How Bad is Corruption? Cross‐country Evidence of the Impact of Corruption on Economic Prosperity

Most people today would argue that corruption is bad for countries' economic development. Yet, we still lack a reliable empirical estimate of the effect. This study addresses the econometric shortcomings of the literature and provides an estimate of the causal impact of corruption on gross domestic product per capita across countries. Certain dimensions of a country's culture are used as instruments for corruption. These instruments stay strong when the other deep determinants of economic development, geography, and the remaining dimensions of institutions and culture are controlled for. In the process of choosing controls, however, the entire set of variables available in the Quality of Governance online database (QOG) that includes all central variables from the literature on institutions and culture are included. It is found that corruption does exert a significant and negative impact on countries' productivity levels.     

The evolution of corruption and development in transitional economies: Evidence from China

It is widely accepted in the literature, that the level of corruption is negatively and robustly related to economic development. However, skeptics argue that for transitional economies, this relationship may not hold. Economic reform loosens up the control of local officials and can increase corruption; Corruption and per capita income can be positively related. Using panel provincial data of China from 1995 to 2014 on prosecuted cases of corruption, we discover that during the early phase of China’s economic reform (during Zhu Rongji and Hu-Wen administrations), a positive short-run relationship is indeed observed. But, there is a robust negative long-run cointegration relationship between corruption and per capita income. The development of the market economy improves private wage and income in the long-run. The relatively inefficient and low returns to ordinary corruption cannot compete with rising market returns, which lead to dwindling corruption. However, the share of major corruption cases is increasing over time to be able to compete with rising market wages.     

HUMAN WELL-BEING EFFECTS OF INSTITUTIONS AND SOCIAL CAPITAL

We examine the effects of income, institutions, and social capital—proxied by the level of corruption and ethnic tensions—on literacy and life expectancy in Africa. Random effects estimates show that income has a robust positive influence. GMM estimates indicate that corruption reduces the effectiveness of institutions in promoting literacy. However, this effect is not monotonic; improvements in the corruption index within the high corruption range reduce the effectiveness of institutions, while continuous improvement within the low corruption range enhances the effectiveness of institutions. Similarly, ethnic tensions reduce the effectiveness of institutions. Based on these findings, we conclude that social capital and institutions can complement each other. ( JEL O11, O17, Z13)     

Estimating the long-run relationship between income inequality and economic development

There are several theories describing the effect of income inequality on economic growth. These theories usually predict that there exists some optimal, steady-state growth path between inequality and development. This study uses a new measure of income distribution and panel data cointegration methods to test for the existence of such a steady-state equilibrium relation. It is shown that there is a long-run equilibrium relationship between the variables, and that this relationship is negative in developed economies.     

Frontiers and sustainable economic development

Exploiting new resource “frontiers,” such as agricultural land and mineral reserves, is a fundamental feature of economic development in poor economies. Yet frontier-based development is symptomatic of a pattern of economy-wide resource exploitation in developing economies that: (a) generates little additional economic rents, and (b) what rents are generated are not being reinvested in other sectors. Such development is inherently unsustainable. The following paper explains this phenomenon, and provides evidence that long-run expansion of agricultural land and oil and natural gas proved reserves across poor economies is associated with lower levels of real income per capita. The paper proposes a frontier expansion hypothesis to explain why the structural economic dependence of these economies on frontier land expansion and resource exploitation is not conducive to sustained long-run growth. The key to sustainable economic development in poor economies will be improving the economic integration between frontier and other sectors of the economy, targeting policies to improved resource management in frontier areas and overcoming problems of corruption and rent-seeking in resource sectors.      

Education, corruption, and the distribution of income

We examine how the interaction between education and corruption affects institutional reform and economic development. While corruption reduces average income and education, education increases not only output and hence potential corruption rents, but also produces more informed electorates that better monitor government actions. We find that economies with intermediate levels of education remain in a poverty trap since the level of skills creates sufficient corruption rents but not enough monitoring. Economies with low or high levels of education can escape the poverty trap, and inequality plays a key role in determining whether this occurs through a change in institutions or an expansion of education.     

