How Corruption Affects the Economy

Corruption—fraudulent conduct that benefits a deceptive few—is an irrational, emotional drive that affects our decision-making. It’s part of our past, our present, and sadly, our future. Here’s how corruption affects our savings, securities, and the stability of our economy.
Handing money bags over – corruption illustration

Corruption: it’s always there, simmering under the surface, even in democracies. The Corruption Perception Index’s least corrupt country in 2015 was Denmark, scored 91/100. A glance at the Corruption Perception Index map shows most of Europe, Canada, the U.S., and a few other countries as a humble yellow—the least corrupt countries—while the rest of the world is colored a corruption-ridden red. This makes the United States’ score of 76/100 look good on a global scale.

And yet, in the U.S. today, it feels like we hear about corruption all of the time. From corrupt police departments to corrupt presidential administrations, corruption is a part of our past, our present, and our future. It is considered by some economists to be an irrational, emotional drive that affects our decision-making. It’s part of our nature as humans, whether we like it or not. While hard to eliminate, corruption can be controlled.

Corruption in a nutshell

While corruption has festered into various types of governments all over the world, it plays a special role in the capitalist economy that we live in today. Capitalism doesn’t produce what people need; it produces what they want, or even more accurately, what they think that they want.

One of history’s greatest examples of corruption involved the sale of counterfeit medicine in 19th Century America and England. Fraudulent patent medicines were sold during medicine shows—miracle remedies that promised results, but did not deliver. To this day, the selling of fake medicine is so ingrained in our history that it gave birth to the term snake oil, or “a product, policy, etc. of little real worth or value that is promoted as the solution to a problem.” Under the capitalist system, if people are willing to buy snake oil, then snake oil will be produced. This allows corruption to be integrated into the economy with sellers earning more than they should and buyers being duped, and ultimately ripped off.

We’ve come a long way since fraudulent medicines were marketed and sold on the street—consumers have grown smarter over time, and consumer protection agencies have been established. However, new and more complicated opportunities for economical corruption have surfaced since then.

How corruption affects the economy

Securities—people’s savings for the future—are constantly at risk for economical corruption. While consumer protection in this area is greatly needed, it is also difficult to provide, given the insubstantiality of financial assets such as stocks, bonds, retirement funds, and life insurance. These financial assets are no more than pieces of paper that promise future payments. By misrepresenting securities to buyers, securities can easily be turned into modern day snake oil.

The last three recessions in the U.S. have all been tied to corruption scandals: the savings and loan scandal with the early 1990s recession, the Enron scandal with the early 2000s recession, and the subprime mortgage crisis with the recession of 2007-2009, also known as the Great Recession. Each of these scandals and subsequent recessions are rooted in complex issues, however, the premise for each scandal is the same. In each instance, black-and-white rules of accounting were tinkered with, which allowed for more money to be taken out than there legitimately should have been. After the books were cooked with falsified financial documents, those involved in the scandal tried to hide their deceitful work by wrapping it in layers of complexity in hopes that nobody would notice, which worked… for a short while. In each case, people were tricked into buying snake oil, en masse.

Stopping corruption: exit, voice and loyalty

There are those who are indirectly and involuntarily involved in corruption, and when they become aware of the situation, they have three options: exit, voice, or loyalty. In other words, if you are in a group and do not like what’s going on, you can choose to leave the group (exit), voice your concern to attempt to change what you don’t like (voice), or you can stay with the group and accept the group’s actions (loyalty).

For example, during the savings and loan scandal, the price of real estate soared in some areas. Those in the legitimate real estate business had a tough choice to make: they could either stay in the business knowing that prices were over-inflated (loyalty), or they could make a career change (exit), which is easier said than done. Voicing their concern in hopes for change (voice) didn’t appear to be a viable option since it would be one individual against systemic corruption and large corporations. So, for most in the industry, it was business as usual, until the cracks began to show.

Many things can keep a person, business, industry or even country locked into the system of corruption. Individuals find it hard to exit a corrupt entity due to unemployment, lack of money, or fear, and on a larger scale, businesses, industries and even governments can often find the payoff from corruption too enticing, or their activities too entrenched in illegality, to want to leave. The trap of corruption means that it’s likely corruption will never completely go away; it’s up to individuals, businesses, industry and countries to keep corruption at a minimum continues.

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