BPEA | Spring 2009

Why Doesn’t Capitalism Flow to Poor Countries?

Discussants: George A. Akerlof and
George A. Akerlof Daniel E. Koshland, Sr. Distinguished Professor Emeritus of Economics - University of California, Berkeley
Peter J. Klenow

Spring 2009

We show that capitalism is far from common around the
world. Outside a small group of rich countries, heavy regulation of business,
leftist rhetoric, and interventionist beliefs flourish. We relate these phenomena
to the presence of corruption, with causality running in both directions. The
paper presents evidence that, within a country, those who perceive widespread
corruption also tend to demand more regulation. As regulation is held constant
within a country, this finding is hard to explain if one assumes that causality
runs only from regulation to corruption. We also find that over time, increases
in corruption in a country precede increases in left-wing voting. To explain our
findings, we present a model where corrupt capitalists are disliked, and voting
for left-wing policies is a form of punishment available to voters even in weak
judicial systems. Evidence on emotions supports this explanation: the frequency
with which people report experiencing anger is positively correlated
with perceived corruption, but this relationship is significantly weaker when
business is heavily regulated.