Analysis of National Corruption/ Income Correlations
Date: Wed, 5 May 2004 08:08:47 -0700 (PDT) From: "Parhatsathid Napatalung" <firstname.lastname@example.org> Subject: Re: 2004 Update Corruption to GDP per Capita Finished To: "Van Sloan" <email@example.com>
Dear Van Sloan:
I have just finished the updating of correlation of GDP to corruption index as well as IQ just to replicate the previous findings. The Excel files are attached to this email As before, the new figures for IQ to GDP per capita came close to the IQ and Wealth of Nations where the correlation I found was .67 versus the book of .62. The numbers were close. However, as an added interested, I notice the GDP curved slightly upward on higher IQ indicating that if I used the log of GDP, I get a better correlation of about .76. As before the corruption showed unusually high correlation of .89 or 89% to GDP per capita indicating that this one variable alone, corruption can explain nearly 89% of the GDP per capita. So if the economic policy pursue exports, tourism, etc. it would not make much impact of GDP as it does if economic policies is to pursue corruption (or transparency). What is surprising about this data is that the correlation shot up from my earlier studies of .82 or 82% of corruption explains the GDP per capita. There are several issues that we have to discuss based on this finding. The first factor is whether there is a bias for people to rate corruption in relation to the economic development. By definition people rate corruption based on perceptions, which means whether people have any trust in the system from the point of view of investment potentials. Since perceptions plays a great deal in human psychology and attitudes of investments, this alone will likely effect economic development. However, obviously corrupt officials will likely play a much greater role in the rating more than the wealth of the country. It is not easy to see whether countries such as Finland or Sweden, for example are richer or not, corruption climate, talking with officials are likely to play a much greater role. Hence, corruption perception index might have small influences of economic development, but the bulk is likely to be what you ask for. The second issue concerns does corruption really influences GDP that much. I mean the figures are ridiculously high, there must be something wrong. It might be we are missing something?
Sloan's comment:A 0.89 correlation does not mean that one factor (corruption) explains 89% of the resulting national income variations. IQ obviously explains a separate, large percentage of income, as do the other factors listed on my http://SQ.4mg.com/success.htm outline page. The World Forum's 2004 Competitiveness Index (which includes corruption as one of its minor factors) may show the greatest correlation to GDP/ person. All of these factors are important in any analysis of GDP and in suggestions for its increase.
It is likely that corruption do play a much greater role than we imagined if you add up your numbers. For example, white collar crime (more appropriately called occupational crime) in dollar value in terms of damage is at least 20 times more costly than all the street crime combined. This value alone is enough to effect the GDP. Now, traditionally, white collar crime are those that "by legal" definition is "illegal". There are gray areas and there are unethical issues but perfectly legal that an occupational crime can be engaged in. These numbers are much larger, but never estimated, it is at least more than the amount of all occupational crime combined. The third issue concerns what causes corruption. A sore sticking point here since the study is not an attempt to find what causes corruption. However there are some observations which bring about corruption. Anytime the system is complicated, restrictive, closed bid, lack of transparency, lack of freedom, absolute power, one political party, etc. you are going to get corruption. The fourth issue is whether corruption is caused by the failure of the system or people? By system I mean defective administration, policies, laws, culture, etc. By people I mean that people are basically "evil" which what causes corruption, they have bad "genes". If you eliminate all the "evil people" out, than you will solve the problem. This argument has been an ageless debate. However, there are some clues if we look from a "macroeconomic" point of view, the facts seems to be leaning towards the failure of the system more than the people itself. Take for example several colonized countries in which the administrative system was turned over "peacefully" to the natives such as Malaysia, Hong Kong, Singapore, etc. Apparently after this change in administration economically the countries remained sound despite the change in people who managed the country. Technically, these people are basically the same Chinese people, especially for Hong Kong, Singapore, and Taiwan. But yet the economic development in China is underdeveloped. It would seem that the government administrative system formed the backbone of the entire economy, rather than monetary values attached such as agriculture, natural resources, or even tourism. The subject we all studied about: checks and balances, auditing, control systems, exception reporting, laws, policies, transparency, economic freedom, accountability, corporate governance, etc. So it would seem funny that the perfect way to apprehend the criminal, you have to design the system which