Corruption and Its Impact on Growth, Business and Government Effectiveness

Topics: Political corruption, Corruption Perceptions Index, Transparency International Pages: 16 (4260 words) Published: June 23, 2012
Corruption and its impact on Growth, Business and Government Effectiveness

Ivo Dimovsky Managerial Economics – Empirical paper EMBA - American University of Bulgaria April 4th, 2012

ABSTRACT

Corruption, like an infection, has co-existed with human society for a long time. Corruption has received significant attention among economists and international financial institutions during the last few decades, given its impact on economic growth both in developed and developing countries. There is an increasing volume of literature on the relationship between corruption and economic growth, and the general conclusion is that corruption slows down the long-term growth of an economy through a wide range of negative post-effects. It hampers economic growth, disproportionately burdens the poor and undermines the effectiveness of any investment and aid. Some theoretical studies suggest that corruption may counteract government failure and promote economic growth in the short run, however in recent years this studies aren`t anymore valid given the clear message from the negative effects on society and the economic system. In this paper we will analyze and present: First, we will describe and list a number of causes and consequences of corruption, derived from recent international studies from worldwide organizations trying to fight corruption. Second, we will introduce a regression model that can help explain the negative relationship between corruption (Corruption Perception Index or CPI1) and economic growth by looking closely over metrics like the government effectiveness2 in percentiles and GDP per worker conclude. 3

in a huge sample of countries. In the last chapter we will

1

CPI - Official metric, which aims to track corruption levels in 258 countries around the world, trough a multifunctional methodology, available at the Transparency international web-page. 2 Government effectiveness - captures perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. (Official World Bank Metric) – 2011. 3 According to the World Bank WW Economic database, applied to the sub-set of countries in the period of 1960 – 2008. 2

INTRODUCTION

Corruption has a large significance with its ability to influence and disrupt the roots of an economy. It abrades property rights and has major consequences for both government efficiency and social equity. It severely impacts political institutions and thus also erodes democracy and the social, political, and economic benefits coming from it. It is often done in secret and consequently demolishes the nature of the economic system. The academic literature remains inconclusive however about the impact of corruption on economic prosperity or development. Some early authors argued that corruption has the potential to improve efficiency and even promote and help growth. On the other side, Shleifer and Vishny 4(1993), explain that corruption is detrimental for investment and economic prosperity. Up to this point, however, the empirical evidence has supported the existence of a linear and negative correlation between the level of corruption and the average growth rate of GDP per worker, the government effectiveness as well as the ease of establishing and running a business. There are, of course, many additional factors which play a role in cultivating the level of corruption, like the distinction between “free” and “non-free” countries in the type of their political regime, development level of educational system and many more sub-factors, which, for example, Ehrlich and Lui (1999) apply in their studies. In this paper we seek to prove the significance of the negative impact of corruption to economic growth by studying the empirical results of a regression analysis run over a sub-set of...
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