财政分权、腐败与治理

财政分权对经济发展的影响已经成为转轨经济学研究的重要问题之一。大多数经济学家往往只看到财政分权对经济发展的促进作用,却忽视了在制度供给失衡的情况下,尤其是对像中国这样的转轨经济而言,它对长期经济发展是不利的,会产生诸如腐败等问题。文章运用中国省级面板数据检验了财政分权与腐败之间的关系。结果表明,财政分权恶化了腐败问题。因此,有必要通过完善财政分权体制来缓解其负面效应,这将有利于中国经济健康发展。     

A cointegrated structural VAR model of the Canadian economy

This paper implements a cointegrated structural VAR model of the Canadian economy using quarterly data over the period 1964–1994. The dynamic properties of the estimated model are compared to the predictions of a simple textbook macro model. Four long-run equilibrium relationships are tested: (i) consumption–income; (ii) consumption–wealth; (iii) money demand; and (iv) the Fisher equation. The empirical results obtained are generally consistent with the predictions of the textbook model's long-run implications, although level shifts are observed in the consumption/income and the wealth/income ratios. Similarly it is found that there was an increase in the ex post real interest rate, implying a level shift in the Fisher relation, following the Bank of Canada's policy change towards a stable price level target.     

Income inequality and FDI: evidence with Turkish data

This article explores how foreign direct investment (FDI) and other determinants impact income inequality in Turkey in the short- and long-run. We apply the nonlinear auto-regressive distributed lag (ARDL) modelling approach, which is suitable for small samples. The data for the study cover the years from 1970 to 2008. The empirical results indicate the existence of a co-integration relationship among the variables with asymmetric adjustment of the income distribution in the short- and long-run. The negative impact of FDI on the Gini coefficient, decreasing income inequality, is statistically significant in the short- and long-run, though with a quantitatively small impact in both cases. In the short run, GDP growth increases inequality initially, an effect that is reversed in the next period, increases in domestic gross capital formation decreases inequality, and increases in the literacy rate have very minor adverse effects on income equality. However, in the long run these variables have no statistically significant effects on the Gini coefficient. A reduction in the population growth rate reduces inequality in the short run but has no effect in the long run, whereas an increase in the rate reduces inequality in the long run but has no effect in the short run.     

Democracy,Rule of Law,Corruption Incentives,and Growth

We bridge the gap between the standard theory of growth and the mostly static theory of corruption. Some public investment can be diverted from its purpose by corrupt individuals. Voters determine the level of public investment subject to an incentive constraint equalizing the returns from productive and corrupt activities. We concentrate on two exogenous institutional parameters: the “technology of corruption” is the ease with which rent‐seekers can capture a proportion of public spending. The “concentration of political power” is the extent to which rent‐seekers have more political influence than other people. One theoretical prediction is that the effects of the two institutional parameters on income growth and equilibrium corruption are different according to the constraints that are binding at equilibrium. In particular, the effect of judicial quality on growth should be stronger when political power is concentrated. We estimate a system of equations where both corruption and income growth are determined simultaneously and show that income growth is more affected by our proxies for legal and political institutions in countries where political rights and judicial institutions, respectively, are limited.     

Corruption in America

We use a data set of federal corruption convictions in the U.S. to investigate the causes and consequences of corruption. More educated states, and to a smaller degree richer states, have less corruption. This relationship holds even when we use historical factors like Congregationalism in 1890 as an instrument for the level of schooling today. The level of corruption is also correlated with the level of income inequality and racial fractionalization, and uncorrelated with the size of government. There is a weak negative relationship between corruption and economic development in a state. These results echo the cross-country findings, and support the view that the correlation between development and good political outcomes occurs because education improves political institutions.     

