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Fiscal transparency, legal system and perception of the control on corruption: empirical evidence from panel data

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Abstract

This study analyzes the effects of fiscal transparency and legal aspects on the perception of the control on corruption. Our argument is that fiscal transparency can reduce information asymmetry and, thus, the existing discretionary power of public officials, politicians and legislators. In addition, we also argue that fiscal transparency and a strong legal system might be able to increase the expected cost of corruption and, consequently, the deterrent effect against corruption, once it increases the probability of corrupt officials, politicians and legislators being caught, representing important aspects able to increase the perception of the control on corruption. Based on a sample of 82 countries for the period 2006–2014 and using panel data methodology, our study provides important practical implications in terms of anti-corruption policy guidelines since the results indicate that more transparent fiscal practices bring beneficial effects in terms of corruption perception. Moreover, the findings indicate that the effect of rule of law on the perception of the control on corruption becomes greater as fiscal transparency increases (the marginal effect of rule of law on this perception increases with fiscal transparency improvements). The findings also reveal that a strong legal system (represented by a strong rule of law, integrity of the legal system and impartial and effective courts that guarantee law enforcement) increases the perception of the control on corruption.

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Notes

  1. In turn, there exists literature related to the “grease the wheels hypothesis” according to which corruption may be beneficial in a second best world by alleviating the distortions caused by ill-functioning institutions (Leff 1964; Huntington 1968; Weill 2011). This hypothesis considers that an inefficient public administration constitutes a major impediment to economic activity and that a dose of “greasing” money may help circumvent. As a consequence, corruption may be less detrimental, or even beneficial, in countries plagued by defective bureaucracy (Weill 2011). However, most studies find evidence that corruption is harmful to the economy.

  2. Regarding these conditions, Dimant and Tosato (2017) identify the following empirical causes of corruption: (i) bureaucracy and inefficient administrative and political structure; (ii) civil participation and press freedom; (iii) economic freedom; (iv) economic growth; (v) ethnic diversity; (vi) gender; (vii) globalization; (viii) government size; (ix) government structure; (x) government system; (xi) historical drivers; (xii) legal system; (xiii) market and political competition; (xiv) natural resource endowment; (xv) political instability; (xvi) poverty; (xvii) property rights; (xviii) religion; (xix) Trade (openness); (xx) transparency; (xxi) urbanization; (xxii) wages. For each of these causes, the authors describe the theoretical expected relation with corruption as well as the studies addressing each issue.

  3. For more details, see Dimant and Tosato (2017).

  4. Oxford English Dictionary.

  5. Table 6 in the appendix shows the list of countries. The classification as developed and developing countries follows the International Monetary Fund (World Economic Outlook-WEO).

  6. Brunetti and Weder (2003) stress that: “measuring corruption is obviously tricky because of its illegal nature. It is further complicated by a wide range of definitions of a corrupt act. And finally, there seem to be many different expressions of corruption, which range from routine ‘tips’ and ‘speed money’ to complicated schemes of favors between businessmen and civil servants”.

  7. The literature relating institutions and growth suggests economic growth improves the quality of political and economic institutions (Acemoglu et al. 2005; Rigobon and Rodrik 2005). Some studies provide evidence that economic growth is effective to reduce corruption (e.g., Mauro 1995; Treisman 2000; Aidt et al. 2008; Nguyen 2016).

  8. Regarding the effect of inflation on corruption, some studies provide evidence that inflation has a positive effect on corruption (e.g., Getz and Volkema 2001; Braun and Di Tella 2004; Akça et al. 2012; Sassi and Gasmi 2017).

  9. We also considered the variables “government size”, “trade openness”, “financial openness”, “GDP per capita”, “unemployment”, “budget balance”, “inequality (Gini index)”, and “democracy”, as regressors. However, the coefficients for these variables did not present statistical significance in the estimates, and we decided to remove these controls from the analysis and have more parsimonious specifications.

  10. Although D-GMM and S-GMM methods are criticized due to the difficult in judging whether the instruments are valid, Bazzi and Clemens (2013) do not recommend that economists refrain from pursuing pressing research questions until perfect methods arrive.

  11. Table 9 in Appendix presents each set of instrumental variables that we use in S-GMM estimations.

  12. Since we are using unbalanced panel data, when instruments are added in S-GMM estimations, the number of observations is reduced due to missing data.

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Acknowledgements

We gratefully acknowledge the Editor (Robert Kunst) and two anonymous referees of this journal for very useful comments and suggestions on an earlier version of this paper.

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Authors and Affiliations

  1. Department of Economics, Fluminense Federal University, Rua Alexandre Moura, Bloco F, 8 - São Domingos, 24210-200, Niterói, RJ, Brazil

    Gabriel Caldas Montes

  2. National Council for Scientific and Technological Development (CNPq), Brasília, Brazil

    Gabriel Caldas Montes

  3. Department of Economics, Candido Mendes University, Rio de Janeiro, Brazil

    Paulo Henrique Luna

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Appendix

Appendix

See Tables 6, 7, 8 and 9.

Table 6 List of countries included in the dataset
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Table 7 Descriptive statistics
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Table 8 Data sources and description
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Table 9 List of instrumental variables
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Montes, G.C., Luna, P.H. Fiscal transparency, legal system and perception of the control on corruption: empirical evidence from panel data. Empir Econ 60, 2005–2037 (2021). https://doi.org/10.1007/s00181-020-01849-9

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