The Surprising Benefits of Corruption in the Economy

Summary

The video script discusses the complex relationship between corruption and economic growth. While corruption is widely regarded as detrimental, some economists argue that a moderate level of corruption might grease the wheels of an economy, particularly in developing countries. The International Country Risk Guide (ICRG) measures corruption, and data suggests a non-linear relationship between corruption and economic growth, with moderately corrupt countries experiencing higher growth rates. However, the video emphasizes that correlation does not imply causation, and the overall consensus remains that corruption is harmful to economic prosperity.

Takeaways

• 🚫 Corruption is generally considered harmful as it rewards rule-breakers and undermines collective prosperity.
• 🌐 Some economists argue that corruption might serve an instrumental role in certain contexts, which contradicts the common view.
• 📊 Data on corruption and economic growth is challenging to collect due to its illegal nature and varying societal acceptance.
• 📉 The International Country Risk Guide (ICRG) provides a widely recognized measure of corruption, ranking countries from 0 (most corrupt) to 6 (least corrupt).
• 📈 Studies have found a positive correlation between corruption and per capita economic growth up to a certain point, after which excessive corruption becomes detrimental.
• 🔄 The 'grease the wheels' hypothesis suggests that moderate corruption can facilitate economic activities by circumventing bureaucratic hurdles.
• 🔄 This hypothesis also posits that as economies develop, the costs of corruption outweigh the benefits, leading to self-correction.
• 🔄 Corruption may allow for more money to be invested in local businesses or personal investments, potentially boosting growth in developing economies.
• 🔄 However, correlation does not imply causation, and the relationship between corruption and economic growth is complex and non-linear.
• 🌍 The study examined only 65 countries, which is a limited sample, and the relationship between corruption and growth is not clear-cut across all economies.
• 📚 The video emphasizes the importance of not taking statistics and correlations at face value, especially when it comes to governance and economic policies.

Q & A

What is the general assumption about the relationship between corruption and economic development?

The general assumption is that richer and more advanced economies tend to have minimal corruption, while poor and underdeveloped countries are plagued by corruption at all levels.

What is the International Country Risk Guide (ICRG) and how is it used?

The ICRG is a recognized measurement of metrics like corruption. It collects data on various variables and creates reports used by governments, businesses, and institutions to assess the risk of doing business in a country.

How does the ICRG rank countries in terms of corruption?

The ICRG ranks countries between 0 and 6, with 0 being the most corrupt and 6 being the least corrupt.

What was the finding of the report on the relationship between corruption and economic growth?

The report found a positive correlation between corruption and per capita economic growth, suggesting that higher corruption rates can lead to higher growth rates up to a certain point.

What is the 'grease the wheels' hypothesis?

The hypothesis suggests that a certain level of corruption can help an economy by making it easier for businesses to navigate red tape and regulations, potentially giving developing countries an advantage in the global economy.

How might the 'grease the wheels' hypothesis be self-correcting?

As economies develop and reach a certain level of wealth, the benefits of corruption diminish, and the costs of corruption become more significant, leading to a natural reduction in corruption levels.

What is the importance of remembering 'correlation is not causation' in this context?

It's crucial to understand that just because two variables are correlated, it doesn't mean one causes the other. The relationship between corruption and economic growth is complex and influenced by many factors, including the wealth level of an economy.

What are the limitations of the study on corruption and economic growth?

The study examined only 65 countries, which is about one-third of the total, and the relationship between corruption and growth is not clear-cut, requiring complex computer modeling to understand.

What is the conclusion drawn from the script regarding corruption?

Despite the findings, the logical conclusion remains that corruption is generally bad, and there are numerous examples where corruption has led to economic decline.

How does the script suggest we should approach economic statistics and correlations?

The script advises that we should not take even well-researched statistics and correlations at face value, especially when it comes to important issues like the governance of our economies.

