicial independence, show the same relationship with corruption indicators. Free media and independent judiciary are institutional characteristics one normally associates with democracies.

Corruption is weaker in democratic countries

Other characteristics are protected civil liberties, rule of law, checks and balances and free elections. These characteristics are summarised by the Liberal democracy index, which is available at https://www.v-dem.net/en/. This indicator is constructed in a way that it assesses the quality of a democracy or polity by the limits it places on governments. These institutional characteristics appear to be favourable for controlling corruption, c.f. Figure 3.

Figure 3. Liberal democracy vs corruption

Source: Liberal Democracy Index: Varieties of Democracy (V-Dem) Project Corruption. World Bank https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators Note: The liberal principle of democracy emphasizes the importance of protecting individual and minority rights against the tyranny of the state and the tyranny of the majority. The liberal model takes a ''negative'' view of political power insofar as it judges the quality of democracy by the limits placed on government. This is achieved by constitutionally protected civil liberties, strong rule of law, an independent judiciary, and effective checks and balances that, together, limit the exercise of executive power. To make this a measure of liberal democracy, the index also takes the level of electoral democracy into account.

Judging by Figure 3, some countries seem to have introduced measures to combat corruption without establishing other conditions which define a liberal democracy. This was also the path which the political leaders in Singapore, South Korea and Taiwan choose. South Korea and Taiwan later developed into liberal democracies while Singapore remains an autocracy with a higher control of corruption than South Korea and Taiwan. Corruption in Singapore is weaker than in India which is regarded “more” democratic than Singapore.

Corruption is weaker in countries with free markets

Turning to economic institutions, the example of Singapore can be used again. It and other countries liberalised their economies and attracted large inflows of FDI. Institutional changes conducive for economic growth were introduced. Protecting property rights, ensuring an independent judiciary, rule of law and liberalising markets are not only favourable for economic growth, but also good for combatting corruption, c.f. Figure 4.

Figure 4. Economic freedom vs corruption

Source: Economic Freedom Index https://www.heritage.org/index/ Corruption. World Bank https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators Note: Control of corruption range from -2.5 to 2.5, the Economic Freedom Index ranges from 0 to 100, the Liberal Democracy Index from 0 to 1.

Free markets and rule of law are characteristic for democracies. Autocracies come in many shapes, from military-ruled regimes to socialist countries. It is well known that the military regimes in Latin America were ridden by corruption. The pervasive corruption in communist countries such as Soviet Union was recognised even by the political leadership that unsuccessfully launched several anti-corruption campaigns. The repeated failures to reduce corruption were due to the inherent corruption in socialism.

Corruption is stronger in socialist countries

The pervasiveness of corruption in socialist countries is confirmed by Svenssson (2005) . He uses four different indicators of corruption. He finds that in the most corrupt 10 percent countries, for each indicator, “Strikingly many are governed, or have recently been governed, by socialist governments.” Following the collapse of the Soviet Union and liberalisation of Eastern Europe, the countries embarked on different paths of development. In some countries, like Russia and Ukraine, the states were captured by oligarchs who divided the assets of the countries between themselves and the political elites. In these countries, the collapse of communism led to increased corruption as the political elites were not interested in building institutions that would prevent it. Still, there is a significant correlation between corruption and years under communist rule, c.f. Table 1.

Table 1. The communist legacy. Correlations between length of communist rule and indicators of democracy and corruption

Source: Control of corruption.World Bank https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators. Political corruption. Varieties of Democracy (V-Dem) Project. https://www.v-dem.net/en/. Corruption perception index. https://www.transparency.org/

The low correlations presented above, imply that it matters what path of development socialist countries embarked on during transitions. As I showed in this post, EU matters. In order to become a member of the EU, countries must adopt the acquis communitaire. The acquis is a full and exhaustive agenda of legal, institutional and economic reforms.

