Wednesday, August 28, 2013

Contagion effect of corruption

Vijay K. Mathur

Published in Standard-Examiner, August 11, 2013, Ogden, Utah

The Corruption Perception Index (CPI) of Transparency International (TI) measures perceived level of public corruption in countries around the world from the perspective of businesses and country experts. The rankings are from least to most corrupt. In 2012, Denmark was the least corrupt while Somalia was the most corrupt among 174 countries. In 2012, the U.S. ranked 19 as compared to 22 in 2010, not a significant change. On the Bribery Payers Index of TI for 28 countries, Netherland ranked 1 with the least bribery, the U.S. ranked 10th, and the most bribery prone country is Russia. The Global Corruption Index of TI surveys 114,000 people around 107 countries. In 2013, 64 percent of the respondents thought that just a few big interests run the U.S. government.

Corruption implies dishonesty, bribery, fraud, cheating and perversion of integrity. On different indices, it seems that U.S. standing on corruption is very poor among the nations of the world. It has also infected the private sector as we witnessed fraudulent practices in the banking and financial investment industry, including hedge funds, derivatives and mortgage finance, in the recent Great Recession. These practices still continue. As recently as July 25, SAC Capital Advisors, a hedge fund, was indicted in New York for “rampant insider trading” and charged that the firm had a culture of pervasive cheating.
Utah is no exception, as evidenced by cases of affinity fraud in which investment fraud is committed by using church connections, securities fraud, as well as fraud cases in other sectors. Public officials are also not immune to fraudulent activity. Utah Attorney General John Swallow is facing scrutiny for accepting bribes from an imprisoned businessman. Creeping corruption corrodes moral and ethical standards, fair play in public policy and in the conduct of business. It also undermines trust in public officials and in the market place.

Corruption diverts resources from productive activities, discourages entrepreneurship and encourages rent seeking behavior, where rewards flow to those who have inside connections within business world and/or with public officials and politicians. Hence, it results in efficiency loss that is detrimental to growth and prosperity for all the people. The 1999 report by the European Bank for Reconstruction and Development provides evidence on deleterious effects of corruption on growth in many countries.

The worst part of corruption is its contagion effect, like a contagious disease. There is a cascading effect of corruption, when the corruption is top down at any level of government or in private sector. A contagious disease spreads from one person to another by mere exposure to the diseased person. The spread of the disease of corruption requires a certain minimum level of corruption before it spreads to others and becomes the social norm. However, it is hard to pinpoint the minimum threshold because it is influenced by cultural traditions, lack of monitoring and accountability, lack of transparency and an incentive system that includes rules, regulations and laws.

Economists C.J. Waller, T.Verdier and R.Gardner, Economic Inquiry, October 2002, theorize that centralized corruption (top down corruption) of public officials (as in Russia) results in less efficiency loss than bottom up corruption (as in India). The U.S. is closer to the centralized corruption regime.

The experimental work, reported by economists Robert Innes and Arnab Mitra (IM), Economic Inquiry, January 2013, at U.S. universities and at a university in India shows that dishonesty is contagious. An Indian experiment found that if a large proportion of the subjects were dishonest, other individuals were also dishonest with greater frequency. In the U.S.,  “... individual propensities for honesty evaporate when peers are thought to be dishonest.”
The above evidence is remarkable in the sense that it does not matter if the country is more corrupt, like India (ranking 94 on CPI in 2012) or China (ranking 80 on CPI in 2012), or less corrupt like the U.S. IM argue that their findings also provide some hope that corruption can be reduced, if there are significant number of honest peers to establish the social norm of honesty, integrity and truthfulness.

Chrystia Freeland, in her book “Plutocrats,” refers to a study in a book by Daron Acemoglu and James Robinson (AR) that analyses rise and downfall of nations. AR argue that the difference between failed states and successful states is “whether their governing institutions are inclusive or extractive.” In extractive states, ruling elites exercise control. 

The ruling elite’s aim is to acquire power and maximum amount of wealth from the rest of the society.

Concentration of power and wealth breeds corruption, and after a point it plagues the rest of the society. Inclusive states enable everyone to take part in the governance of institutions and society and provide access to economic opportunity for all. 

Leaders in the U.S. should be alarmed by the growing concentration of wealth, increasing corruption in business and among public officials, declining growth rate, high unemployment and under employment, declining wages and the gradual decline of the middle class.

Mathur is former chairman and professor of economics and now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio.   He also writes blogs for the Standard-Examiner at,etc.

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