Trust and Corruption in
Transition
Eric M. Uslaner
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Strategic trust: trust we gain from daily
experience.
Particularized trust: trust in people like
ourselves. May stem from direct experience
or from stereotypes.
Trust has many different meanings:
Generalized (moralistic) trust: Trust in
strangers, especially people who are different
from ourselves. Cannot come from
interaction with people we know. We learn it
early in life, from our parents, and it is largely
stable throughout our life. It does not
depend upon our experiences.
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Strategic trust reflects our immediate experience.
But generalized trust does not reflect our
immediate experience—such as income, life
experiences (divorce, being the victim of crime,
friendship patterns, or even civic engagement).
Instead, generalized trust is learned early in life
and doesn’t change much.
Generalized trusters generally dismiss negative
experiences as exceptions to the rule. They are
optimists who believe that they are in control of
their lives.
We learn generalized trust from our parents, not
from our political institutions.
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Generalized trust is part of a “virtuous
circle” of positive forces and outcomes in a
society. Trust stems from equality and
fairness and leads to less corruption, better
government, open markets, and higher
economic growth.
Mistrusting societies are caught in an
“inequality trap.” They have higher (or
increasing) rates of economic inequality,
high levels of corruption, ineffective
governments, closed markets, and lower
growth.
Inequality
Mistrust
Corruption
Closed Markets
Low Growth
Bad
Government
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Generalized trust is the key to solving many
collective action problems. Countries with high
levels of generalized trust have higher growth
rates, more open markets, less corruption, less
crime, better functioning government, and spend
more on redistributive programs that benefit the
poor. Generalized trust is also strongly associated
with universal social welfare programs such as we
see in Sweden.
Generalized trusters are more tolerant of
minorities and are more likely to support rights for
these groups. They are also more supportive of
immigrants and of open markets as well as of an
active role for their country in world affairs.
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Democracy does NOT lead to greater trust in
fellow citizens. Many who have written about
trust (Margaret Levi, Bo Rothstein, Jean Cohen,
Claus Offe, Wendy Rahn and John Brehm) argue
that the state can produce trust in fellow citizens
by impartial institutions that lead people to
believe that evil doers will not get away with their
misdeeds.
Trust is but one route to get compliance with the
law. When trust in other people is high, people
are more likely to behave honestly. But they may
also behave honestly if the government strictly
enforces the law. We may not see much
difference in compliance with the law in high
trusting societies such as Sweden and countries
such as Singapore where even minor violations of
the law will be severely punished.
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Democratization is not a direct route to trust.
The correlation between change in trust in 22 nations from
1981 to the early 1990s (according to the World Values
Survey) and variations in Freedom House scores from 1978
to 1988 is modestly negative (-.381). Yet, even this result
turns out to be largely an illusion. Without the outlying
cases of Argentina and South Korea, the correlation drops
the correlation to -.076. An Indian journalist commented
on the sharp cleavages that led to a cycle of unstable
coalitions, none of which could form a government: “We
have the hardware of democracy, but not the software, and
that can’t be borrowed or mimicked.”
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There is little empirical evidence that
either strong institutions or faith in
government lead to generalized
trust. Generally, the correlations
between trust in people and trust in
government are not large. Trust in
people reflects a deep-seated value
that doesn’t change readily. Trust in
government reflects satisfaction with
the performance of the current
regime.
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Democracy may not create trust, but Communism certainly
destroyed both trust and participation in voluntary
associations. The totalitarian regime made it risky to trust
anyone, even family members. So it is hardly surprising
that few people in transition countries believe that “most
people can be trusted.” As Marc Morje Howard argued in
The Weakness of Civil Society in Postcommunist Europe,
people in Communist countries saw civic associations as
instruments of the state. Even after Communism fell,
people still viewed civic associations with suspicion. They
also remained wary of their fellow citizens.
The following tables show the percentage of
group members in Western and transition
countries, respectively.
The levels of both trust and civic participation
among people in transition countries are low.
Country
Percentage of members
West European countries
Austria
28.6
Belgium
34.4
Denmark
35.7
France
26.4
Germany
18.5
Greece
38.4
Iceland
30.5
Ireland
30.9
Italy
24.3
Luxembourg
29.6
Malta
26.4
Netherlands
34.3
Northern Ireland
20.2
Portugal
15.8
Spain
16.6
Sweden
53.4
United Kingdom
41.8
East European countries
Belarus
14
Bulgaria
13.7
Croatia
21.5
Czech Republic.
30.8
Estonia
17.4
Hungary
14.6
Latvia
20.5
Lithuania
13.8
Poland
12.4
Romania
9.6
Russia
4.6
Slovakia
47
Slovenia
27
Ukraine
9.2
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Trust is much lower in transition countries than it is in the
West. In the World Values Survey, the mean percentage of
people who agree that “most people can be trusted” is 42%,
with a standard deviation (spread) of 11.3. There is a wide
range of variation in the level of trust among Western
nations. The most trusting countries include the Nordic
nations: Norway (65%), Sweden (60%), Denmark (58%),
the Netherlands (54%), Canada (53%), and Finland (49%).
Transition countries rank much lower in trust than the West.
The mean share of trusting people is 23.7%, with a tiny
standard deviation (5.7). Transition countries have
almost uniformly lower levels of trust, as we see in
the following list:
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Share of Trusters in Transition Countries
Country
Armenia
Azerbaijan
Belarus
Bosnia
Bulgaria
Croatia
Czech
East Germany
Estonia
Georgia
Hungary
Latvia
Lithuania
Macedonia
Moldova
Montenegro
Poland
Romania
Russia
Serbia
Slovakia
Slovenia
Ukraine
Trust Share
25
21
24
28
30
25
30
25
22
23
25
25
22
8
22
32
18
16
24
30
23
16
31
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The eight formerly Communist countries included in the
World Values Survey in both 1990 and 1995-97 (Belarus,
East Germany, Estonia, Latvia, Lithuania, Poland, Russia, and
Slovenia) became five percent less trusting, but the average
democracy score from Freedom House increased from a “not
free” 11 in 1988 to a more “free” 4.75 in 1998.
Every transition country included in both surveys except for
Belarus and (barely) Slovenia had a lower level of trust in
2000 than in 1990. From 1990 to 1995, eight of nine
transition countries had lower levels of trust (the exception
being Latvia).
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Our Romanian survey of the mass public had a companion
survey of organizational activists in Cluj-Napoca. These
activists are generally young people, often university
students. Organizational activists are far more participatory,
trusting, and tolerant than ordinary citizens in Romania.
Organizational activists resemble ordinary citizens in Western
democracy more than they do citizens in Romania or other
transition countries.
24% of organizational activists volunteer for youth,
environmental, animal rights, peace, charity, consumer, or
women’s organizations. 8.7% donate money to these same
organizations. 38% volunteer for some type of organization
and 18% give to some charitable cause. Organizational
activists are also more likely to participate in politics. On our
scale of 12 political acts, organizational activists took part in
an average of 2.6, with the most active involved in 3.4 acts,
compared to .8 for the mass public.
Organizational activists are more trusting (both of other
people and political institutions) and are more tolerant:
Activists
General public
Most active volunteers
Trust
other
low
25.8
23.6
41.9
people
middle
18.1
16.1
22.8
high
56.1
60.3
35.3
4.4
4.7
4.3
5.4
6.1
5.5
Trust in
Justice
2
Trust in
EU
Tolerance
public meetings
6
6.4
4.3
neighbors
6
6.6
4.2
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Across many countries (and over time in the United States),
there is one “real-life” factor that shapes both optimism and
trust: the level of economic inequality in a country. The more
inequality, the less trust. Equality promotes the vision of a
shared fate, where others are part of your “moral
community.”
In an unequal world, it is difficult
to establish bonds between those
at the top and those at the
bottom. Trust also depends upon
a foundation of optimism and
control. People are optimistic
and feel that they have control
over their environment when the
gap between the rich and the
poor is small.
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People in trusting countries, especially the West,
are far more optimistic than people in transition
countries. Many people in transition countries have
lost faith that the future will be better than the
past—and they will look upon others with suspicion.
The statistical models estimating trust in the West
and in transition countries work well for both sets
of countries. In both sets of countries, using data
from the World Values Survey, I found that
optimism for the future was by far the strongest
predictor of generalized trust (Uslaner, “Civic
Engagement in East and West” in Badescu and
Uslaner, eds., Social Capital and the Transition to
Democracy.
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As the graph shows, the connection
between trust and inequality only
holds for countries without a legacy of
Communism. In the transition
countries, the correlation between
trust and inequality is very low (r = .25).
Some of this may be due to the
structure of the economy in the East
prior to transition (manufactured
equality) or the poor measurement of
trust in surveys.
However, there is a stronger connection between change in trust from 1990 to 1995
and change in inequality from the late 1980s to the mid-1990s. As inequality
increased in transition countries, generalized trust fell.
trchng95 = 0.011 - 0.711 ginirosserchange
r² = 0.308 RMSE = 0.065 n = 10
trust change 95 from trust90
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.1
LAT
CZK
HUN
BLR
0
ROM
BUL
EST
LIT
-.1
RUS
POL
-.2
0
.1
gini index change rosser/rosser
.2
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There are two related aspects of
government that are important for
generalized trust:
Corruption
Fairness of the legal system
Both are key issues in transition
countries.
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The roots of corruption lie in the unequal
distribution of resources in a society. Economic
inequality provides a fertile breeding ground for
corruption–and, in turn, it leads to further
inequalities. The connection between inequality
and the quality of government is not necessarily
so simple: As the former Communist nations of
Central and Eastern Europe show, you can have
plenty of corruption without economic inequality.
The path from inequality to corruption may be
indirect–through generalized trust–but the
connection is key to understanding why some
societies are more corrupt than others.
Even though transition countries have had-and still have--lower levels of inequality,
increasing inequality since transition is
linked with increasing corruption.

