THE LEGATUM PROSPERITY INDEX™ 2016

Bringing Prosperity to Life

Corruption in Southern Europe: Is the remedy as dangerous as the disease?

A warning from Italy

Looking out across the chaotically corrupt Eternal City, Marcus Tullius Cicero gave vent to anger: “Exploiting the state for selfish profit is not only immoral; it is criminal, infamous.” He rose in the public’s estimation, but not in that of his fellow senators, who had him assassinated a year later.

More than 2,000 years later, and Rome is no longer the Eternal City but the “Mafia Capital”, so named after a scandal that came to light in 2014. This centred on the Palazzo Senatorio, home of the Roman city council, which stands symbolically on top of the most famous of Rome’s seven hills, the Campidoglio or Capitoline Hill, where the first Romans built their citadel. Crime syndicates, newspapers revealed, had stolen millions of euros destined for city services with the help of corrupt officials.

Italy ranks poorly across a range of anti-corruption and good-governance measures, and recent surveys show that most Italians think corruption is widespread throughout their government and businesses. Does it matter?

Corruption is not a specifically Roman problem. Italy ranks poorly across a range of anti-corruption and good-governance measures, and recent surveys show that most Italians think corruption is widespread throughout their government and businesses. Does it matter? Many Italians think that they have comfortable lives, but the Eurozone’s third largest economy ranks just outside the global top 30 for overall prosperity. The famed political scientist Samuel Huntington argued that corruption can raise prosperity by enabling individuals to bribe their way through an inefficient bureaucracy. While there may be some truth in this argument, the weight of evidence suggests that corruption, by weakening social trust and the rule of law, erodes the foundations of prosperity in the most pernicious ways.

In October 2015 the mayor of Rome resigned in the wake of the “Mafia Capital” scandal. Eight months later, he was replaced in a landslide electoral victory by Virginia Raggi of the anti-establishment Five Star Movement, which is led by the 68-year-old comedian Beppe Grillo. Speaking of the corrupt officials who preceded her, Raggi told The Observer, “We have seen a pit of waste which they have created – they have robbed Rome.”

Raggi’s platform centres on fighting corruption, which is unarguably a good policy. But there are concerns that this may come with more of the Five Star Movement’s ideas, such as “degrowth”, an ecological, anti-capitalist ideology that threatens prosperity.

Beware of the backlash: corruption threatens prosperity across Southern Europe

The wider Southern European experience, from Spain to Greece, shows that these two policies – fighting corruption and anti-capitalism – often go hand in hand.

When corruption between government and businesses is widespread, people tend to vote for anti-establishment politicians like Raggi and for the anti-capitalist parties to which they belong.

When corruption between government and businesses is widespread, people tend to vote for anti-establishment politicians like Raggi and for the anti-capitalist parties to which they belong. In the process they end up endorsing regulation, nationalisation, and higher taxes – creating an economic environment that handicaps businesses.

More corrupt countries tend to have worse Business Environment scores. Italy's Business Environment performance is as expected given its level of corruption.

Golden Dawn, the Greek anti-globalist and fascist political party, rode a wave of public anger into the Hellenic Parliament in May 2012, winning seven percent of the popular vote and winning parliamentary seats for the first time since registering as a party in 1993. Its success lay in channelling anger about chronic corruption, economic austerity, and immigration, capitalising on the fact that its members had never belonged to previous highly corrupt governments. Its plans to eliminate cronyism and corruption would involve nationalising banks and Greece’s natural resources.

It appears that voters favour state economic intervention as a means of punishing corrupt businesses and politicians.

It appears that voters favour state economic intervention as a means of punishing corrupt businesses and politicians. Indeed, they are willing to incur the costs of this punishment themselves in order to achieve an economy which they deem to be fairer.

Less corrupt countries tend to deliver more prosperity with their wealth. New Zealand massively over-performs here, and Italy delivers slightly less prosperity with its wealth than its corruption level would suggest.

Perhaps that economy will be “fairer”, but it will not be able to deliver prosperity. One of the few things on which most economists agree is that free markets, along with compensation for those who lose out from liberalisation, are better than state economic intervention at delivering broad-based prosperity.

There has always been corruption in Southern Europe and particularly in Italy, so much so that the abuse of a system is becoming the system itself. Italy maintains a respectable global prosperity rank – though the lowest in the G7 – despite its corruption, but it is unclear how long it can continue to do so. Like Cicero’s Rome, Italy’s prosperity is in decline. Rampant and endemic corruption is one of the causes.