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Corruption and economic growth: does the size of the government matter?

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Abstract

Corruption is often a source of contentious debate, covering different areas of knowledge, such as philosophy and sociology. In this paper we assess the effects of corruption on economic activity and highlight the relevance of the size of the government. We use dynamic models and the generalised method of moments approach for a panel of 48 countries, and as a measure of corruption the Transparency International's Corruption Perceptions Index, from 2012 to 2019. We find a significant adverse effect of corruption on the level and growth of GDP per capita, but that large governments benefit less from reducing corruption. Furthermore, developing economies, regardless of government size, benefit less from reducing corruption, while government size is not sufficient to explain the influence of corruption on economic activity, although the level of effectiveness of public services is crucial. Finally, our findings suggest that private investment is a potential transmission channel for corruption.

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Source: Authors’ calculations and the World Bank

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Notes

  1. The sample has 36 developed countries and 12 developing countries. Unfortunately, it was not possible to expand the sample because some series were not available.

  2. The voice and responsibility index indicates the perceptions that citizens have of participating in the selection of their government, freedom of expression and free media.

  3. https://www.transparency.org/files/content/pressrelease/2012CPIUpdatedMethodologyEMBARGOEN:pdf

  4. This sample includes four countries with missing data (gaps) in 2019.

  5. Due to the lack of availability of more data for private investment, the sample is restricted to the period between 2012 and 2015.

  6. Our models can have only 2 explanatory variables (CPI and L pc) or 3 explanatory variables (CPI, L pc and GFC pc) and the lagged dependent variable Yi, t-1.

  7. In addition to GMM models with orthogonal forward deviations (FOD), we also analyse the models in terms of difference (DF). We find that the coefficient associated with the CPI followed the same pattern as in the GMM-FOD model. Considering the significance level of 5%, the estimated models did not indicate a second-order correlation problem (AR2), nor problems related to over-identifying restrictions (validity of the instruments).

  8. Department of Economic and Social Affairs of the United Nations Secretariat (UN/DESA).

  9. The index reflects the perceptions of the quality of public services, the quality of the civil service, and the degree of its independence from political pressures, as well as the quality of policy formulation and implementation, and the credibility of the government’s commitment to such policies (World Bank).

  10. Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, the UK, and the USA.

  11. After the comparative test, the fixed effects model proved to be more appropriate than the OLS model.

  12. The CPI coefficient has a p-value equal to 0.108.

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Acknowledgements

We thank the very useful comments of two anonymous referees on a previous version of the paper. This work was supported by the FCT (Fundação para a Ciência e a Tecnologia) [Grant Number UIDB/05069/2020]. The opinions expressed herein are those of the authors and are not necessarily those of their employers.

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Appendix

Appendix

See Tables

Table 11 Data sources

11,

Table 12 Corruption and economic activity

12,

Table 13 GMM—government effectiveness (PSP)

13,

Table 14 GMM—government effectiveness (PSP-OP)

14,

Table 15 Government effectiveness: low and high PSP

15 and

Table 16 Government effectiveness: low and high PSP-OP

16 and Figs. 

Fig. 2
figure 2

Source: Authors’ calculations and the World Bank

Corruption perception index and GDP per capita (average for 2012–2019).

2,

Fig. 3
figure 3

Source: Authors’ calculations and the World Bank

Amplitude of corruption perception index (2012–2019).

3,

Fig. 4
figure 4

Source: Authors’ calculations and the World Bank

Corruption perception index and government size (%GDP): small and medium–big governments

4,

Fig. 5
figure 5

Source: Authors’ calculations and the World Bank

Government effectiveness and government size (%GDP): small and medium–big governments

5 and

Fig. 6
figure 6

Source: Authors’ calculations and the World Bank

Government effectiveness

6.

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Afonso, A., de Sá Fortes Leitão Rodrigues, E. Corruption and economic growth: does the size of the government matter?. Econ Change Restruct 55, 543–576 (2022). https://doi.org/10.1007/s10644-021-09338-4

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