My argument stands in contrast to more
traditional institutional accounts of corruption,
which often suggest that the cure for
malfeasance is to put the corrupt politicians in
jail. If we do so (and we ought to do so), they
will be replaced by other corrupt leaders. Nor do
we need a reformed system of government that
either centralizes power to herd in independent
“entrepreneurs” who extort businesses or
average citizens (Treisman, 1999) or
decentralizes power to prevent an all-powerful
“grabbing hand” (DiFrancesco and Gitelman,
1984, 618; Fisman and Gatti, 2000; Kunicova
and Rose-Ackerman, 2004).

Changing institutions may not be easy, but its
difficulty pales by comparison with reshaping a
society’s culture or its distribution of wealth (and
power). Corruption, inequality, and trust are all
“sticky”: They don’t change much over time. Yet,
all is not lost: As we shall see, there are more
malleable ways to control corruption: Policy
choices that countries make also shape
corruption. Countries that have very high levels
of regulation of business have more corruption.
In turn, the level of regulation is shaped by the
fairness of the legal system, the openness of the
economy, and whether the government is military
or civilian.
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Corruption is higher in transition countries
than in the West. The mean score on
Transparency International’s 2004
Corruption Perceptions Index for transition
countries is 3.5 (0 = completely corrupt,
10 = completely honest). For the West,
the mean score is 7.9.
The fairness of the legal system is also
much lower in transition countries. The
mean score on the Economist Intelligence
Unit’s legal fairness measure for 2004 is
2.6, compared to 4.4 for the West (1 =
very unfair, 5 = very fair).
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Corruption and an unfair legal system
can lead to less trust because they
exacerbate inequality.
Corruption thrives in an atmosphere
of inequality. And the unfairness of
the legal system gives advantages to
those with political and economic
power.
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34 percent of people in societies where corruption was seen
as widespread thought the only way you could get ahead
was by luck, compared to 29 percent in honest societies.
People who believed that the future looked bright were
significantly less likely to condone buying stolen goods or
taking bribes. If you live in a more honest society, you are
less likely to condone cheating on taxes.
Corruption leads to the belief that there is no way to get
ahead fairly–so that the ideals underlying what Rawls calls a
“well-ordered society” do not develop strong roots. In a
“well-ordered” society “everyone accepts and knows that
the others accept the same principles of justice, and the
basic social institutions satisfy and are known to satisfy
these principles” (Rawls, 1971:454). It is prosperous and
its government earns the approval of its citizens.

How strong is the
relationship between
corruption and inequality?

