An international conference recently addressed the dangers of corruption to liberty, economic growth, and human flourishing. Many of these criticisms can be applied to cronyism, often the byproduct of formal corruption.
“There is an undeniable link between good governance and human flourishing,” U.S. Deputy Assistant General Roger Alford told the International Conference on the Rule Of Law and Anti-Corruption Challenges in São Paulo on Tuesday.
By “good governance,” Alford – also an assistant dean and professor at Notre Dame – made clear that meant adherence to the rule of law, coupled with independent and impartial administration of justice and respect for individual rights. Eamonn Butler listed the rule of law as one of the Foundations of a Free Society in his book for the Institute of Economic Affairs in London. (The IEA’s Steve Davies discussed the topic further in this video.)
Alford’s speech is one of several recent warnings pointing out specific examples of corruption’s dangers.
- Corruption hampers economic growth and the free market
Alford recalled the words of another U.S. official:
As one of my colleagues at the Justice Department said when he visited Brazil this past May, “corruption impedes free and fair competition and creates a high risk that prices will be distorted and products and services will be substandard. Importantly, corruption disadvantages honest businesses that do not pay bribes. And bribes impede economic growth, undermine democratic values and public accountability, and weaken the rule of law.”
When favored firms receive government contracts apart from their ability to offer the best service at the lowest price, money that could otherwise fund other industries - and produce economic growth - flows to inefficient firms.
- Corruption acts as a “hidden tax” that drives out investment
Alford described the variety of ways in which inefficient and unnecessary payment costs consumers:
Corrupt countries are less competitive globally and less attractive to foreign investment. Corruption increases prices and lowers government output. It reduces government revenue and investment in human capital. It stunts growth, imposes hidden taxes, limits spending on education and health care, and diminishes human development. The bitter fruit of corruption is poverty, ignorance, and death. If a government desires to improve its economy, combating corruption must be high on the agenda.
With 194 other nations to choose from, foreign investors have little incentive to invest in a government that will not reward its efforts.
Alford also exposes an ironic circle: Big government creates corruption, which reduces economic activity. That, in turn, reduces both the funding and quality of the services offered by big government. Economic growth benefits every segment of society.
- Corruption is a potential driver of international conflict
As Jean Pierre Chabot wrote in Providence magazine:
Sarah Chayes, author of Thieves of State: Why Corruption Threatens Global Security, illustrates why conflicts of interest can cause violence: “Acute government corruption may in fact lie at the root of some of the world’s most dangerous and disruptive security challenges—among them the spread of violent extremism.” If violent extremism is caused in part by corruption, a manifestation of injustice, then surely targeting conflicts of interest is critical to de-escalating violence.
Chayes, a senior associate at the Carnegie Endowment for International Peace, testified before the Senate Foreign Relations Committee last year that corruption precipitates “chronic outbreaks of violence due to rivalry among competing kleptocratic networks,” reinforces “transnational organized crime structures through their interpenetration with corrupt governments,” and “gives credence to the arguments of militant religious extremists such as the self-proclaimed Islamic State.”
The more any decision is politicized, especially those affecting citizens' economic well-being (or survival), the greater the social conflict, as warring factions vie for control of scarce resources.
- Corruption is a byproduct of large, remote government – especially in the EU
MEP Richard Sulik found that “European [Union] funds have become the largest source of corruption in Central and Eastern Europe, from the local level up to the political elite.” (You can read his report here.) The Economist magazine observed, “Governments seem less worried about misspending money from Brussels than that of their own taxpayers.”
The formula seems clear: The larger the government, the more favors it can dole out. The more remote the government, the less accountability and concern there is over the funds’ proper use.
- The antidote to cronyism is limited government and less economic intervention
Cronyism, which is always evidence of ethical failure, is often associated with formal, illegal corruption. In crony capitalism, well-connected firms receive government contracts, cartel status, or engage in rent-seeking. Corruption takes place when this process breaks the law - but legal cronyism harms citizens in the same ways.
The answer to improving good governance and increasing “human flourishing,” as Alford put it, is to reduce government’s role in the economy. Having fewer funds to distribute leads to less bribery and concentrates decisions in the hands of consumers, who reward performance and efficiency.
Matt Zwolinski of the University of San Diego explains the connection between cronyism and exploitation in this Learn Liberty video.
You may also enjoy this video of Charles Koch discussing cronyism with Mike Rowe.
(Photo credit: Pictures of Money. This photo has been cropped. CC BY 2.0.)