Effects of corruption on economic growth through transmission channels in developing coutries

UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM-NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

EFFECTS OF CORRUPTION ON ECONOMIC
GROWTH THROUGH TRANSMISSION CHANNELS
IN DEVELOPING COUNTRIES
By

NGUYEN NINH QUOC TRAN

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, JULY 2013

A 
 


UNIVERSITY OF ECONOMICS

INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY

THE HAGUE

VIETNAM

THE NETHERLANDS

VIETNAM-NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

EFFECTS OF CORRUPTION ON ECONOMIC GROWTH THROUGH
TRANSMISSION CHANNELS IN DEVELOPING COUNTRIES
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYEN NINH QUOC TRAN

Academic supervisor

Dr. NGUYEN TRONG HOAI

HO CHI MINH CITY, JULY 2013
B 
 

ABSTRACT

This paper examines direct and indirect effects of corruption on economics growth in
developing countries. Indirect effects of corruption on economic growth will be
examined by five transmission channels such as government size, capital investment,
trade openness, human capital, and political instability. With 35 developing countries
in data set and OLS, 2SLS method, the result is that corruption has positive
relationship with government expenditure, trade openness, human capital, and political
instability. That means more corruption will make more government expenditure, trade
openness, human capital, and political instability. However corruption only relates
negatively with capital investment. And through the effects of these transmission
channels on economic growth, we can infer that totally corruption has positive
relationship with economic growth. The result in this paper is also an evidence of
“grease the wheel” hypothesis in developing countries. This is like a careful remind on
the policy of fighting against corruption because in developing countries a
characteristic of corruption is positively related with economic growth.

Keywords: Corruption, economic growth, government expenditure, capital investment,
openness, human capital, political instability.

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TABLE OF CONTENTS

ABSTRACT ........................................................................................................................ i
CHAPTER 1: INTRODUCTION .................................................................................... 1

1.1- Research context....................................................................................................... 1
1.2- Research objective .................................................................................................... 5
1.3- Thesis structure......................................................................................................... 7
CHAPTER 2: LITERATURE REVIEWS ..................................................................... 8
2.1- CONCEPT OF corruption ........................................................................................ 8
2.2- Practical researches .................................................................................................. 9
2.2.1- Corruption greases the wheels of growth ........................................................ 10
2.2.2- Corruption is sand of the wheels of growth ..................................................... 10
CHAPTER 3: CONCEPTUAL FRAMEWORK ......................................................... 16
3.1- DIRECT EFFECT .................................................................................................. 16
3.2- INDIRECT EFFECTS ............................................................................................ 17
3.2.1- Government size .............................................................................................. 17
3.2.2- Capital investment ........................................................................................... 18
3.2.3- Trade openness................................................................................................. 18
3.2.4- Human capital .................................................................................................. 19
3.2.5- Political instability ........................................................................................... 20
CHAPTER 4: METHODOLOGY AND DATA SOURCE ......................................... 23
4.1- DIRECT EFFECT OF CORRUPTION AND TRANSMISSION CHANNELS
ON GROWTH ............................................................................................................... 23
4.2- INDIRECT EFFECTS OF CORRUPTION ON GROWTH THROUGH
TRANSMISSION CHANNELS ................................................................................... 24

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4.3- TOTAL EFFECT OF CORRUPTION ON GROWTH ......................................... 25
4.4- DATA ..................................................................................................................... 25
CHAPTER 5: RESEARCH FINDINGS IN DESCRIPTIVE STATISTIC
ANALYSIS....................................................................................................................... 27

