Date: Wed, 5 May 2004 08:08:47 -0700 (PDT) 
From: "Parhatsathid Napatalung" <parhat@yahoo.com> 
Subject: Re: 2004 Update Corruption to GDP per Capita Finished 
To: "Van Sloan" <vansloan@yahoo.com>

Dear Van Sloan:

I have just finished the updating of correlation of
GDP to corruption index as well as IQ just to
replicate the previous findings. The Excel files are
attached to this email As before, the new figures for
IQ to GDP per capita came close to the IQ and Wealth
of Nations where the correlation I found was .67
versus the book of .62. The numbers were close.
However, as an added interested, I notice the GDP
curved slightly upward on higher IQ indicating that
if I used the log of GDP, I get a better correlation
of about .76. 
 
As before the corruption showed unusually high
correlation of .89 or 89% to GDP per capita indicating
that this one variable alone, corruption can explain
nearly 89% of the GDP per capita. So if the economic
policy pursue exports, tourism, etc. it would not make
much impact of GDP as it does if economic policies is
to pursue corruption (or transparency). What is
surprising about this data is that the correlation
shot up from my earlier studies of .82 or 82% of
corruption explains the GDP per capita. 
 
There are several issues that we have to discuss based
on this finding. 
The first factor is whether there is
a bias for people to rate corruption in relation to
the economic development. By definition people rate
corruption based on perceptions, which means whether
people have any trust in the system from the point of
view of investment potentials. Since perceptions plays
a great deal in human psychology and attitudes of
investments, this alone will likely effect economic
development. However, obviously corrupt officials will
likely play a much greater role in the rating more
than the wealth of the country. It is not easy to see
whether countries such as Finland or Sweden, for
example are richer or not, corruption climate, talking
with officials are likely to play a much greater role.
Hence, corruption perception index might have small
influences of economic development, but the bulk is
likely to be what you ask for.
 
The second issue concerns does corruption really
influences GDP that much. I mean the figures are
ridiculously high, there must be something wrong. It
might be we are missing something?

Sloan's comment: A 0.89 correlation does not mean that one factor (corruption) explains 89% of the resulting national income variations. IQ obviously explains a separate, large percentage of income, as do the other factors listed on my http://SQ.4mg.com/success.htm outline page. The World Forum's 2004 Competitiveness Index (which includes corruption as one of its minor factors) may show the greatest correlation to GDP/ person. All of these factors are important in any analysis of GDP and in suggestions for its increase.

It is likely that
corruption do play a much greater role than we
imagined if you add up your numbers. For example,
white collar crime (more appropriately called
occupational crime) in dollar value in terms of damage
is at least 20 times more costly than all the street
crime combined. This value alone is enough to effect
the GDP. Now, traditionally, white collar crime are
those that "by legal" definition is "illegal". There
are gray areas and there are unethical issues but
perfectly legal that an occupational crime can be
engaged in. These numbers are much larger, but never
estimated, it is at least more than the amount of all
occupational crime combined. 
 
The third issue concerns what causes corruption. A
sore sticking point here since the study is not an
attempt to find what causes corruption. However there
are some observations which bring about corruption. 
Anytime the system is complicated, restrictive, closed
bid, lack of transparency, lack of freedom, absolute
power, one political party, etc. you are going to get
corruption. 
 
The fourth issue is whether corruption is caused by
the failure of the system or people? By system I mean
defective administration, policies, laws, culture,
etc. By people I mean that people are basically "evil"
which what causes corruption, they have bad "genes".
If you eliminate all the "evil people" out, than you
will solve the problem. This argument has been an
ageless debate. However, there are some clues if we
look from a "macroeconomic" point of view, the facts
seems to be leaning towards the failure of the system
more than the people itself. Take for example several
colonized countries in which the administrative system
was turned over "peacefully" to the natives such as
Malaysia, Hong Kong, Singapore, etc. Apparently after
this change in administration economically the
countries remained sound despite the change in people
who managed the country. Technically, these people are
basically the same Chinese people, especially for Hong
Kong, Singapore, and Taiwan. But yet the economic
development in China is underdeveloped. It would seem
that the government administrative system formed the
backbone of the entire economy, rather than monetary
values attached such as agriculture, natural
resources, or even tourism. The subject we all studied
about: checks and balances, auditing, control systems,
exception reporting, laws, policies, transparency,
economic freedom, accountability, corporate
governance, etc. So it would seem funny that the
perfect way to apprehend the criminal, you have to
design the system which prevents criminal elements
from occurring in the first place. An ounce of
prevention is worth a pound of cure. Based on my
residency here in Bangkok, Thailand the government
administrative system are totally lacking in any
control measures which protects or prevents
corruption, which is why corruption is so easy to
perpetrate here.
 