The plot of inequality and corruption is striking:
Across 85 countries, there is a weak (at best)
relationship. The r2 is a paltry .082, suggesting
no relationship at all between inequality and
corruption. I offer a lowess plot of inequality and
corruption. The lowess curve suggests a slight
downward slope–more inequality leads to more
corruption (or less transparency). But the
pattern is not at all clear and we can see from
this figure that two groups of countries stand
out: the former and present Communist nations,
which have lots of corruption and relatively
equitable distributions of income (lower left part
of the graph), and the Western industrialized
nations, which have relatively low inequality and
even less corruption than we might expect based
upon their distribution of wealth.
10
Corruption by Economic Inequalty
FIN
DEN
SWE
8
AUSHOL
LUX CAN
NZ
SNG
UKNOR SWZ
AST
BEL WGR
IRE
USA
CHL
ISR FRA
JPN
SPN
POR
6
CYP
SLO
TAI
EST
ITA
HUN
4
SLV
BUL
CZK
MAL
TUN
LIT
SKR
BLR
GRE
POL
SRI EGY
BOS
GHA
RUSIND
PAK
SER
2
MAC
UKR
AZR
BNG
.2
.3
SAF
CRI
LAT CRO
ROM
BOT
URU
PRU
CHN MOR
SEN
IRNTUR
PHL
MOL
ARG
NIC
INS
PAN
VNZ
HON
UGA
GEO
GUA
KEN
NIG
.4
Gini Index of Economic Inequality
r2 = .082 N = 85
BRZ
ELS MEX
COL
DOM THA
.5
.6
10
Lowess Plot of Corruption and Inequality
NZ
DEN
FIN
AUS
CAN
LUX
WGR HOL
SWZ
SWE
NOR
8
AST
UK
IRE
BEL
JPN
FRA
SPN
6
ISR
USA
POR
CHL
URU
EST
SLO
CYP
SNG
TAI
BOT
JOR
2
4
CRI MAL
TUN
LIT
SAF
GRE
HUN
ITA
SLVBUL CZK
BRZ
ELS
SKR
COL
LAT
PAN
GHA
CRO
PRU
SRI EGY
CHN TUR
BOS
THA
MEX
DOM
POL
RUS
IND
BLR
MAC
MORSENIRNARG
MOL VTN
UGA
ROM
HON
UKR
SER
ALG
NIC VNZ
ZIM GUA
PHL
AZR
INS
GEO
PAK
KEN
NIG
BNG
.2
bandwidth = .2
.3
.4
.5
Gini index economic inequality
.6
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Corruption thrives in an atmosphere of
low trust. When people trust their
fellow citizens, they are more likely to
behave honestly toward them.
Corruption is high when generalized
trust is low and particularized trust is
strong, as Gambetta argues for the
Italian Mafia. Particularized trust makes
it easier for people to cheat people who
are different from themselves.
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This does not mean that inequality is not a
critical factor in corruption. High levels of
inequality lead to low levels of generalized
trust--and high levels of in-group trust.
Low generalized trust is strongly related to
high levels of corruption.
I argue that the relationship between
inequality and corruption may be indirect
and reciprocal, leading to an inequality
trap:
inequality –> low generalized trust & high
in-group trust –> corruption –> inequality
There is a strong relationship between trust
and corruption across 83 countries.
10
Corruption by Generalized Trust [Imputed]
ICE
SNG
8
FIN
NZ
DEN
SWE
SWZ
LUX
AUS
HOL
CAN
UK
NOR
AST
BEL
CHL
ISR
FRA
WGR
USA
IRE
JPN
SPN
POR
6
CYP
SLO
BOT
TAI
EST
URU
MAL
TUN
LIT
4
SAU
SKR
BLR
BRZ
PRU
COL
ITA
HUN
SAF
CRI
LAT
SLVELS
CRO
POL
SEN
TUR
GRE
BUL
CZK
MEX
SRI
PAN
GHA EGYDOM BOS
THA
MOR
ARM
IRN
ROM
PHL
MAC
2
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VNZ
ARG
KEN
.2
IND
RUS
AZR GEO
NIG
0
NIC
PAK
MOL
UGA
HON
GUA
SER
UKR
INS
BNG
.4
Most People Can Be Trusted [Imputed]
r2 = .420 N = 83
.6
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Another factor that exacerbates
inequality is an unfair legal system.
The justice system is especially
important for two reasons. First, a
corrupt court system can shield
dishonest elites from retribution.
Second, the courts, more than any
other branch of the polity, is
presumed to be neutral and fair.
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There is a strong relationship between
fairness of the legal system and corruption
across 86 countries:
TI Corruption Perceptions Index
by EIU Fairness of Legal System
Least Fair
2
3
4
Most Fair
0
2
4
6
TI Corruption Perceptions Index 2003
8
r2 = .733 for 86 cases with imputation r2 = .722 for 55 cases without imputation
The Bulging Pocket and the Rule of Law
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I estimate a six equation model of corruption
across 62 countries–the number of countries on
which I have data on all variables in the model.
The six endogenous variables are corruption (the
TI Index), generalized trust (with imputed
values), the level of regulation in a country (from
the World Bank Governance data set for 2002),
economic inequality, the overall level of risk in a
country (from the ICRG data), and a new
measure of government effectiveness. This
measure is a factor score derived from aggregate
level responses to questions posed to business
executives in the 2004 Executive Opinion Survey
of the World Economic Forum.
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The key questions I pose are:
Is there a direct relationship between trust and
corruption?
Is there a direct relationship between economic
inequality and trust–and does it flow from
inequality to trust (Uslaner, 2002, ch. 8), trust to
inequality (Knack and Keefer, 1997), or both
ways? A direct relationship between inequality
and trust and a similar connection between trust
and corruption would provide support for my
argument that inequality has an indirect impact
on corruption.
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Does corruption in turn lead to more inequality? Corruption
slows economic growth (Leite and Weidemann, 1999;
Mauro, 1995, 701; Tanzi, 1998, 585). It reduces the
amount of money available for various government
programs, including the government share of the gross
domestic product and expenditures on the public sector, for
education, and transfers from the rich to the poor (Mauro,
1998, 269; Tanzi, 1998, 582-586). So we should expect
that it would lead to more inequality–even if there is not a
direct link from inequality to corruption.
Is the fairness of the legal system an important
determinant of corruption? The fairness of the legal system
should also shape the level of regulation in a society. An
independent and fair judiciary should also lead to less
regulation. Political leaders would not attempt to control
business if they believe that the courts would step in and
challenge attempts to capture the state.
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Does corruption lead to less stable and less effective
government? Corruption should lead investors to shy away
from a country, for fear of expropriation or being compelled
to function in a weak legal enviroment (Rose-Ackerman,
2004, 6). Corruption should also lead to less effective
government. When leaders steal from the public purse,
they shouldl be less responsive to the broader public.
Does ineffective government lead to greater corruption?
Does effective government lead to better policy choices–
especially policies that reduce inequality and create greater
support for the regime?
Do higher risk ratings lead to less effective government or
to poor policy choices? Countries with higher risk ratings
should be likely to adopt strangling regulations that distort
market competition. These regulations in turn should lead
to greater corruption in a vicious cycle.
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Do trust, corruption, a country’s risk rating, and effective
government rest upon institutional foundations–or upon
cleavages within society? I expect that structural factors
should not be the key determinants of trust, corruption, a
country’s risk rating, or effective government–except for
the fairness of the legal system. Rather, corruption should
depend upon trust and policy choices; risk ratings and
government effectiveness should depend upon corruption
and the health of a country’s economy–and on its domestic
conflicts. And trust, in turn, depends on economic equality
and its historical legacies of culture and conflict.
Putnam (1993, 111, 180) argues that trust and good
government go hand-in-hand: Good government promotes
trust (cf. Levi, 1998; Rothstein, 2001) and trust promotes
good government. Is there a reciprocal relationship or
does it only go one way–and, if so, which way? I expect
that trust will encourage good government, but that good
government should not lead to greater trust (Uslaner,
2002, chs. 2, 7).
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A key part of my argument is that
clean government--low corruption--is
largely shaped by economic
inequality, culture, and policy--rather
than institutions.
Clean government leads to effective
government rather than the other
way around.
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An enduring question is how we
measure effective government. This
is an issue on which there is little
agreement. Effective government
must be more than clean
government--and it must be more
than popular government.
Here I use country-level indicators
from the 2004 Executive Opinion
Survey of the World Economic
Forum.
Factor Analysis of Government Effectiveness
Measures:
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World Economic Forum Executive Opinion Survey 2004
Variable
Judicial independence
Efficiency of legal system
Efficiency of legislative system
Wastefulness of government spending
Favoritism of government decision making
Transparency of government decision making
Loading
.919
.976
.913
.876
.942
.934
Communality
.908
.971
.852
.801
.901
.882
Government Effectivness Factor Scores (World Economic Forum Executive Opinion Survey 2004)
Venezuela
Nicaragua
Argentina
Guatemala
Pakistan
Peru
Ukraine
Panama
Dominican Republic
Poland
Honduras
Zimbabwe
Bangladesh
Bulgaria
Bosnia
Georgia
Croatia
Philippines
Russia
Macedonia
Serbia
Romania
Italy
Nigeria
Mexico
Czech
Colombia
Turkey
Slovakia
Latvia
El Salvador
Sri Lanka
Algeria
Kenya
Uruguay
Vietnam
Hungary
Egypt
South Korea
Lithuania
Brazil
Slovenia
Costa Rica
Uganda
Greece
Malta
Portugal
China
Indonesia
Spain
Morocco
Jordan
Thailand
Cyprus
India
Belgium
Israel
Japan
Chile
Botswana
Estonia
Ghana
France
Taiwan
Canada
Ireland
Tunisia
Malaysia
South Africa
USA
Austria
West Germany
Switzerland
Australia
New Zealand
Luxembourg
Netherlands
UK
Sweden
Finland
Norway
Singapore
Iceland
Denmark
-2
-1
0
1
2