5.1- RELATIONSHIP BETWEEN TRANSMISSION CHANNELS AND
GROWTH ...................................................................................................................... 27
5.2 RELATIONSHIP BETWEEN CORRUPTION AND TRANSMISSION
CHANNELS AND EFFECT OF CORRUPTION ON GROWTH ............................... 32
CHAPTER 6: REGRESSION ANALYSIS .................................................................. 40
6.1- DIRECT EFFECT OF CORRUPTION ON GROWTH AND EFFECTS OF
TRANSMISSION CHANNELS ON GROWTH. ......................................................... 40
6.2- EFFECTS OF CORRUPTION ON TRANSMISSION CHANNELS AND
GROWTH ...................................................................................................................... 45
6.2.1- Effect of corruption on government expenditure ............................................. 45
6.2.2- Effect of corruption on capital investment ...................................................... 46
6.2.3- Effect of corruption on openness ..................................................................... 48
6.2.4- Effect of corruption on human capital ............................................................. 49
6.2.5- Effect of corruption on political instability...................................................... 50
6.3- TOTAL EFFECT OF CORRUPTION ON GROWTH ......................................... 52
CHAPTER 7: CONCLUSION REMARKS ................................................................. 54
7.1- RESEARCH FINDINGS ....................................................................................... 54
7.2- THE DRAWBACK ................................................................................................ 55
7.3- POLICY IMPLICATION....................................................................................... 56
REFERENCES .............................................................................................................. 58
APPENDIX.................................................................................................................... 61

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ABBREVIATION

OLS: Ordinary Least Square
2SLS: Two Stages Least Square

CI: Corruption Perceptions Index
EEPC: Engineering Enrolment Per Capita

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LIST OF TABLE

Table 2.1: Summary of literature reviews……………………………………………..15
Table 6.1: OLS of transmission channels and corruption on growth………………....41
Table 6.2: 2SLS of gGX-CI………………………………………..………………….45
Table 6.3: 2SLS of gFC-CI……………………………..…………..…………………47
Table 6.4: OLS of gFC-CI…………………………….………………………………47
Table 6.5: 2SLS of gTT-CI……………..……………………………………………..48
Table 6.6: 2SLS of EEPC-CI…………….……………………………………………49
Table 6.7: 2SLS of PI-CI………….…………………………………………………..51

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LIST OF FIGURES

Figure 3.1: Effect of corruption on transmission channels and economic growth..…..21
Figure 5.1: Scatter graph between g and gFC…………..……………………….…….28
Figure 5.2: Scatter graph between g and gGX……………………………..………….29
Figure 5.3: Scatter graph between g and gTT………………..…………………….….30
Figure 5.4: Scatter graph between g and PI…………..……………………………….31
Figure 5.5: Scatter graph between g and EEPC……………………………………….31

Figure 5.6: Scatter graph between CI and gGX……………………………………….32
Figure 5.7: Scatter graph between CI and gFC…….………………………………….34
Figure 5.8: Scatter graph between CI and gTT….…………………………………….35
Figure 5.9: Scatter graph between CI and gTT (dropping out two outliner points)..…35
Figure 5.10: Scatter graph between CI and PI….……………………………………..36
Figure 5.11: Scatter graph between CI and EEPC…..………………………………...37
Figure 5.12: Scatter graph between CI and g…………………………………………39

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CHAPTER 1: INTRODUCTION

1.1- RESEARCH CONTEXT
Till now there is not the answer about the exact effects of corruption on economic
growth. The literatures have not come to one final agreement about the corruption on
economic growth yet. In early time, some authors argued that with an appropriate level
of corruption, it can make benefit for economic growth. In the case of rigid government
administration, corruption can act as the “grease” to make smooth for economic
operation. Without corruption, people or enterprises may have to “queue in line” and
waste a lot of time to have the final ideas from the government. And the government
also spends more labor force to deal with this situation. Or like another argument on
benefit of corruption, Acemoglu and Verdier (1998) showed that the cost for ensuring
the government officials absolutely clean from corruption can be higher than the price
of corruption. Lui (1985) established “equilibrium queuing model of bribery” to
examine the effect of bribery. With this model, bribes can reduce the cost related with
queuing. Through that it improves the efficiency of public administration. Moreover
Beck and Maher (1986) also showed that bribery model would be “isomorphic” with
bidding model in supplying goods and services to the government. That means “in the

absence of penalties for bribery, supplier firms would be indifferent between bribery
and bidding institutions.”
On the side of against the corruption, many empirical researches have come to the
results that corruption was the “sand” for the wheels of economic operation. In contrast
of the idea of corruption is the “grease” for economic operation in rigid government
administration, the corruption can make much more delays in administration to attract