Outlines

00:00

🚨 Corruption and Its Impact on Society

This paragraph discusses the negative effects of corruption, including its unfair advantages to rule-breakers and its detrimental impact on collective prosperity. It acknowledges the reality of corruption in the real world and introduces the topic of whether corruption might have a positive role in economic growth, as suggested by some economists. The paragraph sets the stage for exploring the relationship between corruption and economic outcomes, posing questions about the nature of this relationship and its implications for different countries.

05:01

📈 The Paradox of Corruption and Economic Growth

The paragraph delves into the complex relationship between corruption and economic growth. It presents the findings of a study that shows a positive correlation between corruption and per capita economic growth up to a certain point. The 'grease the wheels' hypothesis is introduced, suggesting that moderate levels of corruption can facilitate business operations and potentially boost economic growth, especially in developing countries. The paragraph also cautions against the misconception of causation from correlation and emphasizes the importance of not oversimplifying the issue of corruption in the context of economic development.

Keywords

💡Corruption

Corruption refers to the dishonest or fraudulent conduct by those in power, typically involving bribery or other forms of dishonesty. In the video, it is presented as a complex issue that can sometimes be seen as an instrument for the greater good, despite its generally negative connotations. The script discusses how corruption can unfairly reward rule-breakers and favor those with resources, potentially undermining collective prosperity.

💡Economic Growth

Economic growth is the increase in the production of goods and services in an economy over time, often measured by the growth of gross domestic product (GDP) or per capita GDP. The video explores the relationship between corruption and economic growth, questioning whether higher levels of corruption might lead to better economic outcomes in some cases.

💡Grease the Wheels Hypothesis

This hypothesis suggests that a moderate amount of corruption can actually facilitate economic activity by making it easier for businesses to navigate bureaucratic processes. It implies that in some developing countries, corruption can help businesses bypass red tape and other regulations, potentially boosting economic growth.

💡International Country Risk Guide (ICRG)

The ICRG is a recognized source of data on various metrics, including corruption, used by governments, businesses, and institutions to assess the risk of doing business in different countries. It ranks countries on a scale from 0 (most corrupt) to 6 (least corrupt).

💡Econometrics

Econometrics is the application of statistical methods to economic data, allowing for the analysis of economic phenomena and the testing of economic theories. The video discusses the intersection of econometrics, regular economics, and policy in the context of understanding the impact of corruption on economic growth.

💡Policy

Policy refers to a course of action or principle adopted by a government or organization to guide decisions and achieve specific goals. In the context of the video, policy is discussed in relation to how it might be influenced by the findings on corruption and its potential effects on economic growth.

💡Causation

Causation is the relationship between an event (the cause) and a second event (the effect), where the first event is responsible for the second. The video emphasizes the importance of not confusing correlation with causation, a common mistake in interpreting data.

💡Data Collection

Data collection is the process of gathering information and facts about a particular subject. In the video, the difficulty of collecting reliable data on corruption is highlighted, as it is both illegal and often concealed.

💡Economic Systems

Economic systems are the structures and mechanisms by which a society allocates resources and organizes production, distribution, and consumption. The video discusses how developing economies are often in the process of building out robust economic systems, which can be influenced by the level of corruption.

💡Good Governance

Good governance refers to the manner in which power is exercised in the management of a country's economic and social systems. It involves accountability, transparency, and the rule of law. The video concludes with the importance of good governance in maintaining a healthy economy, despite the complex findings on corruption.

Highlights

Corruption is generally considered a negative phenomenon that rewards rule-breakers and undermines collective prosperity.

Some economists argue that corruption might serve as an instrument for the greater good, contrary to common assumptions.

The assumption that richer economies have minimal corruption and impose harsher punishments may not align with data.

The International Country Risk Guide (ICRG) provides a widely recognized measure of corruption.

The ICRG ranks countries from 0 (most corrupt) to 6 (least corrupt), with the Republic of the Congo being the most corrupt and Finland the least.

Corruption has a positive correlation with per capita economic growth up to a certain point, after which it becomes detrimental.

