Societies with greater economic freedom have lower corruption

And India must focus on economic freedom

In the light of the current debate over the solution to corruption, here’s something to think about. There is a correlation between higher levels of economic freedom and lower perceptions of corruption. Here’s an old chart that shows the relationship. It uses 2006 data, but it should hold with newer data as well (Update: Barbarindian has a chart with the latest data, LT @centerofright).

Economic Freedom vs Corruption Perceptions
High economic freedom correlates with low corruption

(Click on the chart to enlarge it.)

This chart shows a correlation. And correlation does not mean causation (OMIPP alert!). In other words, from these data alone, we cannot conclude that higher economic freedom causes lower corruption. We can, however, conclude that wherever there is greater economic freedom, perceptions of corruption are lower, and vice versa,

The question is: which variable should we focus on? There are enough rules, laws and agencies to investigate and prosecute corrupt officials. Clearly, there is overwhelming dissatisfaction over the efficacy of this method. There’s nothing to prove that one more super rule, super law and super agency will do the trick where so many others have failed. Indeed, it is likely to worsen the problem by adding to the red tape and logjam.

It therefore makes sense to shift focus to economic freedom. It’s worked to reduce corruption in India in some fields. You don’t have to bribe the telecom department officer and the line-man to get a phone connection anymore. That’s because there is relatively more economic freedom in the sector: from infrastructure to services, from retail to equipment, there are multiple providers. You have the freedom to choose, the freedom to switch and the freedom to reject phones, plans and providers.

But when the UPA government sought to curb economic freedom—by the blatant abuse of executive power—there was massive corruption.

Indeed, in sectors where there is relatively more economic freedom, corruption has generally been “kicked upstairs”, as this article in Pragati shows. In the 2G spectrum case, it was not prevented and punished in time by a man of well-known integrity. This should be an indictment of that man rather than the system.

Related Link: The 2011 Economic Freedom of the States of India shows how states that have greater economic freedom do better in a wide range of governance outcomes.

21 thoughts on “Societies with greater economic freedom have lower corruption”

  1. Wrong

    1. There aren’t enough laws to punish the corrupt.
    2. Corruption stands in way of economic freedom.

    1. Dear Meenakshi,

      Certitude requires empirical evidence.

      Your first point is debatable. Your second point is a mere assertion, at best a hypothesis, unless you can prove causality. It is belied by evidence, like the “kicked upstairs” link cited above, where corruption has diminished after liberalisation.

      So if your intention was to score a rhetorical point, you have achieved it. If, on the other hand, you wanted to prove it substantially, then the onus of supporting your assertion lies entirely on you.

      1. @Meenakshi

        There can never be enough laws to punish the corrupt. They would have been discovered long ago.

        Free, transparent markets shift power to consumers and it is reasonable to assume that consumers act rationally and will refrain from paying additonal costs (for corruption) when alternatives exist. The government’s role should be to merely regulate free markets (from becoming oligopolies) lest it leads to cronyism and corruption.

        1. the concept of economic freedom should follow social freedom and individual rights.the comparison of homogenous developed countries will not suit india as the pvt sector will be dominated by the founders caste and region.there r thousands of examples ranging from ssi to large industries being dominated by a single caste/family.the caste and religious profile of govt institutions/colleges/pub sector which follow reservation represents the truer picture than a godrej or bajaj or ambani owned enterprise.
          when caste decides the person u lend a house to employ to marry (is it not corruption)the role of economic freedom will lead people to become naxalites. the states which implemented reservations in education and jobs have little naxalism and the increase in pvt sector is making them fall under red corridor. how will u explain will u explain the selection of a ratan tata over russi modi or the drama regarding his successor.the defenders of merit and antireservation heroes bajaj and godrejs are far below in talent/education/experience than a chairman of govt/pub sector body.

  2. How many different reforms will you need to bring economic freedom to 80 percent of the country? How long will it take to implement these reforms going by the speed in which they have been carried out till now? Do we have the resources? Do we have a government with intent? Will the lacs of crores that get drained out in corruption help to expedite the reforms if the money went into development work rather than in the pockets of the corrupt politicians and businesses?