Across a wide range of countries, I
have found strong support for a
model with the following linkages:
Particularized
Trust
Generalized
Trust
Inequality
Legal
Fairness
Corruption
Strict
Regulation
Overall
Risk
Inequality leads to lower trust and to poor government.
Low trust leads to more corruption.
Unfair legal systems lead to strangling regulation and to
more corruption. Strangling regulation leads to greater
corruption. Poor government also leads to strangling
regulation.
Corruption leads to poor government and to more
inequality.
Effective
Government
Ethnic
Tensions
TABLE 2
Simultaneous Equation Estimation of Corruption
Variable
Coefficient
Standard Error
t ratio
Corruption equation
Trust (imputed)
5.580****
1.567
3.57
Regulation of business
1.018***
.351
2.90
Fairness of legal system
.605***
.203
2.97
GDP per capita (ICRG)
.404***
.158
2.58
Ethnic fractionalization (Alesina)
1.035
.546
1.89
Freedom House 2003 democratization
-.776***
.257
-3.01
Constant
-.013
.698
-.02
Economic inequality (Gini index)
-.461***
.195
-2.36
Civil war
-.086****
.025
-3.41
.174***
.063
2.79
.045
-2.01
Trust equation
Protestant share of population 1980
Former Communist nation
-.091**
Government effectiveness
.028
.024
1.18
Constant
.479****
.077
6.19
Fairness of legal system
.251***
.080
3.15
Openness of economy to trade
.232***
.091
2.54
Regulation equation
Real growth in gross domestic product
-.086*
.067
-1.28
Overall country risk (ICRG)
-.014****
.003
-4.76
.837
.39
Constant
.328
Inequality equation
Trust (imputed)
-.152
.187
-.81
Corruption
-.028***
.009
-3.23
Former Communist nation
-.166****
.025
-6.59
.052
2.38
-.001****
.000
-3.77
.583****
.035
16.77
25.180
1.41
Protestant share of population 1980
Muslim percent of population
Constant
.123
Overall risk equation
Economic inequality (GINI)
35.602*
Corruption
-8.209****
.952
-8.62
Internal conflicts (ICRG)
-7.564****
1.416
-5.34
Ethnic tensions (ICRG)
-3.650**
1.607
-2.27
Constant
170.527****
15.812
10.78
.934
1.86
.065
6.69
Government effectiveness equation
Trust (Imputed)
Corruption
1.738**
.436****
Ethnic tensions (ICRG)
-.098**
.046
-2.12
Poverty level 2005 (ICRG)
-.313****
.091
-3.42
Former Communist nation
-.390***
.144
-2.70
-1.475****
.228
-6.47
Constant









Equation
Corruption
Trust
Regulation of business
Inequality (Gini)
Overall risk (ICRG)
Government
Effectiveness
R2
.893
.664
.821
.534
.854
S.E.E.
.859
.081
.388
.072
13.749
Mean
5.252
.296
.612
.360
51.714
F Statistic
79.13
21.35
68.20
12.34
84.09
.831
.431
.146
53.09
Instrumental variables: Religious fractionalization (from Alesina, Devleeschauwer, Easterly, Kurlat, and Wacziarg,
2003); English legal tradition (from the Levine-Loyaza-Beck data set at
http://www.worldbank.org/research/growth/llbdata.htm ), GNP per capita (State Failure Data), constraints on the
executive branch of government (Glaeser, La Porta, Lopez-de-Silanes, and Shleifer, 2004); military in politics (at
www.freetheworld.com ); terrorism risk (ICRG); bureaucratic quality (ICRG), parliamentary system and
proportional representation (from the Data Base of Political Institutions at
http://www.worldbank.org/wbi/governance/pubs/wps2283.html )









Equation
Corruption
Trust
Regulation of business
Inequality (Gini)
Overall risk (ICRG)
Government
Effectiveness
R2
.893
.664
.821
.534
.854
S.E.E.
.859
.081
.388
.072
13.749
Mean
5.252
.296
.612
.360
51.714
F Statistic
79.13
21.35
68.20
12.34
84.09
.831
.431
.146
53.09
Instrumental variables: Religious fractionalization (from Alesina, Devleeschauwer, Easterly, Kurlat, and Wacziarg, 2003);
English legal tradition (from the Levine-Loyaza-Beck data set at http://www.worldbank.org/research/growth/llbdata.htm ),
GNP per capita (State Failure Data), constraints on the executive branch of government (Glaeser, La Porta, Lopez-de-Silanes,
and Shleifer, 2004); military in politics (at www.freetheworld.com ); terrorism risk (ICRG); bureaucratic quality (ICRG),
parliamentary system and proportional representation (from the Data Base of Political Institutions at
http://www.worldbank.org/wbi/governance/pubs/wps2283.html )

I did many sensitivity tests for variables discussed in the
literature and have found no reason to add any of them to
my model. Specifically, I did not find significant
relationships for the level of public sector wages (LaPorta et
al., 1998; Mauro, 1997, 5; Tanzi, 1998, 573; Treisman,
2000; but cf. Rose-Ackerman, 1978, 90-91), per capita
income or gross domestic product (Lambsdorff, 1999, 7;
Mauro, 1995, 701; 1998, 13; Paldam, 2000, 9); the size of
the unofficial economy (Lambsdorff,1999); the level of
newspaper readership (Adsera, Boix, and Payne, 2000);
federal versus unitary governments or the share of
government revenues spent at the local level (Treisman,
1998; Fisman and Gatti, 2000); the level of political
stability (Leite and Weidmann, 1999, 20; Treisman, 2000);
the level of democracy in a country (You and Khagram,
2005); or the structure of the electoral system (Kunicova
and Rose-Ackerman, 2004). All of these other variables
faded into insignificance within the model for corruption.

