Economic Freedom and Transparency in Latin America: Measuring Corruption Power Parity (CPP) Second Report by Pedro Isern This report is divided in two parts: firstly, it relates the index of economic freedom from Fraser Institute with the corruption perception index made by Transparency International for all the countries in general and for Latin America in particular. Secondly, this special research tries to measure the degree of Corruption Power Parity (CPP) by comparing the World Gross Product measured in nominal dollars (GDP) versus the World Product measured in Purchasing Power Parity (PPP). Results are transcendent: Besides telling us that poor countries are less poor, the World Product corrected by PPP also tells us that the degree of corruption is higher not only due to the fact that it is part of a larger World Product but, mainly, due to the fact that it is a larger porcentual part of such real product. DECEMBER 4 Pedro Isern is President of the Centre for the Opening and Development of Latin America (CADAL). He has a Master in Political Philosophy (London School of Economics and Political Sciences), a Master in Economics and Political Science (ESEADE, Argentina) and he is a B.A. in Political Sciences (San Andres University). He contributed with the book Mitos del Milenio. El fin del trabajoy los nuevos profetas del Apocalipsis (March 4, CADAL / TIMBRO). The author would like to thank the contribution of Alejandro Toso and Hernán Alberro.
Economic Freedom and Transparency in Latin America December 4 Part One Chart 1 shows a high correlation between the index of economic freedom made by Fraser Institute of Canada and the Corruption Perception Index made by Transparency 1. However, when talking about Latin American countries the correlation is lower than in 1995. This is due to the corruptive reform process which happened in the 9s in the region, where important referents of the civil society cheated public opinion, insinuating that the painful transformation towards a market economy had to inexorably bear high levels of corruption. Chart 1 Chart Economic freedom and Transparency in Latin America, 1995 1 8 6 4 Venezuela Argentina Mexico Brazil R =,4447 4 6 8 Transparency Index (TI) Chile 8 7 6 5 4 3 1 Economic Freedom and Transparency in Latin America, Bolivia Argentina Venezuela Ecuador Mexico Brazil R =,871 4 6 8 Transparency Index (TI) Chile Chart 3 Economic Freedom (Fraser Institute) Economic Freedom and Transparency in Latin America, 4 8 7 6 5 4 3 1 Venezuela Argentina Mexico Brazil R =,343 4 6 8 Transparency Index (TI) Uruguay Chile 1 According to the definition given by Transparency International, The Corruption Perception Index (CPI) establishes each year a ranking of countries based on their levels of corruption in the public sector perceived by businessmen, risk analysts and ordinary citizens. In the index, ten is the best score that a country could reach being zero the worst one. The index published by the Fraser Institute measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Thirty-eight components and sub-components are used to construct a summary index and to measure the degree of economic freedom in five areas: (1) size of government; () legal structure and protection of property rights; (3) access to sound money; (4) international exchange; and (5) regulation. We have obtained this same result in the comparison done between the Heritage Foundation and the Transparency Indexes. First Report, Cadal, July 4.
December 4 Economic Freedom and Transparency in Latin America 3 So as to confirm the damage the 9s reform at any cost meant for Latin America, we can compare the correlation between both indexes in the world, for the year 1995, and 4: Chart 4 Chart 5 Economic freedom and Transparency in the w orld, 1995 1 Economic freedom and Transparency in the w orld, 1 Economic freedom (Fraser Institute) 8 6 4 R =,6187 Economic freedom (Fraser Institute) 8 6 4 R =,66 4 6 8 1 Transparency Index (TI) 4 6 8 1 1 Transparency Index (TI) Chart 6 Economic freedom (Fraser Institute) Economic freedom and Transparency in the world, 4 1 9 8 7 6 5 4 3 1 R =,6455 4 6 8 1 1 Transparency Index (TI) Here, we see that the correlation in the world is much higher than in Latin America as well as 4 being higher than 1995. Part Two: PPP and corruption For this special research we have used data from the World Bank. There we can see how the World Gross Product is composed if measured in nominal dollars or in Purchasing Power Parity. Table 1 3 The numbers used here correspond to the World Bank (http://www.worldbank.org/data/quickreference/quickref.html). According to the World Bank, the nominal World Gross Product is U$S 36,356 billions, whereas the corrected World Gross Product for Purchasing Power Parity (PPP) is U$S 51,6 billions.