The 'grease the wheels' hypothesis suggests that a moderate level of corruption can facilitate economic activities by circumventing red tape and regulations.

Developing countries might benefit from corruption as it allows for cheaper manufacturing and attracts international companies looking to outsource.

The grease the wheels theory is self-correcting, as wealthier economies have less to gain from corruption and growth rates naturally slow down.

Corruption can potentially boost growth by allowing more money to be invested in local businesses or bypassing taxes.

It's crucial to remember that correlation does not imply causation, and the relationship between corruption and economic growth is complex.

The study examined only 65 countries, and the relationship between corruption and growth is not clear-cut, requiring computer modeling for analysis.

Wealthy developed economies typically have low corruption and low growth, while undeveloped economies have high corruption and low growth.

Developing economies are often improving their government functions while building robust economic systems.

The video emphasizes the importance of not taking statistics and correlations at face value, especially in governance and economic matters.

The video avoids mentioning specific countries but suggests that corruption has been the undoing of some economies.

The video invites viewers to explore a playlist on economies that have been negatively affected by corruption.

The video concludes that the logical conclusion that corruption is bad likely holds true, despite the complexities of the data.

Transcripts

Corruption is a bad thing. It unfairly rewards those that break the rules,

favour people who already have resources at their disposal, and it undermines the

collective prosperity that can be enjoyed when people work on building a society together.

That should hopefully go without saying, at least in theory.

But we all live in the real world where corruption at all levels is not only an inevitability,

but something that according to some economists might even be an instrument for the greater good.

A basic check of the different countries around the world

might be all that some people need to totally dismiss this idea.

Generally, it's easy to think that the richest and most advanced economies tend to have very

minimal corruption, or at the very least impose harsh punishments on those that are caught engaging

in corruption, while poor underdeveloped countries with systemic economic problems

tend to be plagued by corruption at all levels. That would be a pretty sound assumption based on

a lot of the countries we've explored on this very channel, but the data might disagree.

This is a very interesting intersection of econometrics, regular economics, and policy,

and we want to jump right into it, so as always we need to answer a few basic questions.

Do more corrupt countries achieve better economic results? If they do, why do they

achieve those better economic results? And finally, if they don't, why might the data suggest otherwise?

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Before we jump into it, we as always need to give the big disclaimer when covering these

kinds of issues. Reliable data around things like corruption is notoriously hard to collect,

because, well, even in countries where it's commonplace, it's still illegal.

So people are still going to try and conceal this behaviour.

This fact might even impact the data of advanced economies more than the

economies that people typically associate with corruption,

because in advanced democratic countries with strong institutions,

there is less societal acceptance of corruption and harsher punishments when it's discovered.

So people conducting this crime will try even harder to be discreet about it.

With that out of the way, finding the relationship between corruption and economic growth

should theoretically be as simple as plotting economic growth,

or preferably economic growth per capita on one axis,

and the international country risk guide corruption rating on the other,

and plotting their relationship.

The international country risk guide, or ICRG,

is probably the best-recognized measurement of metrics like corruption.

It also collects data on all of these other variables,

and uses them to create a report that is used by governments, businesses, and other institutions

to find out how risky it is to do business with or otherwise operate in a given country.

Just using the metric on corruption, the ICRG ranks countries between 0 and 6,

with 0 being the most corrupt, and 6 being the least corrupt.

The most corrupt country in the most recent release of the report was the Republic of the Congo,

and the least corrupt country was, perhaps unsurprisingly,

Finland, followed closely by those other goody-two-shoes Scandinavian countries, Denmark,

and Sweden.

So plotting these two data points against one another for a broad selection of countries

should show if there's any relationship between corruption and economic growth.

Thankfully, a report written and edited by these two economists has already done

exactly that and found an interesting result.

Corruption does have a positive correlation with per capita economic growth,

meaning the higher the rate of corruption in a country, the higher the rate of growth,

up until a point where seemingly too much corruption becomes a problem again and reduces growth.

