Corruption, Productivity and Socialism

The level of productivity is correlated across countries with measures of (lack of) corruption, but this appears to be due to a common association of these variables with measures of civil infrastructure, here measured by a combination of governance indexes labelled ‘rule of law’ and ‘government effectiveness’. New instruments based on the size‐ and spatial‐distributions of cities within the countries of the world were constructed in order to explore the causal relationships between civil infrastructure and productivity. Civil infrastructure accounts for a substantial fraction of the global variation in output per worker across countries. Within this empirical pattern there is a systematic deviation associated with the current and former socialist states, which have both lower productivity and inferior civil infrastructure than would be predicted for otherwise similar non‐socialist states. However, for a given level of the index of civil infrastructure these states are also shown to have a higher level of productivity than otherwise similar non‐socialist states. The unconditionally low productivity of socialist states is attributed entirely to the indirectly deleterious effects that socialism had on civil infrastructure, which more than offset its directly positive effect on output.