4 Economic Freedom and Transparency in Latin America December 4 A Chart in the English magazine The Economist reflects the difference between world GDP and PPP and how such difference is distributed between rich and poor countries. Graphic 1 Source: The Economist In the chart 7 we have measured the percentage of nominal world Gross Product and the World Gross Product in Purchasing Power Parity that the main countries have and we have related them with the index of Transparency International. Chart 7 GDP and PPP world percentages in selected countries 3% USA 5% % 15% 1% 5% India Russia Mexico Brazil Japan France Germany England % World del Producto GDP Bruto percentage Mundial Nominal % World del Producto PPP Bruto percentage Mundial Real %,8,8 3,4 3,6 3,7 6,9 7,1 7,5 8, 8,6 Transparency Index (TI) Source: Author s data. The difference is relevant and reflects that the relatively most corrupt countries have a greater incidence in the real World Gross Product. The conclusion is worrying: the huge corruption we perceive in Latin America and in the world is in fact even higher. We divide the world in quintiles and we see the direct relation between Real Product and a greater corruption perception.
December 4 Economic Freedom and Transparency in Latin America 5 Chart 8 Relationship between global GDP and PPP according to the level of corruption 18 16 14 1 1 GDP billion en billones de dollars dólares PPP billion en billones de dollars dólares 8 6 4 Mos Quintil t Corrupt más corrupto quintile Segundo Second most quintil más Corrupt corrupto quintile Quintil Neutral neutro Segundo Second most quintil quintile transparent más transparente quintile Quintil Most más transparente quintile We divide now the world between the 15 most transparent countries and the rest, measuring them by GDP and PPP. Afterwards, they were adjusted by the transparency index 3. Chart 9 Percentage of GDP (based on 3535 billion dollars) Percentage of PPP (based on 516 billion dollars) 15 most países transparent más transparentes countries Resto Other countries de los países 15 países más transparentes Resto de los países 15 most transparent countries Other countries 36% 49% 51% 64% Adjusted participation in global corruption (GDP) Adjusted participation in global corruption (PPP) 15 países más transparentes Resto de los países 15 most transparent countries Other countries 5% 15 most países transparent más transparentes countries Resto Other countries de los países 15% 75% 85% 3 Adjusting the product by the transparency index does not imply quantifying corruption. Rather, we multiply the country s GDP by its corruption index (that is, 1 TI). Then we compare its percentage change to PPP multiplied by its corruption index (1 TI). In this way, we are not quantifying corruption but its growth as a percentage of the global product measured in PPP terms, given the perception reflected by the transparency index and its adjustment by each country s share of global product. See Annex for statistical data.
