In my last post, I argued that the familiar hypothesis—advanced by Gary Becker and others—that big governments are associated with more corruption is inconsistent with the available cross-country empirical evidence. In fact, though the results of different studies are not entirely consistent, the weight of the evidence seems to suggest that (controlling for other possible correlates), countries that have larger governments—defined primarily as those that have higher levels of government spending as a percentage of GDP—have lower levels of perceived corruption, as measured by the familiar indexes, such as Transparency International’s Corruption Perceptions Index (CPI). Again, there are some questions about the robustness of this negative correlation—some studies find that it is statistically significant, while others do not—but there’s enough supporting evidence that I think it’s fair to (tentatively) treat this correlation as genuine.

Perhaps in hindsight this shouldn’t be so surprising. Putting aside multiple regression and other fancy statistical techniques, if one just eyeballs the CPI “league table,” it’s clear that the group of countries that consistently score near the top of the rankings include lots of countries—particularly countries in Northern and Western Europe—with quite large governments (such as Denmark, Sweden, Belgium, Norway, the Netherlands, Finland, and Iceland), while the bottom of the CPI list includes countries with very small governments. (Even if one excludes barely functioning states, like Somalia, the bottom group in the CPI includes small-government states like Bangladesh, Cambodia, Haiti, Russia, and the Central African Republic). Of course, this by itself doesn’t tell us much, especially given the well-established correlation between GDP and the government spending/GDP ratio—but, again, multiple regression techniques that control for GDP and other factors show that the positive correlation is genuine, and the handful of favorite examples often trotted out to suggest that small governments are the key to lower corruption (like Singapore and Hong Kong) are in fact statistical outliers.

So let’s assume that, as most studies seem to show, there’s a negative correlation between the government spending/GDP ratio and perceived corruption. What’s the explanation for this?

The short answer is that I don’t know, and I’m not aware of any research that really nails this down. But here are a few possibilities, some cribbed from existing papers, others based on my own wild speculations:

• First, one possibility—and the one that probably comes closest to rescuing the big-government-causes-corruption hypothesis—is that the direction of causation runs mainly from corruption to government size. Here, the reasoning would be that more corrupt governments have more difficulty raising revenue and spending money, perhaps because government officials embezzle resources before they can be spent (so that they never show up in official expenditure statistics), citizens pay bribes to avoid paying taxes, or firms “hide” in the unofficial economy to avoid bribe demands, and consequently do not provide tax revenue. There’s also a political explanation: At least in countries where the government is electorally accountable, citizens may be more likely to support, or at least accept, an expansion of the government’s role in the economy if they believe the government is generally honest, but citizens are more likely to object to “big government” in countries where the government is perceived as more corrupt. Put another way, if people in more corrupt countries are more likely to take Becker’s advice—and cut government in order to cut corruption—then the cross-country data could make it look like Becker’s hypothesis is not true (even if it is). This is certainly possible. Indeed, I suspect that government size is, at least to some extent, influenced by corruption, and not just the other way around. I’m skeptical, though, that this effect fully explains the negative correlation between government size and corruption. This is partly because, though I haven’t actually tried to run the numbers, my intuition is that these effects would have to be very large—implausibly so—to fully explain the observed negative correlation. I have the sense (though perhaps I’m wrong) that there just aren’t enough countries where the perceived corruption problem has led to massive cuts in government size.
• Second, some kinds of government spending may fund measures that help detect, punish, or prevent corruption. Effective law enforcement agencies, an honest and efficient judiciary, and qualified government auditors all cost money. Similarly, larger governments may pay higher salaries and hire more staff, reducing the problem of overworked, underpaid government bureaucrats who think they are entitled (even expected) to solicit bribes. If this is correct, then governments that invest more in anticorruption measures (or simply invest in a higher-quality government bureaucracy) will have higher government spending/GDP ratios, and also (insofar as these investments in anticorruption are effective) have lower perceived corruption. As with the first explanation, my hunch (and again, at this point it’s nothing more than that) is that there’s something to this, but that it’s not a complete explanation, simply because the contribution of these sorts of expenditures on anticorruption and bureaucratic quality are likely too small, as a percentage of overall government spending, to explain much of the variation in government spending/GDP across countries, and therefore unlikely to account for the statistical correlation between government size and perceived corruption in the cross-country data.
• Third, the negative correlation between government spending/GDP and corruption might be attributable to economic inequality. Many states with large governments do a great deal of economic redistribution—using high and progressive tax rates to redistribute income in variety of ways, including through direct transfers, social insurance programs, and spending on public services like education and health care. These redistributive programs—which are associated with higher government expenditure/GDP ratios—entail corruption risks. But they can also substantially reduce economic inequality. And there are several reasons why economic inequality may be an even more significant source of corruption risk. High levels of poverty or other forms of economic distress may lead more people to feel that they need to pay bribes to avoid economic disaster for themselves or their families. Large wealth gaps may also engender a sense of unfairness—the feeling that the game is rigged—which may reduce people’s natural moral reluctance to violate the formal rules (in much the same way that, according to some accounts, the hypocrisy of the Soviet system encouraged a cynical acceptance of corruption as the way to get things done and look out for yourself). Great concentrations of wealth may encourage feelings of envy—perhaps especially by the government officials who, by virtue of their position, rub elbows with the super-rich in their social circle, and may feel entitled to some of those benefits as well. That’s mostly speculation, though there is indeed some evidence that higher levels of economic inequality (as measured by the Gini coefficient) are associated with higher perceived corruption on the CPI and other indexes (see here, here, here, here, here, and here.) Again, I haven’t delved into this research nearly enough to have an informed opinion, but at the moment this explanation—that larger governments, all else equal, tend to reduce corruption by lowering economic inequality—strikes me as the most plausible explanation of the big government-low corruption link.

Again, all of this is tentative. I need to do more research on this, and I’d be interested in the thoughts of other folks out there in ReaderLand on why it might be the case that countries where governments spend more money, relative to GDP, seem to have lower corruption, all else equal. But at the moment, my working hypothesis is that small-government conservatives like Professor Becker had it exactly backwards: Excessively small government, not excessively large government, is the more important root cause of corruption.