|Free markets can hit economic growth
October 03, 2003
Exclusive from New Scientist Print Edition.
If developing countries join the global economy too soon, they risk
becoming trapped in a cycle of poverty and corruption, a new analysis
A number of empirical studies have shown that poorer countries experience
higher levels of corruption. Badly paid officials are easily tempted by
bribes, the reasoning goes, while the well paid officials in richer
nations risk losing their comfortable salaries if they are caught taking
backhanders. But if corruption so bedevils developing nations, how do they
escape and become rich?
Daniele Paserman, an economist at the Hebrew University of Jerusalem,
Israel, and his colleagues say they have found a simple answer. If a poor
country opens up its economy to the outside world too quickly, the flow of
money across its borders encourages corruption, which in turn hampers
Bribery and wealth
But those countries with closed economies can grow until they can afford
to pay their officials well. This runs counter to the conventional wisdom
that free markets across borders encourage development and cut corruption.
"We are highlighting one of the dangers of being more open," says
Paserman. "But there are other benefits."
Paserman's team tested the idea by gathering data on economic output in
the late 1990s from 165 countries. They adopted a recently developed index
of corruption, which pools the views of various organisations on how
corrupt individual countries are.
They then classified countries as open, western-style economies or closed
economies. To do this they used several criteria, including the strength
of each country's black market, which always flourishes in closed
In open countries there was a strong link between poverty and corruption,
with poor countries far more corrupt than rich ones. But in closed
countries they found no correlation (see graphs).
The most plausible explanation for this disparity, says Paserman, is that
in a closed country, corrupt officials are obliged to spend their
ill-gotten gains at home. Even if this money is spent on the black market,
it still helps boost the nation's economic growth. But in open nations,
corrupt money leaves the country, doing nothing to relieve poverty, so
encouraging more corruption.
Andrew Simms of the New Economics Foundation, a think tank based in
London, UK, says developed countries could take some steps to help
developing countries join the global economy. Forcing imported money to be
placed within banks for a fixed period would help track dirty money and
deter money laundering.