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1 C ORRUPTIONAND H UMAN D EVELOPMENT Selçu
C ORRUPTIONAND H UMAN D EVELOPMENT SelçukAkçay Corruption,definedasthemisuseofpublicpower(office)for privatebenefit,ismostlikelytooccurwherepublicandprivatesec- torsmeet.Inotherwords,itoccurswherepublicofficialshavea directresponsibilityfortheprovisionofapublicserviceorapplicatio n ofspecificregulations(Rose-Ackerman1997:31).Corruptiontends toemergewhenanorganizationorapublicofficialhasmonopoly poweroveragoodorservicethatgeneratesrent,hasthediscretionary powertodecidewhowillreceiveit,andisnotaccountable(Klitgaard 1988:75). Corruption’srootsaregroundedinacountry’ssocialandcultural history,politicalandeconomicdevelopment,bureaucratictraditions andpolicies.Tanzi(1998)arguesthattherearedirectandindirect factorsthatpromotecorruption.Directfactorsincluderegulations andauthorizations,taxation,spendingdecisions,provisionofgoods andservices

2 atbelowmarketprices,andfinancingpolitica
atbelowmarketprices,andfinancingpoliticalparties. Ontheotherhand,qualityofbureaucracy,levelofpublicsector wages,penaltysystems,institutionalcontrols,andtransparencyof rules,laws,andprocessesaretheindirectfactorsthatpromotecor- ruption. Corruptionisasymptomofdeepinstitutionalweaknessesandleads toinefficienteconomic,social,andpoliticaloutcomes.Itreduces economicgrowth,retardslong-termforeignanddomesticinvest- ments,enhancesinflation,depreciatesnationalcurrency,reducesex- pendituresforeducationandhealth,increasesmilitaryexpenditures, misallocatestalenttorent-seekingactivities,pushesfirmsunder- ground,distortsmarketsandtheallocationofresources,increases incomeinequalityandpoverty,reducestaxrevenue,increaseschild andinfantmortalityrates,distortsthefundamentalroleofthe government(onenforcementofcontractsandprotectionofproperty CatoJourna

3 l ,Vol.26,No.1(Winter2006).Copyright©Cat
l ,Vol.26,No.1(Winter2006).Copyright©CatoInstitute.Allrights reserved. Selc ¸ukAkc ¸ayisAssistantProfessorofEconomicsatAfyonKocatepeUniversity,Tur key. 29 TABLE1 I MPACTOF C ORRUPTION :AL ITERATURE S UMMARY AuthorsImpactonFinding Mauro(1996)Realpercapita GDPgrowth 0.3to1.8 percentage points Leiteand Weideman (1999) Realpercapita GDPgrowth 0.7to1.2 percentage points TanziandDavoodi (2000) Realpercapital GDPgrowth 0.6percentage point AbedandDavoodi (2000) Realpercapital GDPgrowth 1to1.3 percentage points Mauro(1996)Ratioofinvestment toGDP 1to2.8 percentage points Mauro(1998)Ratioofpublic education spendingto GDP 0.7to0.9 percentage points Mauro(1998)Ratioofpublic healthspending toGDP 0.6to1.7 percentage points Gupta,Davoodi, and Alonso-Terme (1998) Incomeinequality (Gin

4 icoefficient) +0.9to2.1Gini points Gupta
icoefficient) +0.9to2.1Gini points Gupta,Davoodi, and Alonso-Terme (1998) Incomegrowthof thepoor 2to10 percentage points Ghura(1998)Ratiooftax revenuestoGDP 1to2.9 percentage points TanziandDavoodi (2000) Measuresof government revenuestoGDP ratio 0.1to4.5 percentage points Gupta,deMello, andSharan (2001) Ratioofmilitary spendingto GDP +0.32percentage points continued C ORRUPTIONAND H UMAN D EVELOPMENT 31 Thepurposeofthisarticleistoinvestigatetheimpactofcorruption onhumandevelopment.Manyauthorshavestudiedtheeffectof corruptionondifferentmacroeconomicvariables,butonlyafewstud- ieshaveinvestigatedtherelationshipbetweencorruptionandhuman developmentconceptuallyandempirically.Qizilbash(2001)examines thecorruption-humandevelopmentrelationshipconceptually.Akhter (2004)investigatesthenexusbetweencorruptionandh

