SNC-Lavalin reminds us that big government invites big scandals

The SNC-Lavalin scandal, which continues to dominate headlines across Canada, has many moving parts. It’s hard to disentangle everything so as to assign blame. But regardless of the eventual outcome, the situation provides an important lesson that seemingly many have forgot—big government invites big scandals.

Political power can be misused for personal gain. It can be wielded in ways that favour a party’s electoral prospects or personally enrich government officials. The greater the powers, the scale and the scope of governments, the greater the temptation to misuse power. In that regard, there’s a rich economic and political literature that ties size and scope to corruption and political opportunism. Most of it relies on the Fraser Institute’s Economic Freedom of the World index, which captures the two main mechanisms that allow for the misuse of power.

The first mechanism hinges on the fact that government restricts economic activity via regulation. When this happens, there’s an incentive for corrupt officials to “grease the wheels.” The idea is that, because of regulations, firm owners will pay to speed up the process (permit approvals, for example). The index can test the relationship between corruption and regulation. One paper, using a large international sample, found that some regulations tend to increase corruption—especially those related to restrictions on property rights. Other articles have confirmed this idea, noting corruption involving restrictions against importing foreign goods.

The second mechanism relies on government spending. Political actors can direct spending towards privileged parties that have corrupted them. For example, government contracts going to party friends or favoured firms. For this, there’s some empirical evidence. However, scandals from this mechanism, unlike regulatory mechanisms, are found in electoral machinations. As governments can decide where to allocate spending and to whom, political actors have an incentive to use that power in ways that favour their re-election (or even their own personal wealth). Here, the economic history literature is rife with examples.

For example, during the Great Depression in the United States, the poorest states hit the hardest by the crisis received very little of the public spending meant to alleviate the crisis. These states, largely in the South, were already solidly in the column of states that would vote for the president’s re-election. As a result, dollars spent there would yield little electoral rewards and most of the spending went to electorally important states. Another study, using the same historical episodes, noted that the same thing happened at the congressional level whereby those with political clout were able to redirect spending their way.

Finally, there’s a recent Canadian example to corroborate this point. When the last federal government enacted a stimulus package, a disproportionate share of the spending went to electoral districts crucial to the acquisition of a majority position in Parliament.

This wide body of research suggests that if we want fewer scandals, we ought to find ways to scale back government to limit the temptation to indulge in scandalous behaviour. If anything positive comes out of the SNC-Lavalin scandal, perhaps it will be a reminder of this important fact.