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more bribes. The government officials do not want to act quickly because they want to
have more time and force the people or enterprises spend more bribes to them. With
this behavior the officials have tendency to give out their decisions basing on the price
of corruption. The enterprises with better quality but without corruption will have the
disadvantaged decision from the authorized officials. So a good project may come to
an inability enterprise. The benefit from this project can be destroyed by this
enterprise. So by corruption, effective allocation in economic has been made distortion.
This will have the negative effects on economic growth.
Moreover on the side of against the corruption, there are the ideas that corruption
reduces the investment. With corruption, the cost of project can become higher. So this
can drop out the good projects and reduce the investment. Reduced investment will
affect negatively to economic growth.
So until now we really look corruption like the impediment to the economic growth.
The report from World Bank in 1998 has seen corruption like the great obstacle to
economic and social development. However we does not still have enough the exactly
theoretical framework to definitely confirm the impacts of corruption on economic
growth. We have the empirical researches to find out the effects of corruption in the
specific cases with different methodologies. Mauro (1995) showed that corruption
reduced investment. However investment is a main source of economic growth. So

corruption lowered economic growth through reducing investment. As in Mauro
(1995) corruption and growth (also investment) had negative relationship and
significant in aspect of statistic and “in an economic sense”. Tanzi and Davoodi (1997)
conducted the research about “corruption, public investment and growth”. With crosssection data of countries and regression method they found that more corruption made
more public investment and lower government revenues. Also higher corruption made
“lower operation and maintenance expenditures” and “lower quality of public

2 
 


infrastructure”. Also in this paper the authors showed that corruption lowered
productivity of public investment (however increased public investment). So that led to
negative impact of public investment on economic growth. Finally corruption had
negative impact on economic growth. Kaufmann and Wei (1999) had a research on
“grease money”. With data at firm level from worldwide, the authors found conclusion
against “efficient grease” hypothesis. They found that paying more bribes does not lead
to reduce “management time wasted with bureaucrats” and cost of capital. However
paying more bribes would create more “management time wasted with bureaucrats”
and more cost of capital. This would affect investment projects and economic growth
in general.
Beside the direct impact of corruption on economic growth, recent researches have
shown out the indirect impacts of corruption on growth. In summary, we can list out
five popular channels such as human capital, capital investment, government size, trade
openness, and political instability through which corruption affect economic growth.
About human capital channel, Murphy, Shleifer, and Vishny (1991) found that
corruption affected how people invest in human capital. If rent seeking rewards more
than producing operation, people will devote most ability to become rent seeker and
choose occupation that bring them more rent seeking, not for production. Investment in
human capital in this case will be reduced; production of nation will be lowered.

Finally it will reduce growth.
About capital investment, Mauro (1995) showed the negative relationship between
corruption and private investment. Corruption adds more cost for investment. So it
reduces private investment. However investment is the main source of growth. Lower
investment will lower economic growth. Mo (2000) also found corruption had negative

3 
 


impact on private investment channel. And through impact on this channel it reduced
economic growth.
Tanzi and Davoodi (1997) examined the impact of corruption on public investment.
Public expenditure had tendency to become bigger under corruption. Corruption made
public investment increase but its productivity decrease. On net effect, it reduced
economic growth. However according to Hodge, Shankar, Rao, and Duhs (2009)
corruption reduced government spending. On total effect, corruption fosters growth
through this channel by lowering government spending. So we have mixed impact of
corruption on government size. Corruption can decrease or increase government
spending.
About trade openness, one of the ways that the corruption affects trade is quota of
exporting and importing. By that way corruption can restrict trade openness. Pellegrini
and Gerlagh (2004) found negative relationship between corruption and trade
openness. And final impact of corruption on growth through this channel was negative.
Finally corruption affects growth through political instability channel. Corruption can
create the ideas about inequality and impropriety among citizens. This is the root of
political instability. And political instability makes bad environment for investment
and economy. It will impede economic growth. Mo (2000) examined the indirect
impact of corruption on growth through political instability. He found that corruption
had positive relationship with political instability. More corruption will be more

instability. And this will lead to lower growth. Pellegrini and Gerlagh (2004) also came
to the same result as Mo (2000) about the impact of corruption on political instability
and economic growth.
Looking closer on impact of corruption in developing countries, till now we have very
few researches about it. Almost researches here have used data of cross countries all