5 umandevel- opmentempiricallybyusingafull
umandevel- opmentempiricallybyusingafullinformationmaximumlikelihood approach.Hearguesthathighereconomicglobalizationincreasesthe levelofeconomicfreedom,whichinturnimproveshumandevelop- ment.Highereconomicglobalizationalsoreducesthelevelofcor- ruption,whichenhancesthelevelofhumandevelopment. TheoreticalArguments Corruptionismainlyagovernanceissueandiswidespreadaround theworld.Itexistsinallcountries,cultures,andreligionstodifferen t extents.Althoughthereisnoagreementintheliteratureonhowto TABLE1( continued ) I MPACTOF C ORRUPTION :AL ITERATURE S UMMARY AuthorsImpactonFinding Gupta,Davoodi, andTiongson (2000) Childmortalityrate+1.1to2.7deaths per1000live births Gupta,Davoodi, andTiongson (2000) Primarystudent dropoutrate +1.4to4.8 percentage points TanziandDavoodi (1997) Ratioofpublic investmentto GDP +0.5percentage point TanziandDav

6 oodi (1997) Percentofpaved roadsingood c
oodi (1997) Percentofpaved roadsingood condition  2.2to  3.9 percentage points Al-Marhubi(2000)Inflation+0.17to0.26 points Mo(2001)Economicgrowth  0.545percentage point Bahmani-Oskooee andNasir(2002) Realexchangerate  0.03percentage point Habiband Zurawicki(2001) Foreigndirect investment  0.51percentage point S OURCE :TransparencyInternational(2001:256). C ATO J OURNAL 32 andcausesunequaldistributionofland.Moreover,theyfindthat corruptionincreasesincomeinequality:aone-standarddeviationin- creaseinthegrowthrateofcorruptionreducesincomegrowthofthe poorby7.8percentagepointsperyear.Rose-Ackerman(1997:33)ar- gues, “ Corruptionalsotendstodistorttheallocationofeconomicben- efits,favoringthehavesoverthehave-notsleadingtoalessequitable incomedistribution.Ashareofthecountry ’ swealthisdistributed toinsidersandcorrupt

7 bidders,contributingtoinequalitiesinweal
bidders,contributingtoinequalitiesinwealth. ” Table2indicatestheeffectsofcorruptiononpovertythrougha varietyofchannels. TABLE2 AS YNTHESIS M ATRIX :C ORRUPTIONAND P OVERTY “ Immediate ” Causes ofPoverty HowCorruptionEffects “ Immediate ” CausesofPoverty Lowerinvestmentand growth Unsoundeconomic/institutional policiesduetovestedinterests Distortedallocationofpublic expenditures/investments Lowhumancapitalaccumulation Elitecorporateinterestscapturelaws anddistortpolicymaking Absenceofruleoflawandproperty rights Governanceobstaclestoprivate sectordevelopment Poorhavesmallersharein growth Statecapturebyeliteofgovernment policiesandresourceallocation Regressivenessofbribery “ tax ” on smallfirmsandthepoor Regressivenessinpublicexpenditures andinvestments Unequalincomedistribution Impairedaccesstopublic services Briberyimposesregressivet

8 axand impairsaccessandqualityofbasic ser
axand impairsaccessandqualityofbasic servicesforhealth,education,and justice Politicalcapturebyelitesofaccessto particularservices LackofhealthandLowhumancapitalaccumulation educationLowerqualityofeducationand healthcare S OURCE :Thomasetal.(2000:147). C ATO J OURNAL 34 ofhumandevelopment:longevity,knowledge,andadecentstandard ofliving.Itrankscountriesonascalefrom0to1.Ascoreof0 indicatesthelowestlevelofhumandevelopmentwhile1represents thehighestlevelofhumandevelopment. Inordertoinvestigatetheimpactofcorruptiononhumandevel- opment,Iusedataoncorruptionfromthreedifferentsourcesforthe corruptionindex(CI).ThesearetheCorruptionPerceptionIndex (CPI)compiledbyTransparencyInternational(TI),International CountryRiskGuide ’ s(ICRG)corruptionindexcompiledbyPolitical RiskServices(PRS),andthecorruptionindexthatisconstructedby Kaufmann,Kraay,andM

