How Government Corruption Hurts Economic Growth

Government corruption of any magnitude is a problem. It erodes citizens’ trust in government, fosters animosity between voters and public officials, and hinders economic activity.

One study that looks at country-level corruption finds that a 1% increase in the level of corruption reduces the rate of economic growth by 0.72%. The authors attribute most of the negative impact corruption has on growth to the political instability corruption causes, which generates uncertainty for businesses. Another study finds that countries with more corruption receive less foreign direct investment and experience higher inflation, both of which reduce growth.

There is evidence that corruption reduces economic growth in America, too. One study finds that more state-level corruption reduces investment and the growth of output per worker. Another study finds that states with more corruption convictions from 1976 to 1980 experienced slower income growth over the next 20 years. This study also finds that states with more educated populations are less corrupt on average. To explain this finding, the authors suggest that educated voters are more inclined and better able to monitor public officials which reduces opportunities for corruption.

In a recent analysis, Chris Edwards of the Cato Institute examines corruption in the United States by federal judicial district. To measure the level of government corruption in America, Edwards’ examines Department of Justice data on public corruption convictions across the country’s 94 federal judicial districts. He orders the districts by the average annual number of convictions per 100,000 people from 2004 to 2023. Washington, D.C. has the highest conviction rate, and three U.S. territories are in the top five. In the contiguous United States, districts in Louisiana, Montana, Oklahoma, Kentucky, South Dakota, and Tennessee have the highest conviction rates. The least corrupt areas according to this measure are the state of New Hampshire and the Middle District of North Carolina, where Greensboro is located. Both have annual conviction rates of only 0.05.

Closer inspection of the economic data in places with the most convictions reveals the adverse economic effects corruption can have on local economies. Take Louisiana and Illinois: Both states have reputations for being corrupt that are supported by the convictions data and recent stories. In Louisiana, federal officials recently arrested and indicted several former Louisiana law enforcement officials and businessmen allegedly involved in a U-visa scam. In Illinois, the corruption case around former Illinois House Speaker Michael Madigan is still playing out. A former CEO of Illinois utility company ComEd was sentenced just this week.

In addition to high levels of corruption, both Illinois and Louisiana had personal income growth below the national average over the last year according to the most recent data from the Bureau of Economic Analysis (BEA). Income growth was 5.4% in Illinois, 5.9% in Louisiana, and 6.7% for the entire country. In the two states with the least corruption, New Hampshire and Utah, income growth was 6.6% and 7.2%, respectively. These are just a few observations, of course, but they are consistent with the studies discussed earlier.

While government corruption in the United States is far below the levels of autocratic countries, it is still a problem that needs to be addressed. There are plenty of ideas, including strengthening the Inspectors General who oversee audits and investigations in government agencies. One recent study that examines political corruption in Brazil finds that strengthening government audits can reduce corruption. Other policies include better enforcement of anti-corruption laws already on the books; more investigative journalism to uncover corruption; and greater protection and rewards for whistleblowers that reveal corruption.

None of these are a silver bullet, but in combination they would help reduce corruption. Voters should also emphasize character when evaluating political candidates to reduce the number of dishonest people elected to office.

Monitoring public corruption is important since we cannot address a problem we do not know about. The Cato Institute analysis is a reminder that government corruption is alive and well in America. Reducing it will improve local economies and cultivate more trust between voters and elected officials.