At the recent "Ethics and governance in times of crisis" conference, sponsored by the Business Ethics Center of Jerusalem, Bank of Israel Governor Stanley Fischer spoke about the role of good ethics and good governance in economic development. He referred to research suggesting that a high level of public-sector integrity and interpersonal trust make a meaningful contribution to economic success. He also mentioned the rather mediocre score for Israel on these and related measures.
We can bolster this claim with some widely available survey data. The World Values Survey compares levels of interpersonal trust in scores of countries at various stages of development. On average, about 30 percent of people feel they can generally trust others. In some countries the rate is as high as 60%, while in others it is less than 10%.
The international anticorruption organization Transparency International publishes an annual index of public-sector corruption on a one-to-10 scale, where the cleanest countries are at the top. If we do a regression (a statistical measure of correlation) to see how these measures affect per capita output, we find that economic performance is positively related to both. By far the dominant effect is the perceived level of public-sector integrity, which seems to make a critical contribution to economic development. The correlation is valid for both rich countries and poor ones.
The correlation is evident not only statistically but also by simple observation. Examining the top of the integrity scale, we find countries renowned for outstanding economic performance, including Denmark, New Zealand, Sweden and Singapore.
Israel has nothing particular to be proud of on either scale. On Transparency International's integrity scale, Israel gets a 6 - well above average, but still far behind the leading countries, which have over 9. And on the World Values Survey trust scale, we are even below the average, with only 24% stating they feel they can generally trust others. So it seems clear that there is both room for improvement and also something to be gained by increasing the level of trust and public-sector integrity.
The question that interests me is whether virtue is its own reward. Does a high level of ethical conduct make people better off even independent of its effect on economic well-being? One way of studying this question is by using an often-studied survey measure known as "life satisfaction." While there can obviously be no objective measure of how well-off people are, life satisfaction has been shown to be a fairly stable personal characteristic that seems to capture our intuitive concepts of individual welfare.
It is important to emphasize that the economic standard of living is itself a critical element in determining life satisfaction. It may be true that the best things in life are free, but the ones that aren't free also give us satisfaction and rich people enjoy more of them. This is true not only for the individual within a country (people with more income have higher status and feel better off) but equally so between countries: people in wealthier countries are uniformly more satisfied with their lives than those in poor countries.
It turns out that the overall ethical level is correlated with the level of well-being, even correcting for its direct impact on incomes. National virtue is indeed its own reward, although the effect is not large.
What is more interesting is that the effect seems to be confined to the wealthier countries. This is evidence of what I would call the "ethical Kuznets curve." In the 1950s, economist Simon Kuznets hypothesized that decreasing inequality is primarily a priority in rich countries; in poorer countries, development takes priority over distribution.
Irrespective of whether Kuznets was right regarding inequality, it may be true that there is a similar phenomenon regarding ethics. In a poor country, economic development is by far the dominant factor in improving people's well-being. In a richer country, more subjective and humanistic factors, such as equality and trust, become comparatively more important.
Israel is not at a third-world level of ethical standards, but we still have plenty of room to improve. If we increase the level of public-sector integrity and interpersonal trust, we will almost certainly improve our economic well-being, and quite independently we will make our country a more pleasant place to live.
Asher Meir is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem Institute of Technology.
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