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Corruption and Openness

Author

Listed:
  • Zvika Neeman
  • Daniele Paserman
  • Avi Simhon

    (The Hebrew University of Jerusalem)

Abstract

We report an intriguing empirical observation. The relationship between corruption and output depends on the economy's degree of openness: in open economies, corruption and GNP per capita are strongly negatively correlated, but in closed economies there is no relationship at all. This stylized fact is robust to a variety of different empirical specifications. In particular, the same basic pattern persists if we use alternative measures of openness, if we focus on different time periods, if we restrict the sample to nclude only highly corrupt countries, if we restrict attention to specific geographic areas or to poor countries, and if we allow for the possible endogeneity of the corruption measure. We find that the extent to which corruption affects output is determined primarily by the degree of financial openness. The difference between closed and open economies is mainly due to the different effect of corruption on capital accumulation. We present a model, consistent with these findings, in which the main channel through which corruption affects output is capital drain.

Suggested Citation

  • Zvika Neeman & Daniele Paserman & Avi Simhon, 2006. "Corruption and Openness," 2006 Meeting Papers 164, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:164
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    More about this item

    Keywords

    corruption openness growth;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • H0 - Public Economics - - General
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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