Financial development,control of corruption and income inequality

This paper examines the effect of financial development and control of corruption on income inequality in 21 Sub-Saharan African (SSA) countries over the period 1985–2011 using the pooled mean group (PMG) estimator. The empirical results show that financial development measures have positive impact on income inequality, which suggest that financial development increases income inequality. On the other hand, the coefficients of control of corruption are negative and significantly related to income inequality which implies that corruption control reduces income inequality. Further, the interaction of the financial development and the control of corruption is found to be negatively and significantly related to income inequality. Equally the interaction of the financial development and transparency index (an alternate measure of corruptibility) is found to be negatively and significantly related to income inequality. These findings suggest that the control of corruption and transparency in governance are crucial in reducing income inequality in SSA.     

中国金融发展与城乡收入差距关系的再检验——基于面板单位根和VAR模型的估计

金融抑制被认为是导致我国扭曲的金融发展拉大了城乡收入差距的最主要原因,而东西部金融发展的市场化水平差异使得金融发展与城乡收入差距也表现出非完全一致的关系.本文运用面板单位根和VAR模型的实证结果表明,无论是东部还是西部地区,金融发展与城乡收入差距均表现为非同阶单整变量,从而并未支持二者之间长期均衡关系的存在;但从短期来看,西部金融发展显著的构成了城乡收入差距扩大的Granger原因,而这种因果关系在东部地区却并不显著.     

Natural resources, democracy and corruption

We study how natural resources can feed corruption and how this effect depends on the quality of the democratic institutions. Our game-theoretic model predicts that resource rents lead to an increase in corruption if the quality of the democratic institutions is relatively poor, but not otherwise. We use panel data covering the period 1980-2004 and 124 countries to test this theoretical prediction. Our estimates confirm that the relationship between resource rents and corruption depends on the quality of the democratic institutions. Our main results hold when we control for the effects of income, time varying common shocks, regional fixed effects and various additional covariates. They are also robust across different samples, and to the use of various alternative measures of natural resources, democracy and corruption.     

Relation between growth and unemployment in a model with labor-force participation and adverse labor institutions

Based on labor search models with an exogenous labor force, existing papers have found a negative relation between long-run economic growth and unemployment. Motivated by the fact that the labor force participation has changed substantially across OECD countries, this paper revisits the long-run relation by taking account of endogenous labor-force participation. We find that, via the effects on employment, changes in labor market institutions may increase or decrease long-run economic growth. Moreover, depending upon the effects on the labor force and employment, these labor market institutions may increase or decrease unemployment rates in the long run. Thus, changes in labor market institutions lead to a non-monotone relation between long-run economic growth and unemployment that is consistent with the data.     

Corruption and growth: Historical evidence, 1790–2010

We use a newly assembled indicator of corruption from Varieties of Democracy (V-Dem) to examine the effects of corruption on economic growth. The V-Dem indicator is coded for almost all contemporary and historical polities since the year 1900 and, for some countries, since the French Revolution. This global dataset allows us to exploit long-run, slow-moving variation within countries for identification, circumventing many of the difficulties faced by previous studies based on cross-section data or short panels. We present robust evidence of a negative effect of corruption on steady-state growth. Yet, we find that corruption interacts with political regime type, giving rise to heterogeneous effects. In particular, corruption is found to be significantly more deleterious for growth in democracies than in autocracies. Since corruption tends to be decentralised in democracies and centralised in autocracies, these findings are in line with theories of the ‘industrial organisation’ of corruption. We find little to no evidence that institutional weaknesses along other dimensions (state capacity, regulatory quality, property rights protection) make corruption any less harmful for growth, casting doubt on the thesis that corruption may ‘grease the wheels’ of dysfunctional institutions. Our findings provide a rationale to target anti-corruption efforts to young democracies.     