6 Economic Freedom and Transparency in Latin America December 4 s, India s, Brazil s Russia s and Indonesia s cases are shocking. They are responsible for the 63.43% of the additional product of the world (PPP-GDP) and, therefore of a high percentage of the greatest real corruption (CPP) existent in the world. In that way, chart 4 shows us how the additional product is distributed (that is to say, U$S 51, U$S 35,35=U$S16,5) and the degree of corruption perceived in those economies: Chart 1 Selected countries Percentage of Additional Real Product 35% 3% 5% % 15% 1% 5% % India Russia Brazil Indonesia,8,8 3,4 3,7 Transparency Index (TI) It is possible to see the difference among the rich relevant countries: Chart 11 35% 3% Selected countries percentage of Additional Real Product 5% % 15% India 1% 5% % -5% -1% Russia Mexico Brazil Indonesia Japan USA,8,8 3,4 3,6 3,7 6,9 7,5 Transparency index (TI) Selected countries percentage of Additional Real Product Chart 1 % 1% % -1% Canada Australia USA Belgium Germany England Denmark Finland 6,9 7,5 7,5 8, 8,5 8,6 8,8 9,5 9,7 -% -3% -4% -5% Japan Transparency index (TI)
December 4 Economic Freedom and Transparency in Latin America 7 We now use an indexed chart to see the evolution of GDP in PPP in rich countries, in poor countries and in every country. At the same time we made a graph on the variation of corruption in rich countries, poor countries and in every country, measured by the relative weight of their respective GDP and PPP. Chart 13 GDP-PPP Percentage change (GDP=1) 35 3 5 15 1 5 3 3 185 139 99 97 Riqueza Wealth of de richest países ricos countries Riqueza Wealth of de poorest países pobres countries Riqueza Wealth of de all todos the los países countries Corrupción Corruption of en richest los países countries ricos Corrupción Corruption of en los países poorest pobres countries Corrupción Corruption of en all todos los countries países The key point here is that while the global wealth increases 39%, the corruption does so by 85%. This difference shows the growth in the Corruption Power Parity (CPP). Next, we use another indexed chart so as to compare the variation of wealth (that is to say GDP and PPP); the variation of the porcentual participation in the global product and the variation in the corruption perception measured by the product in, India, USA and Finland (the country with the best transparency index). Chart 14 6 55 GDP Compared performance between and USA PPP 5 45 4 35 3 5 15 1 5 EE.UU. Riqueza Wealth % participation in Participación global product porcentual en el producto global % participation in Participación global corruption porcentual en la perception percepción de la corrupción global GDP PPP Compared performance between India and Finland (GDP=1) Gráfico 15 55 5 45 Riqueza Wealth 4 35 3 5 15 India % participation in Participación global product porcentual en el producto global Participación % participation porcentual in global en la percepción corruption de la corrupción perceptionglobal 1 5 Finland GDP PPP
8 Economic Freedom and Transparency in Latin America December 4 Chart 16 focuses on the same question from another point: here, it is shown a positive correlation between a greater porcentual distance between nominal Gross Product (GDP) and real Gross Product (PPP) and a higher level of corruption perception. Chart 16 PPP/GPD relationship vs TI 4 (OECD countriles) 1 1 8 TI 4 6 4 R =,967-4% -3% -% -1% % 1% % 3% 4% 5% PPP/GPD - 1 Chart 17 PPP/GPD relationship vs TI 4 (all countries) 1 9 8 7 TI 4 6 5 4 3 1 R =,516 % 5% 1% 15% % 5% 3% 35% 4% 45% 5% PPP/GPD -1
December 4 Economic Freedom and Transparency in Latin America 9 USA and as the world economy Let s suppose that the total product is generated by USA and. This supposition is valid because it represents a world divided between a rich, more transparent country with a higher relative weight and a poor country with lower relative weight and higher level of corruption. At the same time, this is a representative sample because, once corrected by PPP, differences get smaller. USA and represent 34.8% of the global product in GDP and 33.6% in PPP. Lastly, the supposition is valid because it reflects clearly the higher real incidence of poor and more corruptive economies in the total wealth created in the world. Thus, we see first the weight of rich economies (USA) and poor ones () in a product measured in GDP and in PPP. Table Chart 18 Proportional distribution of global GDP between and USA 13% USA 87% Proportional distribution of global PPP between and USA USA 37% 63% Source: Author s data
1 Economic Freedom and Transparency in Latin America December 4 Then, we pondered them for their corruption perception index (1-TI). Chart 19 Adjusted distribution of global corruption between and USA (GDP) USA 7% 73% Adjusted distribution of global corruption between and USA (PPP) USA 39% 61% The difference is significant. The main point is that, measured in GDP terms, 71% of the world corruption lies in rich countries while, when measured in PPP terms, 61% of total corruption lies in poor countries. When using the indexed chart, we get to the same percentual result than the one reached in the sample of 67 countries used in the chart 13. Chart Percentual performance GDP-PPP (GDP=1) 185,95 15 139,5 Wealth 1 5 Corruption adjusted performance GDP PPP The comparative performances of USA and are a good synthesis of the central argument of this work: The world product is not only higher when corrected by PPP, but it can also be explained as a whole due to a lower poverty of the poor countries. At the same time, the institutional weakness of those (which is the main explanation in order to understand their level of poverty) is reflected in higher indexes of corruption. Therefore, the higher relative wealth of poor countries necessarily reflects not only a higher absolute corruption but also a relative one in the world economy. Pondered by the TI index, we see that the world wealth increases 39 % when measured by PPP, corruption grows 85%, making the Corruption Power Parity (CPP) double its increase compared to the product one.