4 
 


over the world to find out the impact of corruption on economic growth (indirect and
direct impact). According to these researches, corruption has mostly had negative
relationship with growth. That means the countries with higher corruption will suffer
lower growth. However this is still right if we look into group of developing countries?
Corruption makes more cost for the economy and impedes economic growth. If this is
still right for developing countries, corruption will become the great obstacle for
development in developing countries. However we may have the argument when we
look separately in some developing countries. For example, Indonesia and Thailand
have had fast pace of growth in spite of high corruption in these countries. South East
Asia has also experienced fast growth although corruption in most countries of this
area is very popular. So in this case corruption has promoted economic growth. This is
the reason why this paper would like to focus on developing countries. We would like
to examine more detail about the impact of corruption on this group of countries.
Obviously, corruption has the impact on economic growth. In scope of this research we
would like to examine the effects of corruption on economic growth in developing
countries and to find out that corruption has negative or positive effect on economic
growth.
1.2- RESEARCH OBJECTIVE
This paper tries to examine the impact of corruption on economic growth by the model
of transmission channels such as human capital, investment, government size,

openness, and political instability. Firstly the corruption will affect these channels. In
this paper, corruption is supposed to affect human capital, investment, government
size, openness, and political instability. After that these channels will affect economic
growth. By that way we will have the total effect of corruption on economic growth.
By using system of equations this paper establishes the links between corruption and

5 
 


economic growth across countries. This method will break down the ways by which
the corruption affects growth. Because of that we will have the better view on the link
between corruption and growth.
General speaking, this paper firstly establishes the transmission channels model
between the corruption and the economic growth. And by that way we will come to
answer the question “how does the corruption affect the economic growth in
developing countries? “.
This paper uses cross section data in developing countries at 2008 and bases on the
methodology in the paper of Lorenzo Pellegrini and Reyer Gerlagh (2004) to deal with
our problem. However in this paper we replace the variable “human capital” used in
Lorenzo Pellegrini and ReyerGerlagh (2004) and other papers by variable investment
type of human capital. The investment type of human capital means that you choose
how to investment in human capital such as you can choose your study and occupation
in engineering to promote the productivity or you can choose your study and
occupation in other fields to have more opportunities to corrupt. Moreover this paper
also puts the government size into examining. And with the sample data collected from
developing countries at 2008, we hope to have better view about how the corruption
affects the economic growth in developing countries through the transmission
channels.
In summary, by focusing on developing countries, this paper has the following main

objectives:
‐

Systematizing indirect transmission channels of corruption on growth and
examine the impacts of corruption on these channels such as human capital
(focusing on investment type of human capital), capital investment, government
size, trade openness, and political instability.

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‐

Examining the impacts of transmission channels on economic growth, then
finding out indirect impact of corruption on economic growth through theses
channels and comparing indirect and direct impact of corruption on growth.

‐

Combine the direct and indirect effects of corruption on growth and find out the
total effect of corruption on growth. This final result can be considered as the
reference for policies issued to deal with the corruption problem.

1.3- THESIS STRUCTURE
This paper includes total seven main chapters. Chapter 1 Introduction is to represent
generally the context of research and some main objectives of this research. Chapter 2
Literature Review is to review some studies in past that related to the topic of this
paper. Chapter 3 is Conceptual Framework. This chapter will outline the paths that
corruption relates with economic growth. And through it we will set up the framework

to research the effect of corruption on economic growth. And the purpose of chapter 4
Methodology and Data is to build up the methodology and to look for the data source
to solve the issue and find out the answer for research objectives. Chapter 5 Research
Findings in Descriptive Statistics will show out the results of relationship between
corruption and growth in the context of descriptive statistics. And chapter 6 Regression
Analysis will find out the results of relationship among corruption, transmission
channels, and economic growth in the approach of regression. Finally chapter 7
Conclusion Remarks will summarize the main findings of this paper and give out some
comments around these findings.