The most important result is that there is an
indirect linkage between inequality and
corruption and it goes through trust. As we
move from the low level of inequality in Belgium
to the very high level in South Africa, trust
declines by 23 percent. This is equivalent to
moving from the low trust level of Serbia, the
Czech Republic, South Korea, Spain, or Bulgaria
to the high levels of the Netherlands and Canada.
As we move from the least trusting country
(Brazil) to the most trusting (Norway), corruption
decreases on the 10 point TI scale by 3.47 units.
This is equivalent to moving from the low
transparency of Kenya or Pakistan to that of
Taiwan.

A shift from a country ranking highest on legal
fairness to one at the bottom corresponds to a
shift of 2.42 on the TI index–from Kenya or
Pakistan to the level of Greece or South Korea. A
shift from the most strict regulatory regime to
the least (from Nigeria to Luxembourg) would
bring a country to the level of Portugal (6 on the
10 point scale), while moving from a “not free” to
a “free” country has a more modest shift of 1.55
points: More democracy in Pakistan would put it
on a par with Ghana, Thailand, and Mexico–still
quite far from even the middle of the TI rankings.
Ethnic diversity seems to lead to less corruption
rather than more: The coefficient is positive
rather than negative (the simple correlation is .386).

Institutional factors do not loom large in
determining the level of corruption in a country
except insofar as they lead to more or less
equitable treatment of citizens before the law or
except insofar as they promote economic equality
and an economic system free of political
interference. This does not imply that
governments cannot regulate the economy–the
Western European countries that have the least
“regulation” are all welfare states. It does suggest
that politicians must take care in how they
regulate. The equation for corruption performs
extremely well without any standard institutional
variables such as centralization, parliamentary
system, type of electoral list, the type of
executive–each of which fell to insignificance when
added.

There is a causal spiral from inequality to
corruption (and back again) and from both
inequality to lower levels of trust and from low
levels of out-group trust–and high levels of ingroup (or particularized) trust to corruption
(Gambetta, 1993). Perhaps most critical in this
vicious circle is the link between inequality and
trust. Countries with high levels of trust enact
policies that help reduce inequality–they spend
more on the poor and more on programs such as
education that help equalize opportunities
(Uslaner, 2002, 245-246).

How well does this framework apply
to transition countries? Transition
countries had--and still have--much
lower levels of inequality. They also
have low levels of trust. But
transition countries also have
increasing levels of inequality.


The greatest threats to trust (social
solidarity) in the transition countries are:
Rising inequality. Wealth is a sign of
strong connections and especially of
dishonesty (Mateju, 1997, 4-5; Stoyanov et
al., 2000, 35). While most Westerners
believe that the path to wealth stems from
hard work, 80 percent of Bulgarians,
Hungarians, and Russians say that high
incomes reflect dishonesty (Kluegel and
Mason, 2000, 167; cf. Orkeny, 2000, 109).
Market democracy seems a false promise to
many in transition countries and their
citizens see little prospect that things will
improve any time soon.

Corruption. Corruption has increased in almost all
countries for which we have data from 1998 to 2003:

Country












Belarus
Bulgaria
Czech
Estonia
Hungary
Latvia
Poland
Romania
Russia
Slovakia
Ukraine
Change in Corruption
-1.9
-3.2
-1.3
1.2
-.2
-3.5
-1.8
-4.2
-4.9
-2.4
-4.9
A positive score indicates less corruption, a negative score
indicates more corruption. The index ranges from 1 (very
corrupt) to 10 (very honest).
In the transition countries, there has been a
sharp rise in inequality. And this rise in
inequality has led people to become
pessimistic.
Can Count on Success in Life by Economic Inequality
1.8
HUN
LAT
1.7
ROM
1.6
CZK
RUS
LIT
1.5
BLR
EST
BUL
1.4

.2
.25
.3
.35
.4
Gini Index of Economic Inequality (Rosser / Rosser / Ahmed)
r2 = .326
.45


Every country for which there are
data on changes in economic
inequality save one (Slovakia)
showed an increase in economic
inequality from 1989 to the mid1990s (Rosser, Rosser, and Ahmed,
2000).
All but one (Hungary) of the 17
countries for which there are data had
a sharp increase (from .3 to 42
percent) in the size of the shadow
economy (Schneider, 2003).
Increases in Inequality in Transition Countries
(Rosser, Rosser, & Ahmed, 2003)

















Country
Belarus
Bulgaria
Czech
Estonia
Georgia
Hungary
Kazakhstan
Latvia
Lithuania
Moldova
Poland
Romania
Russia
Slovakia
Ukraine
Uzbekistan
Change in inequality 1989-1990s
.014
.110
.035
.127
.270
.020
.056
.018
.100
.111
.045
.048
.186
0
.098
.067
The unofficial economy has contributed to
the rise in economic inequality:
.6
Economic Inequality by Size of the Unofficial Economy
.5
GEO
.4
RUS
.3
LIT
BUL
UKR
KAZ
POL
CZK
ROM
LAT
HUN
.2

SLV
20
30
Size of Unofficial Economy
r2 = .603
40
50
And the change in inequality closely
tracks the rise of the unofficial economy:
70
Change in Shadow Economy (Physical Input Method) by Change in Gini Index of Economic Inequality
60
GEO
50
UKR
MOL
BLR
RUS
40
KAZ
LAT
BUL
ROM
30
UZB
LIT
POL
HUN
20

SLV
CZK
0
.1
.2
Change in Gini Index of Inequality (Rosser / Rosser / Ahmed)
r2 = .514 N = 15
.3
Economic inequality is also connected to an
unfair legal system:
Corruption by Fairness of Courts
6
SLO
5
EST
HUN
LIT
4
CZK
3
SLV
POL
ARM
BOS
ROM
ALB
MOL MAC
SER
UKR KAZ
KGZ
RUS
2
UZB
LAT
BUL
BLR
CRO
TAJ
AZR
GEO
1

