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Exploring the links between corruption and growth

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Author Info
Andrew Hodge
Sriram Shankar
D.S. Prasada Rao
Alan Duhs (School of Economics, The University of Queensland)

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Abstract

Corruption is a widespread phenomenon, but relatively little is confidently known about its macroeconomic consequences. This paper explicitly models the transmission channels through which corruption indirectly affects growth. Results suggest that corruption hinders growth through its adverse effects on investment in physical capital, human capital, and political instability. Concurrently, corruption is found to foster growth by reducing government consumption and, less robustly, increasing trade openness. Overall, a total negative effect of corruption on growth is estimated from these channels. These effects are found to be robust to modifications in model specification, sample coverage, and estimation techniques as well as tests for model exhaustiveness. Moreover, the results appear supportive of the notion that the negative effect of corruption on growth is diminished in economies with low governance levels or a high degree of regulation. No one-size-fits-all policy response appears supportable.

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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 392.

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Date of creation: 2009
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Handle: RePEc:qld:uq2004:392

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