Spoiler: Rule of law is weaker, and corruption is stronger in autocratic countries. This is not only detrimental for today’s generation but also for future generations. The reason is that stronger corruption and lower levels of social trust in autocracies distorts incentives and thereby savings and investments decisions. This makes innovation weaker in autocracies than in countries which are characterised by institutions rendering them rule of law and weak levels of corruption.
In my previous post, I showed that corruption is stronger in autocracies than in democracies. I also showed that this pattern appeared to be stable over the years, c.f. Figure 1.
Figure 1. Democracy vs corruption over two decades.
Source: V-Dem, http://www.v-dem.net/en & Transparency International, https://www.transparency.org/en/publications/corruption-perceptions-index-2020
I discussed the strong relationship between autocracies and corruption also in here where I showed the relationship between the quality of institutions and corruption. There is also a strong relationship between institutions and prosperity.
I will in this post show that corruption and weak institutions are bad also for future generations’ prosperity.
Institutions of good quality are good for the level of trust in a society and bad for uncertainty. High levels of trust between individuals and between the individuals and the government and its authorities are beneficial for all growth and prosperity. Low levels of uncertainty of the future behaviour or performance of other individuals or the government, are bad.
Institutions that give people incentives to engage in long-term economic relationships with other people increase the level of trust between people in societies. Carefully designed institutions provide incentives for individuals to undertake educations, save and invest, innovate, or adopt technologies developed elsewhere. Institutions of good quality reduce the uncertainty in economic actions by making information more available and the behaviour of others more predictable.
Key institutions of that kind are those that protect private property rights and guarantee enforcement of contracts between different individuals or entities. Contracts between different individuals or entities such as shareholders and CEOs, employers and employees, borrowers, and lenders, aim at reducing uncertainties about performances and renumerations and create incentives which are beneficial for the parties of the transactions.
These transactions which imply that the parties of transactions are dependent of each other’s future actions or performance can be carried out at low costs in societies with high levels of trust.
The institutional features also affect behaviours of political elites and public officials. In countries where institutions are weak, politicians and officials have more opportunities to abuse their powers and enrich themselves. Such behaviour tends to spill over to the rest of the population. If people regard politicians and official as corrupt, they might think that also people in the private sector are corrupt and unreliable, especially in sectors with large government contracts. The level of trust between people therefore tends to be lower in autocracies with weak institutions and strong corruption, c.f. Figure 2.
Figure 2. Corruption vs trust in autocracies and democracies.
High levels of trust and low levels of corruption provides incentives for investments as the relative price of future consumption is reduced. Low levels of corruption increase the profitability of investments. For countries with a low level of domestic savings, combatting corruption can attract foreign direct investments and thereby transfers of technology. Low levels of corruption also reduce the costs of entrepreneurship and make it more beneficial to engage in productive activities with positive effects on innovation and economic growth. In democracies are levels of corruption lower and innovation higher, c.f. Figure 3.
Figure 3. Corruption vs innovation in autocracies and democracies.
The relationships between institutions, corruption, trust and growth are complex and not easily captured in a few graphs like in this post. Casual relationships are difficult to disentangle since there might be interrelationships between the variables and unknown factors not considered. There are also situations where corruption can be correlated with growth. Resource rich countries where the extraction of a resource requires greasing the wheels to get licenses, permissions, and infrastructure.
It does however seem intuitive and the correlations above point to there also being a positive relationship between trust and innovation, c.f. Figure 4.
Figure 4. Trust vs innovation in autocracies and democracies.
Sources: Trust: https://www.worldvaluessurvey.org/WVSContents.jsp. Note: Percent responding that most people can be trusted in WVS wave 7. Corruption: https://www.transparency.org/en/cpi/2020/index Innovation: https://www.globalinnovationindex.org/home
Since there is a positive relationship between trust and innovation, it is no surprise that there is a negative relationship between difficulties to trust and innovation, c.f. Figure 5.
Figure 5. Difficulty to trust vs innovation in autocracies and democracies.
Sources: Trust: https://www.worldvaluessurvey.org/WVSContents.jsp. Note: Percent responding one needs to be careful to trust other people in WVS wave 7. Corruption: https://www.transparency.org/en/cpi/2020/index Innovation: https://www.globalinnovationindex.org/home
This post has shown that life in democracies is better than life in autocracies. Why then have autocracies gained ground? Maybe it is to easy to change institutions as in Hungary and Poland where the governments have implemented changes to reduce the judiciaries’ independence and taken control of most of the media. As I have discussed in other posts on this blog, here, here and here, the current institutional framework in the EU and its member states need to be changed to make it difficult to turn democracies into autocracies.
Because nobody outside the Kremlin wants to have a situation like in Russia, cf. Figure 6.
Figure 6. Russia is the most corrupt country in Europe.