Regulation begets corruption

Greater economic freedom is the best solution to Israel's corruption problem.

In annual reports that rank global corruption by Transparency International, Israels ranking has continually declined, signifying greater and greater perceptions of corruption. This bodes poorly for Israels future, as corruption hinders economic growth and development and weakens social solidarity.

We have not looked at the root causes of corruption and how it can be reduced. While a few lone voices have suggested legal reforms or reforming the electoral system -- all important components in reducing corruption -- a greater part of the solution is much simpler, but much more significant: increasing economic freedom in Israel.

A simple scan of Transparency Internationals latest Corruption Perspectives Index and the Fraser Institutes Economic Freedom of the World report (disclosure: JIMS is the Israel partner for the report) shows that those countries with the least incidence of corruption are also the most economically free.

While this may be news to most Israelis, it has long been known by economists and political scientists that bloated governments and too much government regulation cause corruption. According to a report by the International Monetary Fund (IMF), much public corruption can be traced to government intervention in the economy; policies aimed at liberalization, stabilization, deregulation, and privatization can sharply reduce the opportunities for rent-seeking behavior and corruption.

According to the IMF, when government regulation is pervasive (as in Israel), people are tempted to offer bribes and officials are tempted to accept them. The IMF report states, "Studies have shown that a very open economy is significantly associated with lower corruption. In other words, countries tend to be less corrupt when their trade is relatively free of government restrictions that corrupt officials can abuse.

According to the University of Chicago lecturer Richard Posner, one of the worlds top scholars in the law and economics movement, corruption flourishes where the economy is heavily regulated. The Heritage Foundation states that corruption does not reflect so much a lack of ethics as it reflects a lack of economic freedom." According to the institute, convoluted regulations and weak rule of law provide ample opportunities for public officials to accept bribes without punishment. The result is an increasingly unequal society, in terms of the opportunity to create wealth and improve living standards.

By supporting economic freedom in Israel, and advocating policies that aid investment, ingenuity, and entrepreneurship, we can help ensure that, besides a reduction in corruption, there will also be a decline in poverty and greater economic opportunity.

No, economic freedom is not a panacea. It wont bring world peace or eliminate poverty, and it will never completely eliminate corruption. No country has 100% economic freedom. But those countries like Hong Kong, Singapore, Estonia, and Ireland that have high levels of economic freedom also have more social solidarity, lower rates of poverty, and less corruption than states that are less free.

If we are tired of endless news stories of corruption in Israeli politics, there is something we can do besides turning the page or changing the channel. There are real policies that we can advocate. Shrinking the size of government and eliminating excess regulation, besides leading to economic and social progress, also leads to a decline in corruption.

Havent we had enough? Dont we deserve better?

Avi Hein is Director of Programs at the Jerusalem Institute for Market Studies, a non-profit economic policy think tank.

Published by Globes [online], Israel business news - www.globes.co.il - on May 26, 2008

Copyright of Globes Publisher Itonut (1983) Ltd. 2008

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