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GROWTH AND CORRUPTION

GROWTH AND CORRUPTION. Introduction. Malfunctioning government institutions as severe obstacles to investment , entreprenuership and innovasion Inefficient judicial system Low security of property right Cumbursom and dishonest bureaucracies

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GROWTH AND CORRUPTION

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  1. GROWTH AND CORRUPTION

  2. Introduction • Malfunctioninggovernmentinstitutions as severeobstacles to investment, entreprenuership and innovasion • Inefficientjudicial system • Lowsecurityofproperty right • Cumbursom and dishonestbureaucracies • DebateontheimpactofCorruptiononGrowth • Positive impactongrowth • Negative impactongrowth

  3. Introduction (cont’d) • Although most economists agree that efficient government institutions foster economic growth not much is know about the magnitude • The paper tries to identify the channels through which corruption and other institutional factors affect economic growth and the magnitude of the effect • In order to fix the problem of endogeniety the index of ethnolinguistic fractionalization is used as an instrument for the institutional factors • The paper found that corruption lowers investment and growth

  4. Data • The BI Indices of Corruption and Institutional Efficiency • Data gathered from BI correspondents and analysts based in each country • Nine selected indices: insitutional change, social change, oppostion takeover, stability of labor, relationship with neighbors,terrorism, judiciary system, red tape and corruption • All BI indices are postively and strognly correlated • E.g., corruption vs red tape • Bureaucratic efficiency proxied by the average of judiciary system, red tape and corruption indices • Political stability proxied by the average of the other six indices

  5. Data (cont’d) • All thenineindicescan be aggregated to give an averageindexofinstitutionalefficiency • Richercountries and fast growingcountriestend to have betterinstitutionsthanpoorercountries. But, thereareexceptions: Thailand (most corruptbutgoodeconomicperformance) and Korea (fast growthbutrelativelyinefficientinstitutions) • Strongassociationbetweenbureaucraticefficiency and politicalstability: there is strondcorrelationbetweentwovaribles and most countrieslie in the same quintilebasedonthetwoindices (thisdoes not apply to all countrieshowever)

  6. Data (cont’d) • The fact that the indices reflect the subjective opinions of BI’s correspondents has both advantages and disadvantages: • the addvatage is related with the political stability variables. • One disadvantage is the problem of unclear scale of measurement. • An even more serious disadvantage that the correspondents evaluation of the difference indices might have been influenced by the economic performance of the country • In addition to the possible measurement error, economic perfomance may affect institutional effieciency • In order to fix the problem of endogeniety arising either from measruement error or geniunn endogeniety, an index of ethnolinguistic fractionalization was used as an instrument

  7. Data (cont’d) • The Index of Ethnolinguistic Fractionalization (ELF) and Other Variables • The raw data from which ELF index was constructed refer to 1960 and the source is Deparment of Geodesy and Cargography of the State Geology Committee of the USSR 1964 • The criteria for characterizing groups as ethnically separate was based on historical linguistic origin • The ELF index can be given as follows: ELF = 1- Where ni is the number of people in the ith group, N is the total population and I is the number of ethnolinguistic groups in the country.

  8. Data (cont’d) • Assumed that ELF is is exogenous and unrelated to economic variables except through its effects on institutional effeciency; it is a valid instrument • Negative and significant correlation between institutional efficiency and ethnolinguistic fractionalization. Ethinic conflict may lead to political instability. The presence of many different ethnolinguistic groups worsens corruption • ELF index is a valid instrument only for institutional efficiency index • Varible related with collenial history was also used based on the data sources of Encyclopedia Britannica and the World Handbook of Political and Social Indicators

  9. Emperical Estimates • Corruption and Investment • Corruptionaffectsinvestment rate negatively and significantlyboth in the OLS and 2SLS estimatesusingthe simple corruptionindex • The magnitude is alsoconsiderable: a one SD increase in thecorruptionindex is associatedwith an increase in theinvestment rate by 2% of GDP • The slopecoeffiecientdoes not significanltydiffer in low-red-tape and high-red-tapesub-samplesofcountries • Similarresult is observedwhenthebureaucraticefficiencyindex is used insteadofthe simple corruptionindex

  10. Empirical Estmates (cont’d) • Equipmentinvesmentwhich is more relatedwithgrowth is significanlty more closelyassociatedwithbureaucraticefficiencythannonequipmentinvestment • Boththe simple corruptionindex and bureacraticinefficiencyarenegativelyassociatedwiththeinvestment rate evenaftercontrolling for a varietyofother determinants ofinvestment • The mainchannelthroughwhich bad institutionsaffectthegrowth rate is by loweringtheinvesment rate

  11. Empirical Estimates (cont’d) • Corruption and Growth • The corruption and the bureaucratic effieciency indices both significantly affect average per capita GDP growth • The result is robust to different specification of control variables • The null hypothesis of no relationship between investment and corruption can be rejected at a level of significance higher than the null hypothesis of no relationship between growth and corruption can • In the context of an endogenous growth model, bureaucratic inefficiency could affect growth indireclty through investment or directly • Similarly, in neoclassical growth models, corruption could affect the steady-state level of income • E.g, through missallocation of production among sectors

  12. Empirical Estimates (cont’d) • Wheninvestment is included as a an independent variable in thegrowthregression, thebureacraticefficiency and corruptionindiceswilleitherbecomeinsignificant or theirslopebecomesmaller • Investmentmayalso be affected by growth (endogeneity problem) • 2SLS was used usingthenine BI indices • There is onlyweak support for thehypothesisthatcorruptionreducesgrowth by leading to inefficientinvestmentchoices • A considerableportionoftheeffectsofcorruptionongrowthworksthroughitseffectsonthe total amountsofinvestment

  13. Conclusion • The negative associationbetweencorruption and investment as well as growth is significant in both a statistical and an economicsense • The result is robust to differentregressionspecificationsincluding IV estimation and inclusionof relevant factors • Three areas for furtherresearchinlcude • The positive and significantcorrelationbetweenindicesofbureaucraticefficiency and politicalstabilty • Stratagiccomplementaritymay be oneexplanation

  14. Conclusion (cont’d) • The behavior of different types of governments with respect to the compostion of government expenditure; e.g, corrupt governements may invest less on education • The reverse causal link from poverty to bad institutions; persistent poverty may lead to bad institutions

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