Impact of Corruption on the Economy

[Administrator’s note:  This article needs more depth.  You can help the Interlock Project by expanding it – see the Participation page for more information on contributing to the Interlock Project.]

Corruption means much more than bribes and embezzlement.   It twists the way that governments, corporations, and other people and organizations act – what they reward, what they punish or oppose, and what they ignore.  This in turn distorts everything else in the nation to varying degrees, particularly the economy.

Corruption, especially of government, adds unnecessary costs for individuals and businesses, increases the amount of political risk involved in starting new ventures or expanding old ones, reduces the level of creativity and mobility in the economy, and introduces fragility into the economy which can (and has) caused systemic economic failure.  The individual nature and scale of corruption’s effects on the economy vary – some of them are very minor and localized irritants, and some can result in world-wide recessions, but most are somewhere in between; unfortunately, they all impose costs on society in order to favor a small special interest, and there are so many instances of corruption in the US that the total cost is staggering.

The problem with discussing corruption’s impact on the economy lies in measuring that cost.  Questions of definitions and comparisons come up – what do you define as corruption, exactly? and is there a “base” level of corruption that you can compare the current level to?  Then there is the fact that actually calculating the total cost is very nearly impossible, due to the judgment calls necessary to pick out which bits of law, regulation, and judicial decision-making are actually corrupt.  Few experts have attempted this, and none completely agree on the results.

An argument can be made that, at this point, the edifice of tax-expenditure subsidies created by the federal government is so corruptive of the economy that it is both a waste of government money and an active harm to the economy; that would be $1.1 (more or less) trillion in economic damage every year.  One could also look at the impact and costs of over-regulation and red-tape; the annual price-tag for that has been placed at somewhere between $50 billion and $1.75 trillion (which provides a good illustration of how divergent measurements of corruption can be).  The costs of under-regulation, where the government ignores companies and individuals inflicting costs on the rest of society, are even murkier – not only are these activities largely covert, making it hard to find and identify them, but the costs of under-regulation are often delayed, as we saw with the decade-plus delay between, for example, the decision not to regulate derivatives in the 1990s, and the financial meltdown in 2008.

This uncertainty amongst the experts about the exact price tag of corruption in the US shouldn’t be taken to mean that it’s not really all that big, but rather that it’s so big that people simply can’t grasp it properly.  It’s there – there are undeniably costs being inflicted by governmental negligence and corruption.  The critical question is one that no one can answer precisely:  how much is it actually costing us?  1% of GDP per year?  2%?  The truly frightening thing about corruption is that the answer could easily be twice or three times that high, and will only grow higher as our expectations for integrity by public officials continues to decline.

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