Many of the chapters in the acquis concern the functioning of the Single Market but especially important is chapter 23 “Judiciary and fundamental rights” which states that EU member states are forced to guarantee its citizens fundamental rights as guaranteed by the EU Fundamental Rights Charter. The chapter also spells out the member states’ obligations to respect the principles of an independent and impartial judiciary system ensuring a Rule of Law and fight corruption. Therefore, corruption has decreased in former socialist countries that have become EU Member States and are applying for membership, c.f. Figure 5.

Figure 5. Years under communist rule vs corruption and liberal democracy

Source: Control of corruption.World Bank https://datacatalog.worldbank.org/dataset/worldwide-governance-indicators. Liberal democracy. Varieties of Democracy (V-Dem) Project. https://www.v-dem.net/en/

Again, it is confirmed that creating institutions that make countries more democratic also are effective for fighting corruption. A problem though is that once inside the EU, governments in Hungary and Poland are pursuing policies aiming at restricting media freedom and independence of judiciary, c.f. Figure 6.

Figure 6. Attacks on the judiciary (top) and government censorship efforts (bottom) in the EU, Hungary and Poland

Source: Varieties of Democracy (V-Dem) Project. https://www.v-dem.net/en/ Note: Government attacks on the judiciary are measured on a scale ranging from 0 to 4 where 0 indicates that attacks were carried out on a daily or weekly basis and 4 that there were no attacks. Government censorship efforts are measured on a scale ranging from 0 to 4 where 0 indicates that attacks are direct and routine and 4 that the government rarely attempts to censor major media in any way, and when such exceptional attempts are discovered, the responsible officials are usually punished.

And when the judiciary’s and media’s possibilities to monitor and hold the executives accountable, the room of manoeuvre for the political and economic elites to enrich themselves through corruption, increases. In terms of liberal democracy and corruption, Hungary was on a slippery slope already before Fidesz won the majority of the parliament, although the development toward autocracy seems to go even faster since. Since PiS won the 2015 elections in Poland, the government has acted to reduce the rule of law including the judiciary’s and media’s independence as well as civil liberties. Not surprisingly, corruption is on the rise again, c.f. Figure 7.

Figure 7. Liberal democracy and corruption in Hungary (top) and Poland (bottom).

Unfortunately, governments that have violated EU’s fundamental values, can get away with it if the European Council fails to gather the necessary support to trigger the mechanisms of Article 7 of the Treaty of the European Union (https://ec.europa.eu/info/policies/justice-and-fundamental-rights/upholding-rule-law/rule-law/rule-law-framework_en) decision. Since the prevailing Treaty of the European Union does not provide enough protection of EU citizens against its governments, the treaty should be revised aiming to prevent governments who breach EU’s fundamental rights to form blocking minorities in Article 7 decisions.

Read more:

OECD (2013) “Issues paper on corruption and economic growth”. https://www.oecd.org/g20/topics/anti-corruption/issues-paper-on-corruption-and-economic-growth.htm

Organized Crime and Corruption Reporting Project (OCCRP). “Person of the Year 2014: Vladimir Putin. 2014 MAN OF THE YEAR IN ORGANIZED CRIME AND CORRUPTION”. https://www.occrp.org/en/poy/2014/

Svensson, J. (2005). ” Eight Questions about Corruption” Journal of Economic Perspectives—Volume 19, Number 3—Summer 2005—Pages 19–42 http://www1.worldbank.org/publicsector/anticorrupt/Svensson%20Eight%20Questions%20About%20Corruption%20(JEP%20Vol%2019,%20No%203%202005).pdf

Transparency International (2014). “The impact of corruption on growth and inequality” https://www.transparency.org/whatwedo/answer/the_impact_of_corruption_on_growth_and_inequality

Zakharov, N. (2018) “Does Corruption Hinder Investment? Evidence from Russian Regions” European Journal of Political Economy. Volume 56, January 2019, Pages 39-61.

[1] Or strong and negative between corruption and income per capita.

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