.3
.4
.5
.6
Courts Not Fair BEEPS 2002 Survey from World Bank
r2 = .442
.7
And corruption is also linked to an unfair
legal system:
Corruption by Fairness of Courts
6
SLO
5
EST
HUN
LIT
4
CZK
3
SLV
POL
ARM
BOS
ROM
ALB
MOL MAC
SER
UKR KAZ
KGZ
RUS
2
UZB
LAT
BUL
BLR
CRO
TAJ
AZR
GEO
1

.3
.4
.5
.6
Courts Not Fair BEEPS 2002 Survey from World Bank
r2 = .442
.7


A modern democratic market economy where people trust
each other and their institutions should not be dependent
upon “gift payments” that violate norms of trust and
reciprocity or special connections that are not available to all
citizens. Special treatment for some could undermine the
social solidarity that is encapsulated in generalized trust (in
other people) and might lead people to lose confidence in
impartial governmental institutions and the development of a
market democracy.
A third possibility is that lower-level corruption such as the
informal sector plays only a mininal role in shaping people’s
attitudes toward each other or government. People do care
about corruption, but their ire is focused on high-level
corruption (corrupt politicians, judges, business executives)
rather than on the lower-level corruption of the informal
sector



From a survey of Romanians in 2003:
Rising inequality makes people less
optimistic for the future—and less trusting
of their fellow citizens and of the
government (and of government
performance). It also makes people more
willing to limit incomes of the rich.
Corruption makes people less optimistic
about the future, less trusting of their
fellow citizens and of government, more
critical of government performance, and
more willing to limit incomes of the rich.
The model of optimism, trust, inequality change, corruption, confidence in
government, informal connections, and support for the market from a survey of
Romanians in 2003.


Perceptions of increasing inequality reflect
negative evaluations of government economic
performance and of corrupt leaders. Trust in
other people largely reflects optimism for the
future and perceptions that inequality is
decreasing, as well as the belief that politicians
are not corrupt.
Support for democracy reflects expectations of
economic performance and perceptions of how
well the government is handling large-scale
corruption. Support for the market economy
reflects similar economic judgments as well as
perceptions that private firms are trustworthy and
large-scale corruption is being controlled.


Communist societies relied heavily upon informal
connections—which often substituted for a more
generalized sense of trust. Even though people
don’t need to stand in line for basic goods, people
still use connections in daily life in societies where
markets have not taken firm hold.
There is no direct connection between trust and
having connections to help in dealing with
government, the police, for getting a loan, for
dealing with business, for finding a job, or even in
a foreign country.


For each of these measures: (1) the informal sector plays a
minor role in shaping public evaluations; and (2) the
institutions that do have some impact are those that are
perceived to be most fair and impartial: the courts and the
police. Gift payments are almost always insignificant
predictors of trust in fellow citizens satisfaction with
democracy and the market, and even perceptions of rising
inequality. Using informal connections is sometimes
associated with perceptions of rising inequality, but also with
better performance of democratic government (where its
effects are moderately strong).
People see connections and gift payments as part of the
routine of getting by in daily life in contemporary Romania.
They do not condemn their fellow citizens for relying on
these techniques for making life a little bit less difficult in
most circumstances. Making “gift payments” to courts
do make citizens believe that their fellow citizens are less
trustworthy, that inequality is increasing, and that
democracy is not working well.


As economic inequality increases, we
might find that people who have to
rely upon connections would be more
pessimistic about the future and
more willing to limit the incomes of
the rich.
However, people with connections are
less likely to see inequality increasing
and are less likely to favor limiting
the incomes of the rich.




Beyond connections are “gift” or “extra” payments,
vzyatka in Russian (the “take”). Extra payments
were common under Communism and remain
widespread after the transition.
It is routine for people in transition countries to
make extra payments if they visit a doctor’s office,
if they are caught speeding, if they go to court or
even to the municipal building.
Barely more than a third of Hungarians see a moral
problem when doctors demand “gratitude
payments” for medical services (Kornai 2000: 3, 7,
9). Almost all doctors accept “gratitude money”; 62
percent of physicians’ total income came off the
books.
A majority of Russians found it necessary to use
connections to get clothes and medicine and ten
percent still needed someone’s help in getting into
a hospital after the fall of Communism (Ledeneva
1998: 8).


A majority of public officials in the Czech
Republic, Slovakia, Bulgaria, and Ukraine in
1997-98 found it acceptable to receive extra
payments from clients. Between 11 and 39
percent of citizens of those countries (in that
order) reported offering a “small present” to
officials and between 6 and 24 percent offered
“money or an expensive present” (Miller et al.,
2001, 217, 241).
Across the four countries, from 47 percent to 78
percent of officials admitted accepting a gift from
a client. The police and legal services were the
most “honest” and health services personnel
were most likely to admit accepting a favor
(Miller et al, 2000, 10).


As with the use of connections, making
“gift” payments did not reduce trust
among Romanian survey respondents
either in their fellow citizens, their
government, the market economy, or
democracy.
There is one exception to this general
pattern: Gift payments to the courts do
reduce all kinds of trust and confidence.



Why do extra payments not reduce trust—and
why do payments in court stand out?
These payments reflect petty corruption, rather
than the “grand corruption” people associate with
politicians and business people. The small
payments to the doctors, the police officers, and
other functionaries may be bothersome—but they
do not generally make the recipients rich.
These gift payments, like connections, do
not increase economic inequality. They are
reasonable strategies for coping in a system
where markets don’t work well.

The measures of the informal economy are mostly
insignificant across the 36 estimations (nine measures of
connections for each of four dependent variables). But
there are some important exceptions. Making extra
payments to the courts makes people less satisfied with
democracy in Romania and also less likely to trust their
fellow citizens. Making a gift payment to the court reduces
the likelihood of trust by 15.6 percent. This is the fourth
strongest effect, after the direction of the country (effect =
.218), trust in government (.197), and whether most
politicians are corrupt (.185). It is, as Rothstein (2001)
expected, the only form of gift payment that reduces
generalized trust.

Extra payments to doctors marginally decreases satisfaction
with democracy, but this part of the informal economy is
barely significant (p < .10). Informal “gift” payments to
the courts violate the expectation of fairness in the
judiciary. Otherwise, such payments seem to be largely
irrelevant to how Romanians view their political and
economic systems. Perhaps most critically, no form of
extra payment–not even to the courts–leads to perceptions
of growing inequality or to dissatisfaction with the market.

Using connections are not so benign. People who have any
connections or ties for medical treatments or in courts
perceive greater inequality in Romanian life. They clearly
realize that they have access lacking to most other citizens.
But these effects are not large. Court ties increased
perceptions of growing inequality by 7 percent, medical
intermediaries by only one percent, and any connections by
5 percent. Surprisingly, foreign connections led people to
see lower levels of inequality (by seven percent). But
connections abroad do not breed satisfaction with democracy
or the market. In both cases, international ties lead to lower
levels of satisfaction with political and economic institutions.
Foreign networks seem to point to success for individuals,
but institutional failures. Democracy and the market should
not be dependent upon foreign contacts.