9 astruzzi(2003). Inthisstudy,IusedTI ’ s1
astruzzi(2003). Inthisstudy,IusedTI ’ s1998CPI.TI ’ scorruptionperception indexesarebasedona “ pollofpolls, ” indicatingimpressionsofbusi- nesspeople,thelocalpopulationofrelevantcountries,andriskana- lystswhohavebeensurveyed.CPIrangesfrom0to10,with10 indicatingahighlycleancountryand0indicatingahighlycorrupt country.Thisindexisrescaledherebysubtractingcountryscores from10sothathighervaluescorrespondwithhigherperceivedlevels ofcorruption. ICRG ’ scorruptionindexisconstructedbythePRSofEastSyra- cuse,NewYork.Itindicatestheopinionofanalystsoneachcountry regardingtheextenttowhichhighgovernmentofficialsarelikelyto demandspecialpayments,andillegalpaymentsgenerallyexpected throughoutlowerlevelsofgovernmentintheformofbribescon- nectedwithimportandexportlicenses,exchangecontrols,taxassess- ment,policyprotection,orloans.Itranksnationsonascalef

10 rom0to 6.Ascoreof0representsmaximumcorru
rom0to 6.Ascoreof0representsmaximumcorruptionlevel,while6indi- catesminimumcorruptionlevel.Inthisstudy,monthlydataareav- eragedtoobtainannualscoresforthecorruptionindexfortheperiod 1991 – 97.ICRG ’ scorruptionindexisrescaledbysubtractingcountry scoresfrom6sothathighervaluescorrespondwithhigherlevelsof corruption. The1998corruptionindexpreparedbyKaufmann,Kraay,and Mastruzzi(2003)rankscountriesonascalefrom – 2.5(highcorrup- tion)to2.5(lowcorruption).Thisindexisalsorescaledhereby subtractingcountryscoresfrom2.5sothathighervaluescorrespond withhighercorruptionlevels. Economicfreedom(EF)dataaretakenfromtheHeritageFoun- dation ’ s1998EconomicFreedomIndex.TheHeritageFoundation defineseconomicfreedomas “ theabsenceofgovernmentcoercionor constraintontheproduction,distribution,orconsumptionofgoods andservicesbeyondtheextentnecessaryforcitize

11 nstoprotectand C ATO J OURNAL 36 America
nstoprotectand C ATO J OURNAL 36 America(LA),andAfrica(AF),respectively — andu i representsa disturbancetermwiththeusualclassicalproperties. Urbanizationisanaturalpartofdevelopment.Residinginurban areasnotonlyprovidesmoreopportunitiesforhigherincomesbut alsobetteraccesstoschooling,healthcare,andothersocialservices. Asaresult,theexpectedsignofthecoefficientofurbanizationis positive(
1 �0). Economicfreedomprotectsprivateproperty,removesbarriersthat restricttransactions,encouragesentrepreneurship,andincreaseseco - nomicactivities.Astheinvolvementofpeopleineconomicactivities increases,thestandardoflivingalsoincreases.Therefore,theexpecte d signofthecoefficientofeconomicfreedomispositive(
2 �0). Politicalfreedomandparticipationarecloselyrelatedtohuman development.AccordingtoHumanDevelopmentReport(2002:51), “ Peop