Interestingly, or perhaps sadly, even though the rate of growth compared to

corruption created something of a hump shape, with averagely corrupt countries

having the highest rates of per capita growth, the growth rate of the most corrupt countries

was still higher than the growth rate of the least corrupt countries.

So ok, this is a very interesting relationship,

but the next most important question to ask is, why is this happening?

One theory put forth by economists is the so-called grease the wheels hypothesis.

The idea is that a little bit of corruption can help an economy because it makes it easier

for businesses to get around things like red tape, environmental restrictions, and safety standards,

and just get stuff done with a comparatively cheap bribe given to the right person to look

the other way. For developing countries that compete in the global economy based on how

cheaply they can manufacture basic goods, this could be a huge advantage over an economy with

low levels of corruption that enforces things like safety standards and makes businesses pay

their employees a legal minimum wage. Being able to get stuff done quickly and

efficiently for a small bribe or two is also an attractive quality for some international

companies with lots of money looking to outsource operations.

Some economists have even suggested that the grease the wheels theory is self-correcting,

because when economies get to a certain level of wealth they stand to lose more than they gain

through corruption, but simultaneously advanced economies tend to have a slower growth rate

anyway because once an economy is developed there are fewer opportunities for massive increases in

output, like there are in economies that are going through a transition from being primarily

agriculture-based to primarily manufacturing-based. Paying a bribe or two to set up a factory where

once there was a park or a farm will help a developing country produce more output in the

next year which is economic growth. Paying a bribe to undermine financial controls at a major bank

will hurt a delicate system based on trust and mean less people use that bank next year which

is negative growth. The grease the wheels hypothesis also theorises that if corruption

is done to avoid things like tax, then more money can be put back into the economy through

local businesses or investments which boost growth at the expense of public funding.

This is often a worthwhile trade-off in certain developing economies where that money may or may

not have been corruptly stolen by the government anyway and basic investments into modernising

industries can have very high returns. Again a basic farmer skipping out on their taxes so that

they can upgrade from hand tools to a tractor will massively increase their economic output.

Someone in a wealthy economy skipping out on their taxes so they can buy more stocks in a

share portfolio is not going to have such a large effect. But before we go out to undermine our

system of governance with bribes in the name of economic prosperity it's important to remember

one of the most important lessons when dealing with any data, correlation is not causation.

The classic example of this is that regional ice cream sales and regional drownings are very

strongly correlated, but eating ice cream does not cause people to drown unless they eat a lot,

presumably. And people drowning does not somehow magically boost ice cream sales,

it's just that both of these variables are correlated with how hot it is outside.

On hot days more people go swimming and more people buy ice cream.

The same thing may be happening with corruption and economic growth.

The actual data points for this correlation show that for starters the relationship is

not clear at best and it needs a computer modelling to map out its non-linear regression.

The whole thing also potentially has something that is the equivalent variable of hot weather

to drownings and ice creams, and that's how wealthy an economy is.

Wealthy developed economies tend to have low corruption and low growth.

Totally undeveloped economies tend to have high levels of corruption

and also have low levels of growth.

But developing economies are normally building out robust economic systems at the same time

that they are trying to improve or are being forced to improve their government functions.

This study also only examined 65 countries,

which is roughly 1 third of the total number of countries that exist in the world.

So while we almost wish there was more to this story and that we may have

miraculously found a secret to accelerating economic growth,

the logical conclusion that corruption is bad probably holds true.

If anything this was a great case study in never taking

even very well-researched statistics and correlations at face value,

especially for something as important as the good governance of our economies.

Now we have avoided mentioning any countries in particular here in this video,

but there are many examples where good old-fashioned

corruption has been an economy's complete undoing.

And to prove this point we have made an entire playlist of our in-depth

exploration of those economies that you should be able to click to on your screen now.

Also let us know in the comments if you enjoyed this shorter style of

explanation for niche economic theories,

or if you'd prefer us to stay focused on the bigger issues that require more of a deep dive.

Thanks for watching mate, bye.