Virtue is not just its own Reward

I ran into something rather puzzling when I was looking into some of the things that determine the success or failure of countries. I know Fukuyama did a whole book on the subject, but it was not especially satisfying. It seemed to back into its conclusions without offering much empirical support.

I do think that Fukuyama was onto something, though. There is a paper, available online, by Bo Rothstein that approaches issues of trust from the direction of game theory. Start with the famous “prisoner’s dilemma,” in which two prisoners are being interrogated separately. If both remain silent, there will not be enough evidence to convict either, and they will both go free. However, the one who confesses first will receive a light sentence and the other will bear the greater punishment. This problem has two equilibrium points: one confesses and takes the intermediate reward (or less punishment), or neither confesses and both collect the reward of going free. In essence, countries can reach several equilibrium points in how the citizens of each country treat each other. Rothstein points out that we often act against our rational self-interest. For example, we refrain from stealing even when there is no chance of being detected. We will even give up some value for the opportunity to punish someone who we feel has cheated us, which makes no monetary sense. If we expect that we will be cheated, however, we will take the opportunity to cheat ourselves. We can reach a stable equilibrium of either trusting and acting on trust, or mistrusting and acting on that mistrust.

Measuring trust is not an easy thing, so I chose a close substitute. I figured that the index of perceived corruption by Transparency International was a reasonable estimate of trustworthiness. This assumes that the perception is accurate, and gives an idea of the degree of trust in that society. In Transparency’s corruption index, 10 is angelic and anything below 5 indicates a problem. As a measure of prosperity, I used per capita GDP, according to the CIA Factbook.

The correlation? 90%! You can’t get a much tighter correlation in real life.
The figures and more thoughts are on the jump page.

The correlation with GDP growth was very weak: only about 20%. My guess is that GDP per capita represents growth over a long period, while the only figures for GDP growth in common circulation were for either one year or a very short period. Places like Iraq and Afghanistan show tremendous GDP growth, having been nearly destroyed over the past 20 years. India and China also show great growth, but relatively high corruption. I would be very surprised to see them sustain both high rates over the long term.

One possible mechanism by which corruption and lack of trust can destroy wealth is by considering transaction costs. If you are likely to be shaken down by a corrupt cop on your way to work, your cost of commuting includes more than just the mileage on your car. The cost you pay to avoid being cheated, or to bribe an official to receive an ordinary service, makes other locations cheaper and more attractive in comparison.

