Democracy and High Level Corruption

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Studies of the Effect of Democracy on Corruption
Shrabani Saha and Neil Campbell Department of Applied and International Economics Massey University, Palmerston North New Zealand Corresponding author: Shrabani Saha Email: S.Saha@massey.ac.nz Phone: 64 (6) 350 5999 Extn. 2663 Fax: 64 (6) 350 5660

Prepared for the 36th Australian Conference of Economists ‘Economics of Corruption Session’ Tasmania, Australia, 24-26 September, 2007 Draft: Please do not cite without authors’ permission.

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Abstract
This paper studies the influence of democracy on the level of corruption. In particular, does democracy necessarily reduce a country’s level of corruption? The growing consensus reveals that there is an inverse correlation between democracy and corruption; the more democracy and the less corruption. This study argues that a simple ‘electoral democracy’ is not sufficient to reduce corruption. The role of sound democratic institutions, including an independent judiciary and an independent media along with active political participation is crucial to combat corruption. To illustrate the ideas, this study develops a simple model that focuses on the role of democratic institutions, where it assumes that the detection technology is a function of democracy. Under this assumption, the active and effective institutions lead to careful monitoring of agents, which increases the probability of detection and punishment of corrupt activities and reduces the level of corruption. Keywords: Corruption; Bribery; Democracy; Development JEL classification: D73; K42

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1. Introduction
Corruption is viewed as one of the most severe bottlenecks in the process of economic development and in modernizing a country particularly in developing countries. Recent empirical research on the consequences of corruption confirms that there is a negative relationship between corruption and economic growth. High level of corruption lowers the ratio of total and private investment to GDP, and, consequently, lower economic growth (Mauro, 1995). However, very little is known for sure what causes corruption and why some countries are more corrupt than others. This study attracts attention to the causes of corruption and in particular the focus is on the influence of democracy on the level of corruption. The growing consensus reveals that there is an inverse correlation between democracy and corruption; the more democracy and the less corruption. This study argues that a simple ‘electoral democracy’1 is not sufficient to reduce corruption. A simple ‘electoral democracy’ manifests multi-party system regularly competing for power through (relatively) free and fair elections but deficient in many important aspects that define a liberal democracy2. Many electoral democracies, under the mask of political participation political elites continue to manipulate the electoral process to legitimize their retention of power and use of the state machinery in pursuit of their own interests (Doig, 2000). The role of sound democratic institutions, including an independent judiciary and an independent media along with political participation is crucial to combat corruption, because the sound democratic institutions and healthy political competition can significantly contribute to accelerating anti-corruption reform. The histories of countries where once-high levels of corruption have fallen support this view. To illustrate the ideas, this study develops a simple model that focuses on the role of democratic

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Tronquist, O., Politics and Development (London: Sage, 1999), 98. Liberal democracy secures the rule of law, a separation of powers and protection of liberties. See the link: http://en.wikipedia.org/wiki/Democracy.

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institutions, where it assumes that the detection technology is a function of democracy. Under this assumption the active and effective institutions lead to careful monitoring of agents which increases the probability of detection and...
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