Economic Freedom and Corruption

Topics: Political corruption, Transparency International, Corruption Perceptions Index Pages: 23 (7217 words) Published: June 20, 2013
by Alejandro A. Chafuen and Eugenio Guzmán
“Either force or corruption has been the principle of every modern government, unless the Dutch perhaps be excepted, and I am not well enough informed to except them absolutely.” —Thomas Jefferson The effects of corruption on economic freedom have been debated intensely by economists and political scientists for many years, fueled by each new allegation of bribery, extortion, or fraud involving public officials. We began to consider this issue seriously during an ongoing debate on patents in Argentina in 1996. At that time, Argentina’s president, who had championed several free-market reforms, was trying to bring the country’s intellectual property rights laws in line with those of the free world, but his efforts were being stymied by special-interest groups, such as the powerful local pharmaceutical industry that had been exempt from respecting patents since 1864. The ability of these groups to prevent such a change in law received wide press coverage in Argentina and prompted letters of protest from the governments of the United States and the European Union. Indeed, it led to our hypothesis that corruption could prove to be a major stumbling block to economic reform. Cases of allegedly corrupt practices in countries implementing market-oriented reforms heighten criticisms that free-market policies and a so-called neo-liberalism merely fuel greed and encourage corruption. If such criticisms are correct, then the historical record should show that, as economic freedom in a country increases, so does corruption. If economic freedom and corruption prove to be inversely related, then the criticisms have little merit. To understand the relationship between economic freedom and corruption, and to test our hypothesis, we analyzed data compiled in previous editions of The Heritage Foundation’s Index of Economic Freedom, the Fraser Institute’s Economic Freedom of the World 1975–1995,1 Freedom House’s World Survey of Economic Freedom 1995–1996,2 and the less rigorous Transparency International index on the perception of corruption.3 The findings of our first analysis were published in 1997 by the Center of Public Studies in Santiago, Chile, in a paper entitled “The State and Corruption.”4 Since then, we have continued to update and analyze the data, and the findings continue to show not only that economic freedom is not responsible for corruption, but also that—more important— economic freedom is a major deterrent of corruption. Economic freedom, however, does not produce automatic effects, and where corruption is entrenched, many institutions of civil society must become involved to deter and eliminate it.

Chapter 3: Economic Freedom and Corruption


As the authors of the Index of Economic Freedom explain, economic freedom is “the absence of government coercion or constraint on the production, distribution, or consumption of goods and services.”5 For our purposes, economic freedom is the right of individuals to try to do what they want with what they earn, build, create, or own. What they own is what they have acquired voluntarily within the limits of just laws. Corruption, on the other hand, is using to one’s own advantage, and outside a just rule of law, what one does not have the right to own or control. For the sake of this discussion, the authors are concerned only with corruption that takes place within the scope of goods and services handled by the authorities entrusted by the government of a civil society. Judging by today’s headlines, corruption among government officials is fast becoming a major growth industry, perhaps rivaling even the growth of the Internet. A recent news article, for example, reported that, according to senior U.S., British, and Russian law enforcement officials, “Russian organized crime figures laundered at least $15 billion through two New York banks at the direction of President Boris...
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