The Valley Torah Scroll

In 2014 a report from the Center for Strategic and International Studies placed the annual global cost of corruption at over a trillion United States dollars. For context, that accounted for 1.3 percent of global GDP in 2014. 

Years later, a 2018 report issued by the World Economic Forum estimated corruption consumed 5 percent of global GDP.  

While estimates vary significantly, the degree of GDP consumed by corruption annually presents a disturbing prospect – even if one opts for the most conservative estimates. The picture grows even more ghastly when one considers the physical realities rather than mere statistics. Essentially, between one and five percent of all production in the economy is being diverted from productive use – producing goods and services people desire – to fund bribes and various other corrupt activities. These resources would ordinarily go to increasing the production of goods, thereby increasing the quality of life of consumers.

Knowing this, one can hardly be surprised that governments, non-profits, and international organizations have invested great funds and effort in combating corruption.

However, allow us to consider a far simpler approach to expunging corruption – bolstered by economic research conducted in-house at the Valley Torah Scroll.    

This summer, I performed a correlational study between two variables, the lack of corruption and the lack of regulation in 159 countries for 2017 – the recent year with the most data. The corruption numbers were obtained from Transparency International’s corruption perception index, and the regulation data was obtained from the Cato Institute’s economic freedom index. One should note that although the Cato Institute generally posses an anti-regulation bias, Media Bias/Fact Check.com rates their content as high in terms of factuality, this, alongside that lack of editorializing in the index, renders the data acceptable for our purposes. Note the higher the number is, the lower regulation and corruption are.

Correlation Coefficient between level of regulation and level of corruption: 0.678

International Correlation Study Between Corruption and Level of Regulation, By Schneur Friedman

To give that abstract decimal number meaning, the correlation between body fat (BAI) and cardio-vascular disease was only 0.593 for women, according to a study published in the US National Library of Medicine.

If the risk of heart disease may be diminished via weight loss, then perhaps corruption and its cost may be diminished via deregulation. 

While, of course, correlation does not necessarily equal causation, and I have yet to perform research to determine causation, theoretical deduction – or a priori reasoning – does offer an explanation for why regulation could be the cause of corruption.  

While I previously described the cost of bribes, the fact is that bribes often serve as a way of reducing costs associated with licensing, compliance, and other regulatory processes. When one pays a bribe, they have concluded that the subjective cost of the bribe to them is less than the cost of the alternative – investing time and resources into filling forms or waiting in a queue. Those who value their time more than money are more likely to “purchase” bribes, while those who value money than their time are less likely. Thus if some hyper-efficient anti-corruption program managed to eradicate all bribes, the cost of regulatory compliance would rise as the cost of bribes fell. 

The underlying fact is that bribery and other forms of corruption exist largely as mechanisms to mititgate the cost of regulation. So a decrease in regulatory burden would lead to a decrease in the cost of corruption as the upper limit to the cost of corrupt activities – the cost of going through legal channels –  falls. Taking this idea to its logical zenith, the virtual elimination of all regulation would most likely eliminate practically all public-sector corruption.

 The next question one must ask is whether the value conferred by regulation is worth both its own cost and the cost of corruption. 

Focusing on the United States, where there is the greatest volume of data and where we possess the greatest degree of familiarity, the cost of regulatory compliance ate up 1.963 trillion dollars or ten percent of GDP ( according to Competitive Enterprise Institute) and conservatively assuming – for lack of definite numbers – that corruption consumes merely 0.5 percent of GDP, gives us a total regulatory cost of 10.5 percent of the US economy. 

While we lack a definite number as to the value conferred by the regulations which contribute to these costs, we can call the economic utility of certain regulations into doubt.

Occupational licensing, which a quarter of all Americans’ are legally required to obtain in order to work – according to the NCSL, is one example. By forcing the producers of goods/services to obtain a license, the government forces consumers -be they, employers or customers -to purchase higher quality and higher-priced goods/services. 

For example, when one goes to a barber possessing a license – they are guaranteed of the quality yet pay for it in higher costs. Although most people are willing to pay more for quality, this system disenfranchises those who might value saving money over a safer/better haircut. 

In the absence of government licensing, those who value quality more will go to pricier businesses that have voluntarily chosen to obtain some proof of competence, and those who are willing to risk quality to save money can opt for cheaper un-certified businesses. So one may conclude that these laws likely are not worth the cost of regulation and the corruption which accompanies it. 

One should note that although they’re painted as public safety measures, licensing laws simply serve to enrich those already in the industry by restricting entry, leading to a lower supply and thus higher prices. 

Next, there are the dictates of health departments on what steps businesses must take in regards to cleanliness. When one sells foods or drinks or runs classes in a gym, they strive to attract customers by offering attractive prices and quality. As such, it is in the interest of any business to ensure the safety and cleanliness of their product or service. So, even absent any health or safety regulations, there would not be widespread food poisoning or other injuries. So the cost-justification of the regulations, like licensing, can be reasonably called into doubt.

There are a myriad of other superflous regulations that could be abolished in order to reduce corruption which merit consideration, but for brevity we’ll stop at two.

 While far from definite, the correlational study and economic reasoning here provide a basic argument for a simple and lucrative method for curbing corruption, allowing the vast resources it consumes annually to be reallocated to productive use – improving the lives of consumers and producers alike.