Do the Effects of Corruption Upon Growth Differ Across Countries?

By Andreas Assiotis

Department of Economics

University of Cyprus

PO Box 20537, 1678 Nicosia, Cyprus

[email protected] and Transparency International – Cyprus

 

One research path has been to see whether corruption hinders or promotes growth. Earlier studies considered corruption as pro-growth. But more recent studies using more sophisticated statistical techniques have often shown that corruption is anti-growth. These studies have made welcome contributions. However, they often fail to examine how the effects of corruption could differ across countries. In this paper, “Do the effects of corruption upon growth differ between democracies and autocracies?” by Andreas Assiotis, we take a step further and study the association between corruption and growth, where the marginal impact of corruption is allowed to differ across political regimes, namely authoritarian ones versus democracies.

One possible distinction is that opportunities for rent seeking differ across political regimes. In line with the existing literature, public rent-seeking can be divided into two forms: (illegal) corruption and (legal) lobbying. While the former is associated with money given to politicians or public servants (policy enforcers), the latter is usually affiliated with political campaign activities or other practices that aim to influence decision makers. Presumably, (legal) lobbying and (illegal) corruption are imperfect substitutes – implying that a crackdown of corruption should lead to an increase in lobbying. If opportunities for lobbying are less available in authoritarian regimes (or if lobbying of government officials is easier in democratic regimes) with fewer decision makers, then the degree of substitutability between the two is lower in these countries. Perhaps lowering corruption in authoritarian regimes could have greater benefits for economic growth because of the lower substitutability between corruption and lobbying in these countries. Another possible distinction focuses upon the type of corruption. Suppose that democracies are more transparent than are authoritarian regimes due to freedom of the press. Assume that corruption exists in both types of regimes. However, the corruption that exists in democracies could be more benign since corrupt activities that greatly hurt the majority are more likely to be reported and combated. This is not to say that the frequency of corrupt activities is lower in democracies, only that its detrimental effects are smaller. Therefore, a fall in corruption in an authoritarian regime could then have a more positive effect upon economic growth than in a democratic regime. Moreover, if such types of corruption in democratic regimes are so “benign” that bribes act as speed money, then combating such corruption could even lower economic growth.

Using different econometric techniques for a panel of 119 countries between the periods 1984-2007, we find support for the above hypotheses. The association between corruption and economic growth is less positive in democracies and could even be negative. Our results also counter claims that corruption is less harmful in authoritarian countries because it allows one to “grease the wheels” and avoid institutional obstacles dissuading productive activities. If anything, more evidence of greasing the wheels appears for democracies. Perhaps the types of corrupt activities undertaken in strong democracies are more benign than are corrupt activities in non-democracies. This is not to say that corrupt activities always promote growth in democracies nor that these benign forms of corruption are absent in other countries, only that the proportions of these two types of corruption vary across countries. The clarity of whether the effects of corruption upon growth differ across political regimes is vital for policymakers who aim to improve their institutions by controlling corruption. In democratic environments, when governments take steps to control corruption, the effects upon growth might not be as promising since democracies are likely to have more freedoms on other dimensions that need to be accounted.