prevents criminal elements from occurring in the first place. An ounce of prevention is worth a pound of cure. Based on my residency here in Bangkok, Thailand the government administrative system are totally lacking in any control measures which protects or prevents corruption, which is why corruption is so easy to perpetrate here. The fifth issue is suppose all this is true, that corruption do influence economic GDP per capita, what can we do about this to helped the economy? Do we just hire police to apprehend white collar criminals? The answer is really no. We have to understand that since it is the failure of the system as mentioned in the last paragraph, this what is so important. The development of sound organizations, checks and balances, transparency, laws, etc. really forms the basics to lowering corruption on the level of prevention. This is where economist should take a serious look at, rather than free trade, or corruption , where organizations, administrations and laws might be a more constructive arena for economic development. Free trade, removing barriers, etc. is really good, but without adequate controls and prevention, free trade could put a country into bankruptcy with unscrupulous investors. For example, some years ago, Ken Lay, the CEO of Enron, was also an Energy advisory, what he did in name of "free trade" was to remove price ceilings of energy prices in California. This created a havoc for California which is now on the brink of bankruptcy. Because Enron is likely to "profit" from these "energy price spikes", California energy company became a victim of unscrupulous businessman. Of course, if you do enough criminal activities, pretty soon, the law is going to catch up on you, but after all the damages has been done. So even if IMF or World Bank talk about free trade, adequate sound administration and governance is really the key issue here. Free trade is acceptable provided that the administration can handle the free trade free from "white collar crimes". Since this article is not meant to be a detailed article on "organizational administration", this is really another topic and I doubt that you will want me to go further into that topic. Once we clear these issues mentioned, let's further discuss some additional findings from the corruption and GDP data. If I arbitrarily assigned countries in three categories of nearly equal in number into developed, developing and underdeveloped countries, and further analyzed by correlation the relationships between corruption to GDP and IQ in each category, I found that developed countries still have a 0.70 (70%) correlation of corruption perception index to GDP per capita. This is still a high figure which means even if a country is developed, CPI is still an important variable to further continue with economic development. Meanwhile, its IQ to GDP remains a modest .49 correlation. For developing countries however something perplexing took place, its correlation for GDP per capita to corruption is only 0.49 and its correlation for GDP per capita to IQ is even more meaningless 0.13. Since I am lucky to live in a developing country, I know why these numbers exists. For one thing, while corruption is still important towards an improving GDP, other factors exists which may influence the country's development, such as non-corruption variables such as I dare say, inadequate laws, free trade barriers, oversized bureaucracy, etc. The funny thing about developing countries is the meaningless IQ to GDP per capita, which might explain that intelligence quotient is really not utilized due to cronyism, nepotism, inadequate facilities of research and development, lack of applied research, lack of patents protection, copyright piracy, all of which may influence "brain drain" for developing countries. This is just my best guess. For underdeveloped countries something even more surprising where GDP per capita to corruption is a near meaningless 11% (0.11) correlation while the IQ to GDP per capita leapfrogged from developing country to 0.59 correlation, which is even higher than for developed countries. This I could not explain except that the lack of development also implies the lack of any administrative infrastructure necessary to manage a country. With the lack of any administrative infrastructure, corruption therefore becomes meaningless. Why is it when an underdeveloped country that suddenly IQ came out from the thin air to be an important variable? It might be that the basic skills such as reading, writing and arithmetic is really needed for the society to communicate and such skills are hard to find amongst the generally illiterate population. You need just a remedial IQ to do the economy any justice. For other parts of the study where I equally divide countries ranked purely by Integrity and by IQ, I find that these variables do not explain much aside from the fact that in a country with already high integrity (low corruption) its correlation is still high at a level of 0.72 (72%). Which means richer countries no matter how you look at it, controls more money and with more money, creditability and integrity is even more important necessary to main and further expand the economy. There's never too much of a good thing. No analysis is perfect, and I am sure there are some holes in my logic. Please feel free to disagree any points which you think I am out of line or any additional work I need to do that I obviously forgot. Ted
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