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  • Virtue is not just its own Reward

    Posted by Mitch Townsend on August 5th, 2006 (All posts by )

    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
    Côte 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 Responses to “Virtue is not just its own Reward”

    1. Brett_McS Says:

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

    2. Half Sigma Says:

      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. Lex Says:

      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. Brett_McS Says:

      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. Mitch Says:

      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.