Rep. Cliff Stearns

U.S. House of Representatives

Combating Corruption Requires Expanding Freedom

September 19, 2006

Mr. Speaker, according to the State Department, international corruption costs American companies that play by the rules many billions of dollars in lost exports. Corruption impedes government efforts to deliver basic efforts to citizens, weakens confidence in democracy, and is often linked to international criminal activity. It causes rampant economic inefficiency, interferes with capital markets, and obviously contributes to poverty.

Transparency International is a global not-for-profit organization dedicated to the fight against corruption. Transparency puts out annual reports on the state of corruption worldwide, trying to measure whether we are winning or losing that fight.

This fight is a top priority for the U.S. Departments of State, Justice and Commerce. My colleagues, since 1979, the Organization for Economic Cooperation and Development, OECD, has had a convention against corruption and continues to see it as a top global priority. All this reflects a growing international consensus that corruption is a problem that we must confront. That much is true. But working on anticorruption campaigns, all these entities treat the symptoms rather than the disease. The disease is oppression and lawlessness. The cure is freedom and the rule of law.

The annual Index of Economic Freedom, compiled by the Heritage Foundation and the Wall Street Journal, provides a simple framework for understanding how open countries are to competition; the degree of state intervention in the economy, whether through taxation, spending or overregulation; and the strength and independence of a country's judiciary to enforce rules and protect private property.

One of the indicators in the index is the size of a nation's “informal,” or black market economy, which helps to measure this corruption. Charting the relationship between economic freedom and the size of the informal economy as a percentage of GDP, the Heritage Foundation found a positive correlation between these two factors. They reported, “as economic freedom vanishes, the informal economy takes a larger share of GDP. The size of the informal economy in economically unfree and repressed economies is almost three times the size of the informal economy in free economies, and almost double the size of the informal economy in mostly free economies.” The Heritage calculations demonstrate the perverse effect of economic repression on the moral behavior of simple, ordinary people and the continuation of the cycle of poverty that entraps them.

Access to credit in most developed countries is the key to a better standard of living. That access is incumbent upon proving income or property, for which you need a formal job and a legal title to that property.

When it is difficult for people to invest in business, whether a corner grocery store or a major factory, formal jobs are hard to come by. Jobs can be more easily had in the informal economy, where small and medium entrepreneurs can negotiate salaries and benefits, and tie them to performance. In cases like this, the government bureaucracy encumbers legal businesses, encouraging employers and employees to operate in the shadows.

Without a formal job, you can still get credit if you have titled property to offer as collateral. But while Peruvian economist Hernando de Soto has shown that most of the poorest people in the developing world own property, they face innumerable bureaucratic hurdles in order to actually title that property as their own. In Peru, he says, “to obtain legal authorization to build a house on state-owned land took 6 years and 11 months. To obtain a legal title for that piece of land took 728 steps.” Other countries are similarly ridiculous. In Egypt, it takes 77 steps in 31 government offices and anywhere from 6 to 14 years. In the Philippines, it takes 168 steps through 53 offices and anywhere from 13 to 25 years to get legal title to this property.

An oppressive government system perpetuates the poverty of its citizens by making it impossible to claim their property rights and pursue legal employment. Equally important, the Heritage Foundation says that the resulting black market economy “creates a culture of contempt for the law and fosters corruption and bribery in the public sector as a necessary means to navigate the bureaucracy.”

Mr. Speaker, when those folks, particularly international elites, take on corruption, they see it as just one more corporate scandal to be uncovered and think that will be that and we can fix it. One more capitalistic crime, they call it, that must be prosecuted. That is not it. That is not it at all. In reality, corruption indicates a simple lack of freedom and, more importantly, a consistent rule of law.

See the original in the Congressional Record on Pages H661 and H662

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