Country Corruption GDP
Afghanistan 2.5 700
Albania 2.4 4500
Algeria 2.8 5900
Angola 2 1900
Argentina 2.8 11200
Armenia 2.9 3900
Australia 8.8 28900
Austria 8.7 30000
Azerbaijan 2.2 3400
Bahrain 5.8 17100
Bangladesh 1.7 1900
Barbados 6.9 16200
Belarus 2.6 6000
Belgium 7.4 29000
Belize 3.7 4900
Benin 2.9 1100
Bolivia 2.5 2400
Bosnia and Herzegovina 2.9 6100
Botswana 5.9 8800
Brazil 3.7 7600
Bulgaria 4 7600
Burkina Faso 3.4 1100
Burundi 2.3 600
Cambodia 2.3 1700
Cameroon 2.2 1800
Canada 8.4 29700
Chad 1.7 1200
Chile 7.3 9900
China 3.2 5000
Colombia 4 6300
Congo, Democratic Republic of the 2.1 600
Congo, Republic of 2.3 700
Costa Rica 4.2 9000
Cte d’Ivoire 1.9 1400
Croatia 3.4 10700
Cuba 3.8 2800
Czech Republic 4.3 15700
Denmark 9.5 31200
Dominican Republic 3 6000
Ecuador 2.5 3300
Egypt 3.4 3900
El Salvador 4.2 4800
Equatorial Guinea 1.9 2700
Eritrea 2.6 700
Estonia 6.4 12300
Ethiopia 2.2 700
Fiji 4 5800
Finland 9.6 27300
France 7.5 27500
Gabon 2.9 5500
Gambia 2.7 1700
Georgia 2.3 2500
Germany 8.2 27600
Ghana 3.5 2200
Greece 4.3 19900
Guatemala 2.5 4100
Guyana 2.5 4000
Haiti 1.8 1600
Honduras 2.6 2600
Hong Kong 8.3 28700
Hungary 5 13900
Iceland 9.7 30900
India 2.9 2900
Indonesia 2.2 3200
Iran 2.9 7000
Iraq 2.2 1600
Ireland 7.4 29800
Israel 6.3 19700
Italy 5 26800
Jamaica 3.6 3800
Japan 7.3 28000
Jordan 5.7 4300
Kazakhstan 2.6 7000
Kenya 2.1 1000
Korea, South 5 17700
Kuwait 4.7 18100
Kyrgyzstan 2.3 1600
Laos 3.3 1700
Latvia 4.2 10100
Lebanon 3.1 4800
Lesotho 3.4 3000
Liberia 2.2 1000
Libya 2.5 6400
Lithuania 4.8 11200
Luxembourg 8.5 55100
Macedonia 2.7 6700
Madagascar 2.8 800
Malawi 2.8 600
Malaysia 5.1 9000
Mali 2.9 900
Malta 6.6 17700
Mauritius 4.2 11400
Mexico 3.5 9000
Moldova 2.9 1800
Mongolia 3 1800
Morocco 3.2 4000
Mozambique 2.8 1200
Myanmar 1.8 1900
Namibia 4.3 7100
Nepal 2.5 1400
Netherlands 8.6 28600
New Zealand 9.6 21600
Nicaragua 2.6 2200
Niger 2.4 800
Nigeria 1.9 800
Norway 8.9 37700
Oman 6.3 13400
Pakistan 2.1 2100
Panama 3.5 6300
Papua New Guinea 2.3 2200
Paraguay 2.1 4600
Peru 3.5 5200
Philippines 2.5 4600
Poland 3.4 11000
Portugal 6.5 18000
Qatar 5.9 21500
Romania 3 6900
Russia 2.4 8900
Rwanda 3.1 1300
Saudi Arabia 3.4 11800
Senegal 3.2 1600
Serbia and Montenegro 2.8 2300
Seychelles 4 7800
Sierra Leone 2.4 500
Singapore 9.4 23700
Slovakia 4.3 13300
Slovenia 6.1 18300
Somalia 2.1 500
South Africa 4.5 10700
Spain 7 22000
Sri Lanka 3.2 3700
Sudan 2.1 1900
Suriname 3.2 3500
Swaziland 2.7 4900
Sweden 9.2 26800
Switzerland 9.1 32800
Syria 3.4 3300
Taiwan 5.9 23400
Tajikistan 2.1 1000
Tanzania 2.9 600
Thailand 3.8 7400
Trinidad and Tobago 3.8 9600
Tunisia 4.9 6900
Turkey 3.5 6700
Turkmenistan 1.8 5700
Uganda 2.5 1400
Ukraine 2.6 5300
United Arab Emirates 6.2 23200
United Kingdom 8.6 27700
United States 7.6 37800
Uruguay 5.9 12600
Uzbekistan 2.2 1700
Venezuela 2.3 4800
Vietnam 2.6 2500
Yemen 2.7 800
Zambia 2.6 800
Zimbabwe 2.6 1900

5 thoughts on “Virtue is not just its own Reward”

  1. Awesome correlation. Note also the success of the Tit for Tat strategy in the iterated prisoners dilemma – a strategy which mirrors ethical behaviour.

  2. It’s hard to say which way the cause and effect works here, but I do believe that a citizenry with virtues such as honesty, civic mindedness, are essential for an economically successful democratic society.

  3. If you took out the countries that are wealthy solely from resource extraction, like Saudi Arabia, I suspect the correlation would be even higher.

  4. Yes, Lex, and quoting GDP per person for Saudi Arabia is a little -er- optimistic. What does the income distribution look like? Hardly “normal”.

  5. There is a measure of income inequality called the GINI index. You can represent absolute income equality with a straight line from zero going up at a 45 degree angle, so that 5% of the population has 5% of the wealth, 50% has 50%, etc. The GINI index represents the amount of “sag” that the real income distribution curve displays when the bottom 50% of the population receives less than 50% of the income.

    I’ve played with GINI a little, too, and may have something to say about what else it implies. Wouldn’t ya know it, though – our friends the Saudis don’t show up on the list. I suspect they like to keep that kind of information within the family. Kuwait is missing, too.

    The primary source for the data going into the GINI calculation is income taxes. This may be unreliable or missing.

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