Abstract.
Corruption is known to reduce the ratio of investment to GDP. This study breaks down investment into domestic savings and net capital inflows. A significant impact of corruption exists only for the latter variable because the first variable is distorted by general equilibrium repercussions. An increase in Colombia’s level of integrity to that of the United Kingdom is found to increase net annual capital inflows by 3 percent of GDP. Decomposing this impact reveals that bureaucratic quality, civil liberty and government stability are irrelevant, but that a country’s law and order tradition is a crucial sub-component for attracting capital.
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Received: May 2001, Accepted: September 2002,
JEL Classification:
E2, K4, C21
Johann Graf Lambsdorff: The author is grateful to A. K. Jain, H.-J. Jarchow, P. Mauro, H. Möller, S. Rose-Ackerman, J. Williamson and three anonymous referees for providing helpful comments. C. and M. Schinke, S. U. Teksoz and C. Crozier were invaluable in proofreading and revising the manuscript.
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Lambsdorff, J.G. How corruption affects persistent capital flows. Economics of Governance 4, 229–243 (2003). https://doi.org/10.1007/s10101-002-0060-0
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DOI: https://doi.org/10.1007/s10101-002-0060-0