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CHAPTER 2: LITERATURE REVIEWS

In this section we will review necessary researches and papers that were conducted to
examine the relationship among corruption, transmission channels of corruption and
economic growth.
However at the beginning we are going to present a few things about corruption and
sources of growth. Then we are going to review some papers to see how the
relationship between corruption and growth has been examined.
2.1- CONCEPT OF CORRUPTION
According to the definition from Transparency International (on its website)
“Corruption is operationally defined as the misuse of entrusted power for private gain”.
Also according to this organization, corruption can be separated into two types:
"according to rule" and “against the rule”. The first type is defined as “facilitation
payments, where a bribe is paid to receive preferential treatment for something that the
bribe receiver is required to do by law”. And the second one is “a bribe paid to obtain
services that the bribe receiver is prohibited from providing”. And also according to

Transparency International, corruption can cost in four aspects: economic, political,
social, and environmental costs. With more focusing on economic aspect, the
corruption can “lead to the depletion of national wealth”. Corruption leads to allocate
the national resources inefficiently. Corruption can cause uneconomic projects to take
place meanwhile economic projects are rejected. Corruption also breaks up the “fair
market structure” and “distort competition”. As a result corruption makes negative
economy. Moreover corruption makes political system become weaker. It destroys

8 
 


people’s trust in the political system. It makes instability in society. And with the
existence of corruption, projects damaging environment can be licensed. This will lead
to destroy living environment and natural resources.
In this paper we consider the impact of corruption on economic growth by direct and
indirect way. So corruption is also called the factor of growth. Basically on the
neoclassical growth theory, following the growth model of Solow, growth is a function
of capital and labor. Capital formation and labor force are the main factors of economic
growth. Moreover on researches about the determinants of growth, other factors have
been found out. Human capital is also the important factor of growth. Mankiw, Romer,
and Weil (1992), by cross-country data, found out human capital was the significant
factor of economic growth beside labor and physical capital. And Baro (1996) also
showed that initial level of GDP, human capital, government consumption, term of
trade, investment ratio were among the factors affecting growth. Moreover Alesina,
Ozler, Roubini, and Swagel (1992) found that political instability had negative effect
on economic growth. Generally economic growth is a complicated function of many
independent variables. In this paper we add one more determinant of growth. This is
corruption. However beside the direct impact of corruption on growth, we also
examine the indirect impact of corruption. Corruption makes links with growth by just

source factors of economic growth such as human capital, capital investment,
government size, trade openness, and political instability. Indirectly corruption affects
growth through these channels. In the following part we are going to represent some
researches about how corruption affects growth and its transmission channels.
2.2- PRACTICAL RESEARCHES
Like in Introduction part, we have stated that corruption can be good or bad for
economic growth. So we will break down this section into two parts. The first part is to

9 
 


review some papers that support for the positive effect of corruption on growth. And
the second part is of negative effect of corruption.
2.2.1- Corruption greases the wheels of growth
As in Meon and Weill (2008), the authors tested whether corruption is “grease” or
“sand” of economic growth. They examined the relationship among corruption,
aggregate efficiency, and the dimensions of governance across 54 countries (including
developed and developing countries) in period 1994-1997. With OLS method, the
result showed that in the countries with effective institution, corruption would have
negative effect; however in case of ineffective institution, corruption would have
positive effect. So, this paper came to conclusion of supporting for “grease the wheels”
hypothesis. According to this paper, with inefficient institutional countries, let
corruption being free would bring back benefit. However the authors also warned that
“country that would allow unfettered corruption may eventually find itself with an even
worse global institutional framework, and thus be caught in a bad governance/low
efficiency trap”.
Or in Kaouthar Gazdar (2012), the author also would like to test the hypothesis “grease
the wheels” of corruption. This paper examined the relationship among the corruption,
growth, and the quality of governance. 19 MENA countries in period of 1984-2010

were used in this paper as the data for analyzing. With the method of GMM, the author
found that in case of weak institutional framework, the corruption is less detrimental
for economic growth. The corruption is positive effect on economic growth in case of
low governance. The hypothesis was again supported by this paper.
2.2.2- Corruption is sand of the wheels of growth
Firstly Pak Hung Mo (2000) did a research about the relationship between corruption
and economic growth. He used data of 52 countries in period 1960-1985. He found that

