Corruption makes economies less crisis-resilient
In modern jargon, he was writing about the resilience of economies and societies to recover after a major shock. How rapidly and easily are they able to bounce back?
The financial crisis of the late 2000s was such a shock. The year 2007 is the ‘peak’ year of the long economic upswing of the 1990s and 2000s, with output beginning to fall almost everywhere during 2008. So we can calculate how well various economies recovered after the crisis. The key question is: is output in 2015 higher or lower than at its previous peak point, in 2007?
Looking at a group of 20 developed economies in Europe, North America and Australasia, their resilience differed sharply. In Australia, real output in 2015 was 18 per cent higher than in 2007, and in Greece it was 26 per cent lower.
In no fewer than 6 of the 20 countries, output in 2015 was still below the level of 2007. This is an unusually long time for an economy to fail to bounce back and surpass its previous peak level. The Great Depression of the 1930s saw some examples, and there were a few others in the dislocations following two world wars. But over the past 150 years, these are the only other examples.
Perhaps surprisingly, almost 80 per cent of the total variation in the recovery rates of the 20 economies can be accounted for by just two variables. One of these is membership of the Euro. Over the 2007-2015 period, the average growth in real output in the 8 countries which are not members of the Eurozone was +9.3 per cent. In the 12 which are, the average was -1.9 per cent. Even leaving the extreme case of Greece out of the latter calculation still gives an average barely above zero, +0.3 per cent.
The second is the level of corruption in the economies. The organisation Transparency International (TI) constructs an index of corruption for countries across the world, and their index is the one most widely used indicator of corruption. There is very strong evidence that the more corrupt an economy was measured to be in 2007 by TI, the weaker was its recovery to 2015. Not just that. Above a certain level of corruption, its impact on the economic performance 2007-15 intensifies.
My paper Corruption and economic resilience sets out the detailed statistical evidence. But the message is clear. A large proportion of variation in the growth rates over the 2007-2015 period in the sample of 20 countries can be explained by just two variables, namely membership or otherwise of the Euro, and the level of corruption within an economy.
The impact of corruption is particularly sharp on four Mediterranean economies, Italy, Spain, Portugal and Greece. If Spain, for example, had been less corrupt and had a TI score equal to the average across the 20 developed economies examined, its growth would have been +4.7 per cent instead of -3.2 per cent. Greece is even more dramatic. If it had been equal to the group average, growth would still just have been negative, at -0.4 per cent. But this contrasts sharply with the actual growth of -26.2 per cent.
A great deal is made of the impact of the Euro and macro policy in general on the dramatically poor performance of the EU’s Mediterranean countries since the financial crisis. However, much of this can be attributed to their own internal culture and institutional structures.
Prof Paul Ormerod is the author of the paper ‘Corruption and economic resilience: Recovery from the financial crisis in Western economies’, published in Economic Affairs.