    Shouldn’t steps to prevent corruption be the first step, then. We may have laws, but it takes decades to punish the guilty, if at all.

    1. In the early 1990s, implementing reforms for 100% of the country took place almost overnight. Similarly, NDA’s reforms were undertaken in a matter of months. It is not true that reforms take time or are difficult. The question is of intention. The UPA government, especially the Congress party leadership, does not believe in economic freedom. They believe in an entitlement economy, which is presented under the garb of “social justice”. These have contributed to the exacerbation of corruption.

      1. If you say that the Congress party is no good at carrying out reform, and the people of the country keep voting them in because of the money power they obtain from running a corrupt government, what do we do?

        Just hope that one day Congress will give way to BJP? Keep cursing the poor ignorant people for voting them in?

        Congress is getting richer by the day. The people aren’t. Congress will have more money to throw into winning elections in 2014 than they did last time. They are also making sure, as they always have done, that people don’t get smarter and richer.

        You know when this cycle will end? When the corrupt guys go to jail. Tougher and effective laws will boot them out. The electorate will never become enlightened enough to take the right decisions till these guys keep making money.

        1. @Sanjay

          What if Lokpal is used as a tool to eliminate the opposition in the guise of tackling corruption. It will make Congress even more powerful.

          It can also be used to indirectly discipline errant members of the Congress so that they fall-in-line.

          Remember, the Lokpal will be more powerful than any other pillar of our democracy – judiciary, parliament or police. Even the media may get reprimanded for critcizing them.

          And think who all will be out of their jursidication.

  3. Interesting point. It does make sense that more choices and elimination of monopolies leads to less corruption. Although, when it comes to our government, I have a few questions and an example.

    1. Interestingly nobody faces corruption when it comes to transport: rail and bus, controlled by government. Is there something to learn and emulate in other departments here?

    2. How can economic freedom matter where a single player controls? like police, licensing agencies, passport, etc.,

    3. In your example of 2G scam and Manmohan Singh’s failure, what in the system can ensure he be punished for his failing or at least to nudge him into action? Is it sufficient that he be removed from office in next term?

  4. Hi Nitin,

    Good insights. I think and that’s only my perception (dont have data right now), that strong “Social Security” would also have an good effect on minimising corruption, hence you see the countries with strong social security setups, capturing good spots on the chart above.

  5. Very interesting graphic and indeed as you say, there is a positive correlation between economic freedom and high transparency rank, which, of course, takes into account other factors as well. The point is, it works both ways in this case if you change the axes. It does not necessarily mean that reducing economic freedom will _result_ in a lower rank in transparency score. One needs to be careful in interpreting these results.

  6. you may be right in asserting that janlokpal is just going to be a super law.
    And the answer may lie in greater economic freedom.

    but my point is why do you think this ‘super law’ will not work? why not give it a try?

    and continue to work for greater economic freedom as well?

    they can both go hand in hand, isn’t it?

    it is not mutually exclusive in any case.

    your cynicism for the bill may be unwarranted. we are all on the same side,aren’t we?

  7. The neta babu criminal nexus in India defraud the state exchequer, embezzle money into private accounts abroad and build illegitimate assets worth billions without any restraint or fear because there is no institution and organization that has the freedom and powers to track such activities, recover the loot back and prosecute the criminals.

    It is the absense of such an institution that has allowed criminal politicians like Sharad Pawar and Laloo Yadav to operate without reprisal actions for so long. This is not a democracy but a lootocracy that loots its citizens with impunity and simultaneously creates fear in them.

    The Lokpal bill once drafted would go through the normal process of parliament where our great elected representatives would review and debate it. The danger here is the Lokpal made into another compromised institution like the ED or CBI by this well entrenched and criminal neta babu nexus.

    Malgovernance and Lootocracy do not emerge due to the failures in implementing economic reforms. It is their due to an already flawed constitution where the founding fathers were unable to foresee the future monopolization and cartelization of power by entrenched power cartels and political families.