Political Economy of Systemic and Micro-Corruption Throughout the World

The purpose of this paper is to apply some of the core general principles of heterodox political economy — especially with an institutional and evolutionary emphasis — to the topic of corruption as a global, regional, and national phenomenon. I start with the principle of historical specificity, where the known history of corruption processes and concepts are examined. I follow the evolution of the corruption discourse, starting with the classical scholars of ancient Greece and numerous others, who had a systemic view of the matter. I proceed through the micro-views of Roman law, to Adam Smith and others who took an individualist view of corruption, and onto the reemergence of the corruption discourse in the period between the 1970s and the 2010s. In the process, I investigate the micro-perspective, but increasingly center on the "modern classical works" on systemic corruption. Then, I present the basics of a modern institutional and evolutionary perspective on corruption through the principle of contradiction, which defines corruption as the promotion of vested interests against the common good in the form of bribery, fraud, embezzlement, state capture, nepotism, extortion, and others. Social dominance theory is applied to corruption vis-à-vis dominant and subordinate groups, and the styles of corruption activated by elites are surveyed as they gain resources, favors, and economic surplus against the interests of "common people." Finally, I scrutinize the principle of uneven development, paying special attention to four main stylized facts about corruption throughout the world in relation to (i) development patterns, (ii) corporate corruption, (iii) key sectors/nations, and (iv) inequality. Throughout the paper, I outline ways to reduce corruption and modify the structure of power to benefit the common good, socioeconomic performance, and the functioning of institutions.     

The co-evolution of innovation,demand and growth

In order to explain long-run economic development, we analyse in this paper the interplay between supply-side and demand-side processes. On the supply side, three different innovation processes are observed and interact: (i) growing productive efficiency, (ii) the emergence of new sectors and (iii) the increasing quality and differentiation of existing products. On the demand side, we analyse the meaning of disposable income and varying preference systems. The analysis is undertaken with the help of a numerical model of economic growth by the emergence of new industries. Our results show that the time path of economic development which we observe could not have been generated by taking into account a supply-side-based view on innovations alone. Without making reference to the formation of an adequate demand, development processes cannot be explained. The three processes need to be combined because each one individually would not suffice to generate long-run economic development. However, only with the formation of an adequate demand long-run economic development becomes sustainable.     

A Cross‐country Causal Panorama of Human Development and Sustainability

This paper conducts a multivariate causal analysis for: human development, demographic transition, urbanization, technology, sustainability, democracy/autocracy, good administration, and economic integration. A 15 × 18 causal coefficient matrix is estimated using a cross‐country panel for the 1985–2010 quinquennia. Each matrix entry is estimated using three types of instrumented regressions: (a) levels regressions; (b) growth regressions; (c) growth regressions also containing the contemporary growth of independent variables. The instruments are the 1970–1980 values of the variables. It is found that from 1980 to 2005 income and human development reacted relatively quickly and positively to globalization. However, institutions changed slowly, and the fundamental long‐term causes of divergence, namely demographic transition, urbanization, and technology, were weakly and even negatively affected by integration. The results also suggest human development and sustainability are complementary. Hence technology transfer to the poor and poor regions may provide a sustainable policy tool for development, promoting demographic transition, human development, and convergence.     

Rule of law, democracy, openness, and income

We estimate the interrelationships among economic institutions, political institutions, openness, and income levels, using identification through heteroskedasticity (IH). We split our cross‐national dataset into two sub‐samples: (i) colonies versus non‐colonies; and (ii) continents aligned on an East–West versus those aligned on a North–South axis. We exploit the difference in the structural variances in these two sub‐samples to gain identification. We find that democracy and the rule of law are both good for economic performance, but the latter has a much stronger impact on incomes. Openness (trade/GDP) has a negative impact on income levels and democracy, but a positive effect on rule of law. Higher income produces greater openness and better institutions, but these effects are not very strong. Rule of law and democracy tend to be mutually reinforcing.