December 4 Economic Freedom and Transparency in Latin America 11, India and the World Corruption in the mid-run term As we have mentioned, and India generated 53% of the real additional wealth produced in the selected sample (GDP-PPP). At the same time, the corruption perception index places India in the % most corruptive countries, while belongs to the 33% of the most corruptive ones. Chart 1 and India participation in Real Additional Global Product (PPP-GDP) and India adjusted participation in global additional corruption + India Resto de los países Other countries + India Resto de los países Other countries 47% 49% 53% 51% requires a special consideration: due to the fact that it is a socialist economy, the traffic of influence is an intrinsic condition to the regime, since every economic decision is subject to, for action or omission, the arbitrariness of a superior organism because of its centralized nature. Before the Absence of a Rule of Law, the role of the traffic of influences in a socialist economy has been systematically underestimated: this is due to the fact that there are private and informal places which cannot be controlled by the estate action, not to remark that it is effectively like this for omission. That is to say, the relationship cost benefit makes the estate power not find it profitable to try and control informal markets and private matters. If it were politically or economically profitable, the traffic of influences would also control that part of society and economy. and India are today 19% of the real world economy and 3% of the perceived corruption. Since the latter number is partly subject to the former, if the former increased, in a context of immutable rules and incentives, the latter number would go on increasing. Whereas and India seem to be the two most profitable markets to do business in the short and medium term, it is relevant to note that not only investments are moving there, but also a major part of the future corruption. Chart India and participation in global product (GDP) 6% India and participation in global product (PPP) 19% + India Resto de los Países Other countries + India Resto Other de countries los Países 94% 81% India and adjusted participation in global corruption (GDP) 13% India and adjusted participation in global corruption (PPP) 3% + India Resto de los Países Other countries + India Resto Other de countries los Países 87% 7%
1 Economic Freedom and Transparency in Latin America December 4 Latin America, Corruption and PPP In this sense, Latin America can be analyzed in its performance as regards the rest of the world as well as isolated. In the first case, the regional product adjusted by PPP shows a significant increase as a percentage of the total product. At the same time, when the participation for corruption perception is pointed out (1-TI) in the total product, the incidence of the region grows. Chart 3 Latin American share of global GDP Latin America share of global PPP Latin American Rest of the world 4% Latin American Rest of the world 7% 96% 93% Latin American adjusted share of global corruption (GDP) Latin America Rest of the world 8% Latin American adjusted share of global corruption (PPP) Latin America Rest of the w orld 1% 9% 9% This confirms the perception of the Latin American population who sees the region as one of the most corruptive places in the world. Although it is true that, due to their relative weight on the world product,, India and Asia in general have a greater participation in the world product pondered for corruption, the appropriate conclusion form Latin America (the same as Africa) is that the real corruption is higher than the supposed one. At the same time, the suspected corruption was already relevant itself and even determinant on its own so as to explain institutional failures and (failed) reform processes. When we measure the difference which exists between the GDP and the PPP, it is significant to see Brazil s performance. However, the impact in the pondered corruption is not modified, since the participation Brazil gains is by dint of Mexico and Venezuela, two equally corruptive countries. Chart 4 Latin American additional distribution: PPP-GDP Mexico Brazil Argentina Colombia Chile Others 4% 17% 14% 1% 15% 4%