Police connections raise satisfaction by 8.5 percent, bank ties by
7.8 percent, help in finding a job by 10.8 percent, and any
connections by 19.5 percent (using a dichotomized measure of
satisfaction with democracy). But relying on ties outside the
country reduces satisfaction with democracy by 2.6 percent–
perhaps reflecting the feeling that you need to rely upon friends
abroad to get what you want from the system.
Even though Romanians do see a connection between connections
and growing economic inequality–and inequality and trust in both
people and in government (not shown)–they also recognize that
having such ties makes democracy work with fewer hitches. They
seem generally unbothered by using informal ties–and not much at
all by having to make “extra” gift payments for routine services.
Having used connections and having made gift payments for so
long under Communism, transition citizens do not see these parts
of the informal economy as moral quandaries. Instead, they are
part of daily life and they are very different from the high-level
corruption that underlies their more fundamental frustrations.



Payments to courts stand out because the justice
system, as Bo Rothstein argues, is supposed to
be fair and impartial. We demand that courts be
impartial and we do not insist that other
institutions of government be so fair. We often
assume that they are not.
People also associate unfair legal systems with
special advantages by people who are both rich
and corrupt.
People who see the legal system as unfair are
much less likely to trust their fellow citizens, our
Romanian survey shows. An unfair legal system
exacerbates inequality—and thus destroys social
solidarity.


Even where corruption seems under
control, it still may contribute to low trust
in both other citizens and in government.
Ordinary citizens are far more likely to see
corruption as rampant than are elites—and
this contributes to perceptions of unfair
advantages for those who are well off.
Estonia is, together with Slovenia, the
least corrupt transition country. In 2004
its score on the TI index was 6.0, better
than Taiwan and slightly below Uruguay,
Portugal, and Israel. Estonia is the only
transition country where the TI corruption
index improved from 1998 to 2003.

The measures of the informal economy are mostly
insignificant across the 36 estimations (nine measures of
connections for each of four dependent variables). But
there are some important exceptions. Making extra
payments to the courts makes people less satisfied with
democracy in Romania and also less likely to trust their
fellow citizens. Making a gift payment to the court reduces
the likelihood of trust by 15.6 percent. This is the fourth
strongest effect, after the direction of the country (effect =
.218), trust in government (.197), and whether most
politicians are corrupt (.185). It is, as Rothstein (2001)
expected, the only form of gift payment that reduces
generalized trust.

Extra payments to doctors marginally decreases
satisfaction with democracy, but this part of the
informal economy is barely significant (p < .10).
Informal “gift” payments to the courts violate the
expectation of fairness in the judiciary.
Otherwise, such payments seem to be largely
irrelevant to how Romanians view their political
and economic systems. Perhaps most critically,
no form of extra payment–not even to the
courts–leads to perceptions of growing inequality
or to dissatisfaction with the market.


Yet ordinary Estonians, in a survey
commissioned by the government in
2003, saw many forms of corruption
as widespread. Companion surveys
of business people and government
officials showed that the elites saw
corruption as rare.
This is a sign of inequality: Citizens
see far more corruption than do
elites.



Do people in transition countries with
more honest governments have
different perceptions of corruption?
Estonia ranked as the 27th most
honest country in the world (out of
160) in the 2005 Transparency
International Corruption Perceptions
Index (between Portugal and Israel).
Slovakia ranked 47th, compared to
Romania which was tied for 75th.

Perceptions of Estonians on Trust and Corruption: The Public, Business, and Public Officials

Question
Public
Business
Officials
p level

Corruption increased since Soviet times*
1.734
2.183
2.143
.0001

Corruption inevitable in Estonia***
2.355
--
2.625
.0001

Courts in Estonia ensure fair trials**
2.232
2.201
2.199
n.s.

Common: Offer bribe to avoid fine
.795
--
.078
.0001

Common: Offer bribe to change law
.466
--
.007
.0001

Common: Offer bribe for favorable ruling
.696
--
.040
.0001

Common: Entrepreneur offers bribe to expedite
procedures
.745
--
.064
.0001

Common: Bribe offered to get job
.608
--
.005
.0001

Common: Civil servant uses state car
.917
--
.928
n.s.

Common: Civil servant lectures for pay
.650
--
.758
.0001

Common: Entrepreneur asks friend to expedite
.799
--
.826
n.s.

Common: Entrepreneurs give civil servants goods for help .755
--
.651
.0002

Common: Civil servants order from relatives’ company
.694
--
.771
n.s.

Corruption if official accepts gift after service**
2.417
2.143
2.277
.0001

Corruption if official accepts bribe for service**
1.396
1.295
1.202
.0001

Acceptable: Business offers civil servants goods help
.245
.127
.033
.0001
Accept: Patient jumps queue for operation
because brother went to medical school with doctor
.342
.322
.145
.0001



•
•
•
All cell entries are proportions agreeing except where noted by:
* Range is from 1-3, with higher values indicating decreased corruption.
**Range is from 1-4 with lower values indicating greater trust in police, greater likelihood of fair trials, greater
support for democracy, agreement that activity constitutes corruption, and that corruption is not inevitable in
Estonia.


The public and elite have very different
perceptions about how common corruption
is, what constitutes corruption, and even
how acceptable it is.
Ironically, the public seems more willing to
say that at least some forms of corruption
(in the surveys here, petty corruption) are
acceptable. This is consistent with the
Romanian data showing that petty
corruption does not destroy trust or lead to
perceptions of growing inequality. Most
ordinary citizens accept petty corruption as
part of life—something beyond their
control.


