Bureaucracy Breeds Corruption

OK, so I was casting about, desperately looking for something to blog about this weekend. (Not that I don’t have good ideas, just not enough time to develop them.) On a whim, I decided to grab my copy of Thomas Sowell’s Basic Economics — an excellent book… that I have yet to read — and flipped to Chapter 17, “Government Functions”. Lo and behold, as I started skimming through it, I found some interesting stuff in the section on “Law and Order”. Here are some snippets:

two hands grasping in business handshake“Order includes more than laws and the government apparatus that administers laws. It also includes the honesty, reliability, and cooperativeness of the people themselves. “Morality plays a functional role in the operation of the economic system,” as Nobel Prize winning economist Kenneth Arrow put it.

Honesty and reliability can vary greatly between one country and another. As a knowledgeable observer put it: “While it is unimaginable to do business in China without paying bribes, to offer one in Japan is the greatest of faux pas.” When wallets with money in them were deliberately left in public places as an experiment, the percentage of those wallets returned with the money untouched varied greatly from place to place: in Denmark, for example, nearly all of these wallets were returned with the money still in them. Among United Nations representatives who have diplomatic immunity from local laws in New York City, diplomats from various Middle East countries let numerous parking tickets go unpaid — 246 by Kuwaiti diplomats — while not one diplomat from Denmark, Japan, or Israel had any unpaid parking tickets.

Honesty and reliability can also vary widely among particular groups within a given country, and that also has economic repercussions. Some insular groups rely upon their own internal social controls for doing business with fellow group members whom they can trust. The Marwaris of India are one such group, whose business networks were established in the nineteenth century and extended beyond India to China and Central Asia, and who “transacted vast sums merely on the merchant’s word.” But, for India as a whole, that is not the case. Yet business transactions among strangers are an essential part of a successful modern mass economy, which requires cooperation — including the pooling of vast financial resources from far more people than can possibly know each other personally. As for the general level of reliability among strangers in India, The Economist reported:

‘If you withdraw 10,000 rupees from a bank, it will probably come in a brick of 100-rupee notes, held together by industrial-strength staples that you struggle to prise open. They are there to stop someone from surreptitiously removing a few notes. On trains, announcements may advise you to crush your empty mineral-water bottles lest someone refill them with tap water and sell them as new…. Any sort of business that requires confidence in the judicial system is best left alone.’

Where neither the honesty of the general population nor the integrity of the legal system can be relied upon, economic activities are inhibited, if not stifled. At the same time, particular groups whose members can rely on each other, such as the Marwaris, have a great advantage in competition with others, in being able to secure mutual cooperation in economic activities which extend over distance and time — activities that would be far more risky for others in such societies and still more so for foreigners.”

In short, it’s a complex world, where the cultural emphasis on personal and professional integrity varies from place to place, group to group. Add in the fact that most everything boils down to money — we are talking about economics, here — and it becomes even more confusing and frustrating.

“While government can do little to create honesty directly, in various ways it can indirectly either support or undermine the traditions on which honest conduct is based. This it can do by what it teaches in its schools, by the examples set by public officials, or by the laws that it passes. These laws can create incentives toward either moral or immoral conduct. Where laws create a situation in which the only way to avoid ruinous losses is by violating the law, the government is in effect reducing public respect for laws in general, as well as rewarding specific dishonest behavior.”

And then there’s the bureaucracy….

two hands about to shake, with bribe“When laws and policies make honesty increasingly costly, then government is, in effect, promoting dishonesty. Such dishonesty can then extend beyond the particular laws and policies in question to a more general habit of disobeying laws, to the detriment of the whole economy and society. As a Russian mother said:

‘Now my children tell me I raised them the wrong way. All that honesty and fairness, no one needs it now. If you are honest you are a fool.’

To the extent that such attitudes are widespread in any given country, the consequences are economic as well as social….

While a market economy operates better in a country where honesty is more widespread, it is also true that free markets tend to punish dishonesty. American investigative journalist John Stossel, who began his career by exposing various kinds of frauds that businesses commit against consumers, found this pattern:

‘I did hundreds of stories on such scams but over the years, I came to realize that in the private sector, the cheaters seldom get very rich. It’s not because ‘consumer fraud investigators’ catch them and stop them; most fraud never even gets on the government’s radar screens. The cheaters get punished by the market. They make money for a while, but then people wise up and stop buying.

There are exceptions. In a multi-trillion-dollar economy with tens of thousands of businesses, there will always be some successful cheaters and Enron-like scams; but the longer I did consumer reporting, the harder it was for us to find serious rip-offs worthy of national television.’

Where a government bureaucracy is both small and honest, as in nineteenth-century Britain, it has few negative effects on the economy and, if the relatively few services it performs are useful, its net effect can be positive. However, when a government bureaucracy is both large and pervasive in its powers, the stifling effect on the economy of endless red tape and bureaucratic delays can be mitigated by a certain amount of corruption, such as bribes to get needless bureaucratic obstacles removed and delayed processes speeded up. The beneficial effects of honesty, like the beneficial effects of clean air and clean water, are not absolute and categorical, but incremental. Given large and stifling bureaucracies, an incorruptible one may be worse in its effects than one whose most harmful restrictions can be mitigated with bribes. On the other hand, a thoroughly corrupt bureaucracy tends to inhibit economic activity because, in effect, there are no known laws to depend on when engaging in planning and investment.”

When cultural/societal values are “poor” or unreliable, the rule of law becomes all the more important. When there is no formal “rule of law”, or the populace’s respect for it is… sketchy, it ain’t good for the economy or society at large. Sad that it exists, but there it is.

Contemplate.

Discuss.

That is all.

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