The fifth issue is suppose all this is true, that
corruption do influence economic GDP per capita, what
can we do about this to helped the economy? Do we just
hire police to apprehend white collar criminals? The
answer is really no. We have to understand that since
it is the failure of the system as mentioned in the
last paragraph, this what is so important. The
development of sound organizations, checks and
balances, transparency, laws, etc. really forms the
basics to lowering corruption on the level of
prevention. This is where economist should take a
serious look at, rather than free trade, or corruption
, where organizations, administrations and laws might
be a more constructive arena for economic development.
Free trade, removing barriers, etc. is really good,
but without adequate controls and prevention, free
trade could put a country into bankruptcy with
unscrupulous investors. For example, some years ago,
Ken Lay, the CEO of Enron, was also an Energy
advisory, what he did in name of "free trade" was to
remove price ceilings of energy prices in California.
This created a havoc for California which is now on
the brink of bankruptcy. Because Enron is likely to
"profit" from these "energy price spikes", California
energy company became a victim of unscrupulous
businessman. Of course, if you do enough criminal
activities, pretty soon, the law is going to catch up
on you, but after all the damages has been done. So
even if IMF or World Bank talk about free trade,
adequate sound administration and governance is really
the key issue here. Free trade is acceptable provided
that the administration can handle the free trade free
from "white collar crimes". Since this article is not
meant to be a detailed article on "organizational
administration", this is really another topic and I
doubt that you will want me to go further into that
topic.
 
Once we clear these issues mentioned, let's further
discuss some additional findings from the corruption
and GDP data. If I arbitrarily assigned countries in
three categories of nearly equal in number into
developed, developing and underdeveloped countries,
and further analyzed by correlation the relationships
between corruption to GDP and IQ in each category, I
found that developed countries still have a 0.70 (70%)
correlation of corruption perception index to GDP per
capita. This is still a high figure which means even
if a country is developed, CPI is still an important
variable to further continue with economic
development. Meanwhile, its IQ to GDP remains a modest
.49 correlation.
 
For developing countries however something perplexing
took place, its correlation for GDP per capita to
corruption is only 0.49 and its correlation for GDP
per capita to IQ is even more meaningless 0.13. Since
I am lucky to live in a developing country, I know why
these numbers exists. For one thing, while corruption
is still important towards an improving GDP, other
factors exists which may influence the country's
development, such as non-corruption variables such as
I dare say, inadequate laws, free trade barriers,
oversized bureaucracy, etc. The funny thing about
developing countries is the meaningless IQ to GDP per
capita, which might explain that intelligence quotient
is really not utilized due to cronyism, nepotism,
inadequate facilities of research and development,
lack of applied research, lack of patents protection,
copyright piracy, all of which may influence "brain
drain" for developing countries. This is just my best
guess.
 
For underdeveloped countries something even more
surprising where GDP per capita to corruption is a
near meaningless 11% (0.11) correlation while the IQ
to GDP per capita leapfrogged from developing country
to 0.59 correlation, which is even higher than for
developed countries. This I could not explain except
that the lack of development also implies the lack of
any administrative infrastructure necessary to manage
a country. With the lack of any administrative
infrastructure, corruption therefore becomes
meaningless. Why is it when an underdeveloped country
that suddenly IQ came out from the thin air to be an
important variable? It might be that the basic skills
such as reading, writing and arithmetic is really
needed for the society to communicate and such skills
are hard to find amongst the generally illiterate
population. You need just a remedial IQ to do the
economy any justice.
 
For other parts of the study where I equally divide
countries ranked purely by Integrity and by IQ, I find
that these variables do not explain much aside from
the fact that in a country with already high integrity
(low corruption) its correlation is still high at a
level of 0.72 (72%). Which means richer countries no
matter how you look at it, controls more money and
with more money, creditability and integrity is even
more important necessary to main and further expand
the economy. There's never too much of a good thing.
 
No analysis is perfect, and I am sure there are some
holes in my logic. Please feel free to disagree any
points which you think I am out of line or any
additional work I need to do that I obviously forgot.
 
Ted
 

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