    It is these that should be disbanded first like the cleansing of clogged gutters to enable efficient forms of governance and real leaderships to emerge. Until then, the artificial shortages and rent seeking would be imposed by this criminal netababu nexus. They will loot because they can. And they wont stop unless someone stops them.

  8. The best argument for an independent Lokpal is its ability to create fear and a strong deterence in criminals politicians. Once the impunity of free looting of state exchequer and public money is gone – it will deter and heavily disincentivise criminals to enter politics in the first place.

    At least future generations wont be condemned with looters like Pawars and Laloo Yadavs in public life.

  9. The advocacy should be of a Lokpal that is free of political ideologues. Leftist ideologues would use this institution to further vent their vendettas.

    And a Lokpal that has the powers to investigate, recover loot, attach property and prosecute criminals in public office within specific time frames.

  10. Another additional problem is of projects like the NREGA where billions of public money is just thrown away down the drain. This is a problem of shadow power centers and its socialist rasputins who have entered into the systems via backdoor. These rasputins are the parasites of power and can be very destructive if prolonged. Like a tumor growing into a cancer and ultimately destroying the entire body.

  11. In the end, it is the public / voters who are responsible for the kind of govt they get!

  12. Hi!

    Some time ago I did the very same investigation upon those two variables: Economic freedom and corruption. I used data for the period of 1995-2010.

    The results I found was that economic freedom and absence of corruption are strongly correlated variables, that is, the higher the economic freedom, less corrupt a society is.

    The Pearson correlation coefficient is 0.7534, what makes those two variables strongly correlated.

    Here you may check a post upon that simple statistical analysis I made. I feel sorry but the text is in Brazilian Portuguese, but you can read an automatic translation on this link.

    Here a chart that summarizes the whole show on economic freedom and corruption.

    See You!

  13. Hi!

    If someone would like to see a new chart correlating economic freedom and corruption that uses more recent data, you just have to ask me and I make it for you. I have all the data for the period 1995-2011.

    I can make you the chart with English texts and you may publish it on your website.

    See You!

  14. Hi Nitin
    This is not the Corruption level but the Perception of Corruption Provided by a Survey of Third party .
    ” The CPI uses an eclectic mix of third-party surveys to sample public perceptions of corruption through a variety of questions, ranging from “Do you trust the government?” to “Is corruption a big problem in your country?”

    “The authors state in 2008: “Year-to-year changes in a country’s score can either result from a changed perception of a country’s performance or from a change in the CPI’s sample and methodology.”

    oops even they are not sure

    Also Please see Singapore and Hongkong there .. How Much the economic freedom and How Much the Strict Policing effect the corruption level is a question Mark .
    Also Please see the Anti bribery law in Denmark . They also Have Public Prosecutor for Serious Economic Crime (SØK) who deals with severe white collar crime, including corruption.
    Switzerland and USA is a Joke .. One Thrives of the World Corruption and another is the Source of corruption which didnt even leave its own citizen.

  15. Most of the communities in India (such as Bengali), are succumbed in ‘Culture of Poverty'(a theory introduced by an American anthropologist Oscar Lewis), irrespective of class or economic strata, lives in pavement or apartment. Nobody is at all ashamed of the deep-rooted corruption, decaying general quality of life, worst Politico-administrative system, weak mother language, continuous absorption of common space (mental as well as physical, both). We are becoming fathers & mothers only by self-procreation, mindlessly & blindfold. Simply depriving their(the children) fundamental rights of a decent, caring society, fearless & dignified living. Do not ever look for any other positive alternative behaviour (values) to perform human way of parenthood, i.e. deliberately co-parenting of those children those are born out of ignorance, real poverty. All of us are being driven only by the very animal instinct. If the Bengali people ever be able to bring that genuine freedom (from vicious cycle of ‘poverty’) in their own life/attitude, involve themselves in ‘Production of Space’(Henri Lefebvre), at least initiate a movement by heart, decent & dedicated Politics will definitely come up. – Siddhartha Bandyopadhyay, 16/4, Girish Banerjee Lane, Howrah-711101.

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