World Bank Diagnostic surveys
conducted in Romania and Slovakia
point to very different perceptions of
corruption and its effects.
The Romanian public is far more
likely to see corruption as increasing
inequality and lowering incomes than
is the Slovakian public.
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The Slovakian public is considerably more
concerned than the Romanian public with the
effect of corruption on moral decline, harming
transition, and leading to declining foreign
investment.
Slovakian elites were more concerned that
corruption increased crime, led to moral decline
and dishonesty, affected human rights, and
threatened the security of the state than were
Romanian entrepreneurs.
People who believe that corruption increases
inequality in Slovakia were less likely to express
confidence in government. However, believing
that corruption leads to more inequality had no
effect on trust in government for either
entrepreneurs or for government officials.
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Perceptions of the Consequences of Corruption:
World Bank Corruption Diagnostic Surveys of the Romanian and Slovakian Publics and Elites
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Proportion Naming Each Consequence as First or Second Most Important
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Romania
Consequence
Public
Entrepreneurs
Increase inequality
.53
.37
Lowers income
.53
.41
Infringes on human rights
.17
.07
Contributes to dishonesty
.11
.14
Leads to increased crime
.12
.09
Contributes to moral decline
.15
.23
Hurts transition
.05
.09
Lose confidence in one’s
own abilities
NA
NA
Hurts private enterprise
.04
.18
Leads to loss of foreign
investment
.12
.26
Endangers security of state
.18
.14
Slovakia
Public Entrepreneurs Officials
.37
.31
.43
.20
.22
.25
.17
.20
.35
.15
.32
.36
.15
.28
.32
.38
.20
.32
.25
.22
.25
.27
.09
.31
.21
.27
.20
.29
.20
.38
.10
.27
.31
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The transition countries, among
others, are stuck in an inequality
trap. Inequality leads to low trust.
Low trust leads to more corruption.
More corruption leads to bad
government and resentment among
the poor toward others in the society
and to demands for restricting
markets. This in turn leads to more
rather than less inequality.
The Inequality Trap
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Corruption is sticky. There is little evidence that countries can
escape the curse of corruption easily–or at all. The r2 between
the 2004 Transparency International estimates of corruption and
those of the ICRG (International Country Risk Guide) in 1980-85
across 52 countries is .742.
The r2 for the most commonly used measures of economic
inequality (Deininger and Squire, 1996) between 1980 and 1990
is .676 for a sample of 42 countries. A new inequality data base
developed by James Galbraith extends measures of inequality
further back in time and across more countries. The r2 between
economic inequality in 1963 and economic inequality in 1996 is
.706 (for 37 countries).
The r2 between generalized trust, as measured in the 1981,
1990-1995 World Values Surveys across between 1980 and the
1990s is .81 for the 22 nations included in both waves—the r2
between generalized trust in 1990 and 1995 is also robust (.851,
N = 28).
Institutional Reform Won’t End Corruption
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Two of the most widely used indicators of democratization,
Freedom House’s political rights and civil liberties indices,
are not so stable over time. The r2 for political rights from
1973 to 2003 is .165 and for civil liberties it is .263 (both N
= 77). Even excluding countries that were Communist in
1973, the respective r2 values increase only to .264 and
.375 (N = 67).
Even more troubling, the changes in political rights and
civil liberties from 1973 to 2003 are unrelated to changes in
corruption from 1980-85 to 2004 ( r2 = .007 and .038
respectively, N = 38). Moving the democratization
measures forward to 1988 does not improve the fit with
changes in corruption ( r2 = .004 and .0005 for political
rights and civil liberties, N = 39). Institutions are not
nearly as sticky as corruption–and structural change does
not track the level of transparency.
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If corruption depends upon policy
choices as well as from inequality and
low trust (and unfair legal
institutions), how do we get the
"good policies" that can help combat
corruption?
"Good government" is not as critical
as clean government in the quest for
positive outcomes and positive
policies for economic growth.
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I estimated regression equations for
15 outcomes and policy options
across nations. Of the 15 models,
corruption was a more significant
deteminant of good outcomes/policy
choices in 11, effective government
in three, and one model showed
equivalent effects.
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Outcomes for which corruption matters more
than government effectiveness:
Growth competitiveness ranking 2003
Tax compliance (WEF)
Expropriations risk 1982-97 (Glaeser et al., 2004)
Index of state owned enterprises (LaPorta et al., 1999)
Government consumption/GDP (freetheworld.org)
How ethical are business firms (WEF)
Executives involved in charitable causes (WEF)
Education spending (LaPorta et al., 1999)
Education Gini 1990 (Thomas, Wang, Fan, 2001)
Education standard deviation (Lederman)
Secondary school enrollment (UN Development Program)
Public health expenditures (UN Development Program)
Transfer payments (LaPorta et al., 1999)
UN Human Development Index (UN Development Program)
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Outcomes for which government effectivenss
matters more than corruption:
Satisfied with state of environment (Gallup Millennium)
Markets open to small/medium firms (LaPorta, et al., in press)
Good labor-management relations (WEF)
Outcome for which government effectivenss
matters equally to corruption:
Market capitalization (LaPorta, et al., in press)
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Effective government has its greatest
"advantage" in opening markets.
Corruption is most critical in shaping
policies that have the potential to reduce
inequality--especially education spending,
educational inequality and enrollment,
health expenditures, and the overall UN
Human Development Index.
Universalism, Trust, and Equality
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Bo Rothstein and I in a forthcoming article
show that education spending is an
especially powerful tool in reducing
inequality and in boosting trust.
Universalistic policies produce a sense of
community, while means-tested policies
stigmatize the beneficiaries. People who
receive means-tested benefits are less
trusting, even controlling for income, race,
and other factors such as optimism.
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Health spending and especially
education expenditures also have great
potential for reducing inequality--if they
are universal benefits. Universalistic
benefits are more effective in reducing
inequality than are means-tested
programs--even though means-tested
programs are targeted at people who are
most needy.
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If the key to combatting
corruption is reducing inequality,
it seems as the path to less
inequality is through less
corruption as well. This is the
fundamental dilemma of the
inequality trap.
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In transition countries, the growth of a market
economy has meant displacement of many
former state workers guaranteed employment
and a living wage. Communism already had
depressed levels of generalized trust.
Overcoming both poverty and low levels of trust
loomed large on the political agenda of these
countries—but there has been little support for
the universal policies that might create a more
vibrant economy and society. Instead, there
seems to be support for a more radical
redistribution of income that would exacerbate
tensions and make the transition more difficult.
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As inequality increases in transition
countries, there are more demands for
redistribution of wealth and confiscation of
the fortunes of the newly rich (as our data
from Romania show).
The best policy response to growing
inequality is to enact universalistic social
welfare programs. However, the social
strains stemming from increased inequality
make it almost impossible to enact such
policies. Demands for redistribution will
thus lead to inefficient poverty reduction
strategies—and ever more increasing social
strains.
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Starting from a base of relative equality, the
transition states had a golden opportunity to enact
universalistic social welfare policies. Yet, these
states also had corrupt governments with
widespread tax evasion and little public confidence.
Transition states had only one of the key elements
(relative equality) for the enactment of
universalistic policies. Lacking the other (honest
government), they have been unable to stem the
growing inequality and increased social strains that
follow from it. Many transition states had
universalistic social welfare policies under
Communist regimes, and most still do as official
policy—but the implementation of such policies in
transition has focused more on targeted benefits
and health care often depends upon the ability to
pay for insurance.
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The envy of the rich and the
unwillingness of majorities in postsocialist societies to enact
universalistic social welfare policies
reinforce the inequality trap.
Increasing inequality is associated
with a rise in political support for
Communist parties, which target
benefits to the lower income groups
rather than enact universalistic
policies. Ironically, these policies
reinforce inequality rather than
reduce it.
Many would find much to agree with
the comment of the satirical group,
The Royal Canadian Air Farce, in the
1980s: “Things are going to get a lot
worse before they turn bad.”