12 lewithoutpoliticalfreedomsuchasbeingable
lewithoutpoliticalfreedomsuchasbeingabletojoinassocia- tionsandtoformandexpressopinionshavefewerchoicesinlife. ” Democraticgovernanceprotectshumanrights,promoteswiderpar- ticipationintheinstitutionsandtherulesthataffectpeople ’ slives, andachievesmoreequitableeconomicandsocialoutcomes.Without politicalfreedompeoplecannotclaimtheireconomicandsocial rights.Asaresult,democracyenhanceshumandevelopment.Thus, theexpectedsignofthecoefficientofdemocracyispositive(
3 �0). Astheliteraturesurveyindicates,economicdevelopmentsuffers fromcorruption.Therefore,itcanbeclaimedthathumandevelop- mentwillalsobenegativelyaffected.Thus,theexpectedsignsofthe coefficientsofthecorruptionindexesarenegative(
4 0). ThesignofthecoefficientoftheAfricandummyvariableisex- pectedtobenegative(  0)becauseAfricahasimportantdisad- vantagescomparedw

13 ithotherregions(likeendlesscivilwars,lac
ithotherregions(likeendlesscivilwars,lackof democracy,andsocialandeconomicproblems).SimilartotheAfrican dummyvariable,thesignofthecoefficientoftheLatinAmerica dummyvariableisalsoexpectedtobenegative(  0).LikeAfrican countries,mostoftheLatinAmericancountrieshaveheavysocial, economic,andpoliticalproblems.AstheEuropeanUnioncountries aredevelopedeconomically,politically,andsocially,theexpected signoftheEuropeanUnionmembershipdummyvariableispositive (  �0). EmpiricalResults Inordertotestthehypothesisthatcountrieswithhigherlevelsof corruptionhavelowerlevelsofdevelopment,thesimplecorrelations betweencorruptionindexesandHD(asmeasuredbythe1998HDI) C ATO J OURNAL 40 TABLE5 O RDINARY L EAST S QUARES .D EPENDENT V ARIABLE :H UMAN D EVELOPMENT I NDEX ,1998 ModelAModelBModelCModelDModelEModelFModelG Constant0.4110.5240.4550.4570.6

14 280.7020.606 (4.808)***(6.316)***(7.319)
280.7020.606 (4.808)***(6.316)***(7.319)***(9.609)***(8.565)***(10.285)***(1 1.291)*** UR0.0030.0020.0020.0020.0020.0020.002 (4.636)***(4.528)***(4.705)***(5.282)***(4.293)***(3.902)***(4. 275)*** EF0.0740.0480.0780.0620.0340.0190.050 (2.586)***(1.774)*(3.370)***(3.011)***(1.581)(0.978)(2.736)*** DEM0.0110.0080.007 (1.510)(1.219)(1.084) COR1  0.013  0.015 (  2.216)**(  2.941)*** COR2  0.048  0.051 (  3.803)***(  4.486)*** COR3  0.041  0.039 (  4.263)***(  4.353)*** D EUM 0.0440.0340.0230.021 (2.221)**(1.814)*(1.350)(1.206) D AF  0.153  0.154  0.138  0.139 (  5.544)***(  5.952)***(  5.746)***(  5.746)*** D LA  0.054  0.027  0.005  0.013 (  2.314)**(  1.154)(  0.234)(  0.592) C ATO J OURNAL 42 Ad

15 justedR 2 0.740.780.790.820.840.860.86 F
justedR 2 0.740.780.790.820.840.860.86 F-statistic43.443***52.674***56.260***55.907***54.512***66.149* **64.953*** White ’ shetero- scedasticitytest (withcrossterms) 1.2091.1730.9970.9430.9771.3511.906 Observations63636363636363 N OTES :*,**,and***denotesignificanceat10percent,5percent,and1percent, respectively. C ORRUPTIONAND H UMAN D EVELOPMENT 43 mandevelopmentinasampleof63countries.Inordertotestthe impactofcorruptiononhumandevelopment,threedifferentcorrup- tionindexesareused.Testresultsrevealthatthereisastatistically significantnegativerelationshipbetweencorruptionindexesandhu- mandevelopment.Empiricalevidenceofthestudysuggeststhat morecorruptcountriestendtohavelowerlevelsofhumandevelop- ment.Inbrief,thisstudyextendsthelistofnegativeconsequencesof corruptionandarguesthatcorruptioninallitsaspectsretardshuman development. Referen

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