Auckland New Zealand Tel 64212645012 fax 64 9 373 7430 email mamanaucklandacnzbureaucracy and political instability through empirical evidence and to offer policy recommendations based on ndingsThe ID: 880833
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1 I+,")(**"% A+,--)****Using panel data fr
I+,")(**"% A+,--)****Using panel data from the International Country Risk Guide corruption index, institutional quality and political stability indices and several state variables for developed and developing countries, this paper explores the linear
2 quadratic empirical relationship betwee
quadratic empirical relationship between corruption and economic growth. Empirical literature has shown a linear relationship between corruption and economic growth but hasnÕt dif!ferentiated between growth-enhancing and growth-reducing levels of co
3 rruption. An analysis based on the gener
rruption. An analysis based on the generalized method of moments estimation shows that a decrease in corruption raises the economic growth rate in an inverted U-shaped way. This result is robust with respect to alternative speciÞcations of the econom
4 etric relationship. JEL classiÞcation: D
etric relationship. JEL classiÞcation: D73, O4, O43, P48Keywords: corruption, economic growth, institutional quality, bureaucratic ef!Þciency, political stability1. I)#+.'(/#0.)Until the 1980s, scholarly research on corruption was largely conÞned to
5 the Þelds of sociology, political scienc
the Þelds of sociology, political science, history, public administration, and criminal law. Since then, economists have also turned their interest to this topic, largely on account of its increasingly evident link to economic performance. Much of th
6 e early research focused on weaknesses i
e early research focused on weaknesses in public institutions and distortions in economic policies that gave rise to rent-seeking by public of!Þcials and the incubation of corrupt practices. *"We are grateful to Dr. Erwann Sabai and Dr. Chirok Han fr
7 om University of Auckland for their valu
om University of Auckland for their valuable comments and to the following people: Dr. Paolo Mauro of the International Monetary Auckland, New Zealand. Tel: +64-21-2645012; fax: +64 9 373 7430; e-mail: m.aman@auckland.ac.nz****" bureaucracy and poli
8 tical instability through empirical evid
tical instability through empirical evidence and to of!fer policy recommendations based on Þndings.The speciÞc objectives of the study are: (a) speciÞcation of a model of corruption based on a theoretical foundation for cross-country analysis; (b) to
9 determine the growth maximizing level o
determine the growth maximizing level of corruption; and (c) to determine whether it is the combined ef!fect of corruption and institutional quality that causes growth.Consistent with the objectives of the study, the following hypotheses will be tes
10 ted:Hypothesis 1: In the linear speciÞca
ted:Hypothesis 1: In the linear speciÞcation, corruption is negatively correlated with real GDP. In the case of non-linear speciÞcation, a moderate level of corruption positively af!fects real GDP, while a high level of corruption is detrimental to g
11 rowth.Hypothesis 2: Other things being e
rowth.Hypothesis 2: Other things being equal, better institutional quality tends to be positively related to economic growth.The study proceeds by reviewing the existing literature on institutions, corruption, and economic growth in Section 2. Growth
12 modeling of corruption on the basis of
modeling of corruption on the basis of the theoretical framework described in Section 2 is presented in Section 3; this section also provides a detailed discussion of data, construction of variables and estimation techniques. The empirical analysis
13 of the results is carried out in Section
of the results is carried out in Section 4. Finally, Section 5 summarizes the main Þndings of the study to of!fer policy recommendations. of private-regarding (personal, close family, private clique) wealth provides the opportunity for state authori
14 ties, both administrative and political,
ties, both administrative and political, to obtain payments. Secondly, the general scarcity of public assets relative to demand accompanied by policies of Þxed of institutional quality, $ is the coef!Þcient of lag of GDP per worker and Þnally, µ is t
15 he random error term. The set of conditi
he random error term. The set of conditioning variables X4 and X5 measures the quality of human capital. past have included an instrumental variable and conducted a two-stage TANPERU add conditioning variables. The coef!Þcient is still signiÞcant at
16 the conventional levels, as shown in co
the conventional levels, as shown in column 5. Therefore, these results do not provide any support for the claim that in the presence of a slow bureaucracy, corruption would become beneÞcial, as suggested by Lef!f (1964) and Huntington (1968). Corru
17 ption and bureaucratic inef!Þciency both
ption and bureaucratic inef!Þciency both adversely and signiÞcantly af!fect real GDP per worker.Having provided some evidence in favor of the claim that corruption associated with GDP per worker, although the level of signiÞcance of the political st
18 ability index improves when human capita
ability index improves when human capital indicators are included in the list of independent variables (Table 2, columns 7 and 8). The magnitude of the coef!Þcient on bureaucratic ef the growth equation is positive and statistically signiÞcant, indic
19 ating that capital growth is the key var
ating that capital growth is the key variable af! but for what it is worth, the estimates of this study suggest that if for example, Bangladesh were to improve the integrity and ef!Þciency of its bureaucracy to the level of that of China (correspondi
20 ng to a one-standard-deviation increase
ng to a one-standard-deviation increase in the bureaucratic ef!Þciency index), its real GDP per worker would rise by almost one and a half percentage points. The catch, of course, is that high levels of corruption and bureaucratic inef!Þciency are th
21 emselves likely to impede investment and
emselves likely to impede investment and growth (Mauro, 1995). But corruption does not necessarily prevent economic growth when other factors are conducive. Indeed, the three Òmost corruptÓ countries in the International Country Risk Guide data for t
22 he mid-1980sÑIndonesia, Paraguay and Gha
he mid-1980sÑIndonesia, Paraguay and GhanaÑhad average economic growth of 1% during the 1980s (although substantially below the worldwide average of 3.2%). The analysis for the panel data on countries lends signiÞcant support to the proposition that
23 the quality of public institutions plays
the quality of public institutions plays a crucial role in the growth performance of any country. This is evident not only in the high statistical signiÞcance of the estimated parameters for the institutional variables but also in their robustness to
24 changes in model speciÞcations. There a
changes in model speciÞcations. There are several channels, not all of which are analyzed in this study, through which corruption hinders economic development. They include Barreto, R.A. (1996), ÒEndogenous Corruption, Inequality and Growth,Ó Jour
25 nal of Public Economics, Vol. 33, No. 2:
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26 : 222-279.Lambsdorf!f, J.G. (1999a), ÒCo
: 222-279.Lambsdorf!f, J.G. (1999a), ÒCorruption in Empirical Research Ð A Review,Ó Transparency International Working Paper, Berlin. Lef!f, N. (1964), ÒEconomic Development through Bureaucratic Corruption,Ó American Behavioral Scientist, Vol. 8, No.
27 3:8-14.Levine, R. and D. Renelt (1992),
3:8-14.Levine, R. and D. Renelt (1992), ÒA Sensitivity Analysis of Cross-Country Growth Regression,Ó American Economic Review, Vol. 82, No. 4: 942-963.Li, H., L. Colin, and H-F. Zou (2000), ÒCorruption, Income Distribution and Growth,Ó Economics and
28 Politics, Vol. 12, No.2: 155-181.Lui, F
Politics, Vol. 12, No.2: 155-181.Lui, F.T. (1985), ÒAn equilibrium queuing model of bribery,Ó Journal of Political Economy, Vol. 93, No. 4: 760-81.Mankiw, N., D. Romer, and D.N. Weil (1992), ÒA Contribution to the Empirics of Economic Growth,Ó Quart
29 erly Journal of Economics, Vol. 107: 407
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