To Root Out Corruption, Boot Out Big Government

In several countries I visited in the past year, major scandals centered on corruption charges against prominent politicians and businessmen. Everywhere, I was told that their business leaders were uniquely venal and their political system especially vulnerable to corruption. But corruption is common whenever big government infiltrates all facets of economic life, never mind the political and business systems.

In modern economies, profits often are determined more by government subsidies, taxes, and regulations than by traditional management or entrepreneurial skills. Huge profits ride on whether companies win government contracts, get higher tariffs and quotas, receive subsidies, have competition suppressed, or manage to have costly regulations eased.

Companies respond to the importance of government's role by striving to influence political decisions. It often is effective just to lobby politicians, and human nature guarantees that sometimes businesses bribe officials and politicians in return for government favors and profits.

"Rent-seeking" is the way economists describe all efforts by special interests to benefit by influencing political decisions. The expression applies to any group that depends on government handouts and other favors. Paradoxically, rent-seeking can serve a social purpose. It may prevent policies that would cause considerable social harm or promote policies that make an economy more efficient. For example, if all the detailed regulations regarding construction in the statutes and codes of most U.S. municipalities were followed to the letter, construction would virtually cease because of the costs of compliance. And communist economies would have performed much worse than they did--and their record was bad enough--had bribes not greased the wheels and overcome the most outrageous government controls over the economy.

BUMPY ROAD. But bribery and other illegal rent-seeking usually do considerable damage. They always divert the time and resources used by high-powered lobbyists and fixers away from the production of useful goods and services. They also often promote policies that distort the operation of an economy.

Organized criminals extract monopoly prices for the goods and services they control through bribes and intimidation. Roads are badly built or diverted to less useful routes in order to reward builders and landowners who influence officials making the decisions. Loans from government banks and agencies go to companies with political clout rather than where they can be invested most profitably. Evidence of these and many other acts of political corruption have been highlighted by the scandals in Brazil, Italy, Japan, South Korea, and other countries.

In several countries, politicians and parties caught with their fingers in the till were ousted this past year. The reaction has been so strong in Italy that the largest party of the political center, the Christian Democrats, may be permanently damaged. Recent elections in Rome and other Italian cities have been dominated by ex-Communists and fascists, a pathetic choice between two political extremes.

The party that ruled Japan continuously since the 1950s has splintered into several competing groups. The Brazilian Congress impeached the nation's first democratically elected president in 30 years, Fernando Collor de Mello, because of revulsion at the widespread corruption in his government.

SEVER THE LINK. Voting out crooked politicians and punishing people in business who illegally influence policies discourages corruption. Reform movements that come to power often make good for a while on their promises to clean up the process and eliminate corruption. During such crackdowns, businesses and other rent-seekers must rely on campaign contributions and other legal ways to influence outcomes.

But corruption always reemerges wherever governments have a major impact on economic conditions. The momentum behind reform movements peters out as politicians, officials, and companies become tempted once again to risk exposure and disgrace by giving and receiving bribes and engaging in other corrupt acts.

There is only one permanent way to reduce undesirable business influence over the political process: Weaken the link between business and politics. It is essential to simplify, to standardize, and especially to eliminate many of the regulations affecting economic activity. Surely this explains why new governments recently elected in Japan and Korea have pledged to deregulate, and why a new Italian political center is forming around demands for privatization and increased competition.

Evidence of widespread corruption can be a blessing in disguise if it is the catalyst for reducing government control over large segments of the economy. But if all it does is to help elect politicians who promise to be more honest and diligent than their predecessors, experience shows that before long, political and business corruption will rear its ugly head again.

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