December 4 Economic Freedom and Transparency in Latin America 13 Lastly, we will contrast the increase in the real weight in the countries of the region with the index of Transparency. Chart 5 TI 4,13 7,4 Chile Wealth distribution in Latin America: selected countries (GDP and PPP) Latin America 6, 3,8 3,7 3,6 3,5,5,3 Uruguay Colombia Brazil Mexico Peru Argentina Venezuela GDP PPP 5 1 15 5 3 35 Note: The Latin American transparency average (4.13) is not adjusted by GDP and PPP relative weight. All the relevant countries of Latin America and the Caribbean own a product corrected by PPP higher than the one measured by GDP. At the same time, except Chile and Uruguay, the rest of the countries show high indexes of corruption perception. Therefore, while the real corruption grows when correcting the product of the region by PPP, porcentually speaking it keeps at the same level. This must not confuse the reader, since it doesn t mean that the additional corruption is not relevant. On the contrary, corruption is today a more serious problem in real terms. It is simply not an even more serious problem in relative terms because it already was a very relevant point in Latin America, measure in GDP. Final remarks We know little about the real scopes of corruption. This is a logical inference of the nature of the problem. The two parts involved are generally persons and / or powerful governments and, even more, it is a crime of peculiar characteristics, since this fraud does not harm any of the two parts involved (quite the contrary) so there is no incentive to denounce it. The index of Transparency International is a good and imperfect instrument to measure the corruption perception in a country. At the same time, measuring production of an economy for its Purchasing Power Parity (PPP) is an imperfect but better mechanism than the traditional to measure real wealth produced in the world. Then, we can certainly sustain that the world real gross product is higher than its product measured in nominal dollar exchange rates. After that, we can also sustain that the poor countries are relatively less poor than the richer countries. Since rich countries have corruption indicators much lower than the poor countries, the greater incidence of the poor countries in the world gross product in PPP, tells us that corruption is a larger porcentual part of a (real) larger product. Although it is highly difficult to define a number which tells us about the existent corruption, the analysis provided in this report aims at pointing out the degree of sub valuation we have in our corruption perception. We do this by saying that a considerable part of the greater wealth that poor countries really have, is withdrawn by different ways of corruption, in a percentage even higher than that perceived from the measurement of the world Gross Product in nominal dollars. Therefore, the relevant conclusion here is that while citizens of poor countries perceive (correctly) that in real terms they are a bit less poor than traditional measures maintain, on the other side the world public opinion does not perceive that (in real terms) the resources withdrawn from poor countries by different corruption acts are in fact much higher than we had supposed. That is, the Corruption Power Parity (CPP) is much higher.
14 Economic Freedom and Transparency in Latin America December 4 Methodological Note Since the charts of the World Bank have 193 countries where their Nominal Gross Product is measured and 166 where their Real Gross Product (PPP) is measured, we have taken into account a sample of all the countries which have a minimum PBN of U$S 35 billions or a minimum PPP of U$S 5 billions, that is to say, we started from a minimum,1% of the total World Product in every measurement. In that way, we use a sample of 64 countries, representing 96.43% of the Nominal World Gross Product and the 94.95 % of the Product measured by PPP. The sample is representative for our aim, since the rest of the countries are mostly poor or very poor countries with a high ratio PPP / GDP and high corruption perception indexes (although many of these no dot have PPP measurement or do not appear in the TI index) References: Transparency International www.transparency.org Fraser Institute www.fraserinstitute.org The Economist www.economist.com World Bank www.worldbank.org/data The Centre for the Opening and Development of Latin America (CADAL), was constituted as a Foundation on February 6, 3 with the objective of promoting the strengthening of democracy, the estate of right and the economic freedom in the countries of the region. For that, analysis, research and broadcast activities are made in three areas: Latin America Politic; Democracy and Expression Freedom; and Economy and Estate of Right. Av. Roque Sáenz Peña 68 piso º Of. R (C135AAO) Buenos Aires - Argentina E-mail: Website:
December 4 Economic Freedom and Transparency in Latin America 15 Selected countries data used in this report: ANNEX
16 Economic Freedom and Transparency in Latin America December 4 Data used to estimate the difference between GDP and PPP: