A Study on Economic Freedom Through the Lens of Corruption

This article won the 2nd prize in the Fraser Institute’s 2020 Student Essay Contest.

Power tends to corrupt: absolute power corrupts absolutely.[1] This was the observation of Lord Acton, a British historian, who noted that the attainment of more power leads to a degradation of morals. In many countries, corruption can be observed where leaders have great power over the political and economic levers of the state, leading to the limitation of the levels of freedom enjoyed by the citizens of that state. In Capitalism and Freedom, Milton Freidman argued that economic freedom, while not sufficient, is a necessary condition for political freedom because “such a form of organization separates economic power from political power.”[2] Thus, as long as the free market is restricted by the state, the political freedoms of the people will be limited as well. Building on Friedman’s theory on economic freedom, this paper argues that economic freedom and freedom from corruption are interrelated and key factors in the enrichment of the human condition.

There is a relationship between corruption and economic freedoms. Corruption is defined as the use of a public office for private gain. This occurs when officials misuse their power when making decisions or by diverting public spending to where individual gains are the greatest.[3] The incentive for corruption is prevalent when public officials possess discretionary power and can receive economic rents from that power.[4] Markets that give public officials more discretionary powers are often tied to countries that have low levels of economic freedom. Where there are many regulations and market restrictions, the bureaucracy can use its political power for corrupt purposes, such as coercively regulating and redistributing wealth and demanding bribes. Consequently, corruption takes hold leading to negative impacts on the country’s development. Corrupt officials use their power to inefficiently increase public spending and public debt. Additionally, as corruption lowers tax revenues for a state, it also increases the size of government[5] and raises the price of imports between 7–15%, effectively acting as a trade barrier. [6]

Comparing the annual economic freedom rankings from the Fraser Institute with Transparency International’s corruption perception index (CPI), using a dataset of 158 countries, confirms a strong correlation between freedom from corruption and economic freedom. The higher the country scores on the economic freedom score, the more likely it is to have a higher CPI, implying that the country is freer from corruption (Figure 1). In addition to a correlation, there is also an element of causality given that corruption and economic freedom are intertwined. The broad themes used to evaluate economic freedom, such as the size of government, regulations, and freedom to trade internationally, can be negatively affected by the level of corruption in a country. For example, as corruption increases public debt and spending this would also increase the size of government, one of the factors in calculating the economic freedom score.

In Capitalism and Freedom, Friedman acutely observed that certain politically unfree countries like Singapore scored well on economic freedoms. However, despite corruption being a factor in calculating political freedom, the relationship it has to economic freedom is not the same. No country with a low corruption score (high/moderate level of corruption) also has a high level of economic freedom and vice versa. A country in the fourth quartile of economic freedoms (freer) is 2.5 times less corrupt than a country in the first quartile and 1.5 times less corrupt than countries in the third quartile (Figure 2). The difference in the average corruption score between a country in the third and fourth quartiles is more substantial than the difference between the second and third quartiles. This shows that improvements in the corruption score are important at the upper level of economic freedom scores and thus necessary for strong economic development. It is no surprise that the countries that do well in controlling corruption are mostly located in the freer societies of Western Europe and North America. On the other hand, most African countries can be found in the first or second quartile with the average corruption score among African countries 25% lower (worse) than the global average.

On the African continent, however, Botswana stands out as an anomaly; one of the few that score well on both the economic freedom and corruption index. While Botswana is one of the richest and economically free countries on the African continent today, at the time of its independence in 1966, it was the third poorest country in the world with an average national income of $671.[7] Since its independence from British rule, however, the country “adopted pro-market policies […] low and stable taxes to mining companies, liberalized trade, increased personal freedoms, and kept marginal income tax rates low to deter tax evasion and corruption.”[8] The gradual free-market expansion of Botswana was based on an understanding of the important role of respect for individual liberties, limited government intervention and control of corruption can have on economic growth. In 1994 the country implemented the Directorate on Corruption and Economic Crime, an anti-corruption agency with broad powers to investigate and prosecute corruption and economic crimes.[9] Although the country places in the third quartile for economic freedom, it continues to make improvements and is one of two African countries in the fourth quartile for average corruption score.

Similar to Botswana, Zimbabwe gained independence from British rule in the late 20th century but followed a path of state planning that placed limitations on the freedoms of the citizens and gave public officials great amounts of discretionary powers in planning the economy. Many years after its independence, Zimbabwe dismantled property rights by seizing the land of 4,000 farmers, and while the Government claimed that it would be given to the masses, it was ultimately used to reward the friends of the President. As a result, the agriculture sector collapsed, and consequently, the economy collapsed leading to a decrease in tax revenues. To respond to the crisis, the Government initiated an inflationary monetary policy, leading to hyperinflation and an unstable monetary system, and increased the size of government through state patronage and looting.[10] The economic suppression of Zimbabwe, which led to devastating consequences, was led by corrupt public officials who used their office to increase their private gains, by increasing their economic and political power. As a result, the restrictions on economic freedom by the political class allowed for corruption to flourish in the country.

The contrast between Botswana and its neighbour Zimbabwe places context on the data presented in this paper and highlights how corruption is linked with the economic freedom of a country, often working as a feedback loop. This is the case because economically freer countries will have a smaller government, less prone to interfering in the success of the private market. Rather, these countries will focus on promoting individual liberty, property rights and making corruption-free investments in infrastructure, healthcare and education, which increases the standard of living and aids in the development of a prosperous private sector. On the other hand, where the free market is restricted, corruption is more prevalent. The discretionary power of public officials in highly controlled markets creates the opportunity for self-enrichment at the cost of the individual liberties and prosperity of those who reside in the state. Because certain businesses may find it still possible to profitably operate in that country, they pay bribes out of a necessity to maintain operations. As such, public officials can use their political power to seek rents and thereby possesses the economic powers of the state.

As a result, the Government becomes engaged in the process of buying and selling privileges and not in the protection of political and economic freedoms.

Limiting these freedoms can have negative consequences on the human condition.[11] While Botswana and Zimbabwe are neighbours on the African continent, the standard of living tells a different story. According to the UN’s human development index, Botswana scores a 0.728 whereas Zimbabwe scores 0.563.[12] The results show that economic freedom and freedom from corruption, while not the only factors, are essential in the enrichment of the human condition. Around the world, developed countries continue to spend billions of dollars to improve the living conditions in developing countries. Yet, most African countries are poorer today than they were at the time of their independence[13] (and COVID-19 is making it worse). To effectively aid the economic and political development in underdeveloped nations, donor nations should focus on providing technical support on the adoption of free-market policies and anti-corruption measures. Countries that are economically free tend to be free from corruption and as a result, have higher standards of living and protect individual liberties; the contrast between Botswana and Zimbabwe serves as evidence of such.

[1] Dictionary.com

[2] Friedman, Capitalism and Freedom, 1962

[3] Jain, Corruption: A Review, 2001

[4] Ibid

[5] Ibid

[6] Wei, Why is Corruption So Much More Taxing Than Tax? Arbitrariness Kills,1997

[7] Mitchell, Why Botswana is Better off than Zimbabwe, 2018

[8] Ibid

[9] Larsson, Fighting Corruption in Botswana, 2018

[10] Tupy, As went Congo, so goes Zimbabwe, 2008

[11] Heritage Institute, “The Power of Economic Freedom”, n.d.

[12] UNDP, “Human Development Reports,” 2018

[13] Guest, “The Shackled Continent”, 2005

Undergraduate Student at Sciences Po Paris & UBC.