10 
 


“1% increase in the corruption level reduces the growth rate by about 0.72% or,
expressed differently, a one-unit increase in the corruption index reduces the growth
rate by 0.545 percentage points”. And political instability is one of the top important
channels beside human capital, and investment channels. Political instability took 53%
of total effect on economic growth.
With the research “Does corruption grease or sand the wheels of growth?”, Pierre and
Khalid (2003) assessed the corruption’s effect on growth and investment. Panel data
from 71 countries in period time 1970-1998 was used in this research. The corruption
would have more and more negative impact on investment in case of inefficient
government and political instability. Same as investment, corruption also affected
negatively on economic growth. This result supported for the hypothesis of “corruption
sands the wheels of growth”.
Beside the impact of corruption on growth, Lorenzo Pellegrini and Reyer Gerlagh
(2004) also did the research about the transmission channels of corruption. They
examined four channels such as schooling, political instability, openness of trading,
and investment. Corruption had all negative effects on schooling, trade openness, and
investment. However corruption and political instability had positive relationship. The
final result confirmed that corruption had negative impact on economic growth.

Moreover Mina Baliamoune-Lutz and Léonce Ndikumana (2008) also examined the
impact of corruption on investment in African countries. Firstly they analyzed the
effect of investment on economic growth. After that they would research the impact of
corruption on investment. By that way they could have a better view about the effect of
corruption on growth through investment. The paper used the GMM method to
examine 33 African countries from 1982 to 2001. The result once again concluded that
investment had significant effect on economic growth. More important thing was that

11 
 


corruption also had negative impact on domestic investment. However corruption had
different effects on private investment and public investment. In aspect of private
investment, corruption had negative effect on it. But in view of public investment,
corruption had positive relationship with it.
And Aliyu and Elijah (2008) also did the research in Nigeria about the relationship
between corruption and economic growth. The authors used ECM method along with
time series data in period 1986-2007 to conduct research. The study showed that
corruption had negative impact on economic growth. Moreover it also explored that
corruption had negative relationship with human capital development. However
corruption went the same way with government capital expenditure.
Sriram Shankar (2009) conducted the paper to “model the transmission channels
through which corruption indirectly affects growth”. Five main transmission channels
he used in this research were investment, human capital, government size, openness,
and political instability. Data of 81 countries from 1984 to 2005 was chosen to
examine in this paper. Using system of equations methods he found that corruption had
negative effects on investment, human capital, and political instability. Through these
channels corruption hindered economic growth. However “corruption is found to foster
growth by reducing government consumption and, less robustly, increasing trade

openness”. In total, corruption had negative effect on economic growth.
And Ugur and Dasgupta (2011) have conducted the research about the impact of
corruption on economic growth in low income countries. The author has used metaanalysis method to analyze the findings of 72 empirical researches. The authors also
have examined the transmission channels of corruption to economic growth. The result
of this research showed that corruption put the significant effect on economic growth.
And another important thing was that corruption had negative impact on growth. This

12 
 


result also extended to non-low income countries. The corruption also had negative and
significant effect on growth in non-low income countries.

Without transmission

channels, the paper found out that the direct effect of corruption on non-low income
countries was higher than low income countries. So the authors concluded that
“corruption should be considered as an international problem with negative economic
consequences rather than as a problem specific to LICs only”.
All the above studies can be summarized like the following:

AUTHORS

METHOD

DATA

FINDING

Pierre Guillaume OLS
Meon
and
Laurent
Weill
(2008)

Panel,

54 corruption has positive effect on

countries,

Kaouthar Gazdar GMM

Panel, 19 MENA This paper supports for "grease the

(2012)

countries,

1997

1994- growth

in

case

of

inefficient

institutional framework

1984- wheels" of growth of corruption.

2010
Pak Hung Mo OLS

Panel,

52 Corruption had negative effect on

(2000)

countries,
1985

1960- growth. political instability is one of
the top important channels beside
human

capital,

and

investment

channels

Pierre

and OLS

Khalid (2003)

Panel data from 71 The corruption would have more and
countries in period more negative impact on investment
in case of inefficient government and

13 
 


time 1970-1998

political instability. corruption also
affected negatively on economic
growth

Lorenzo

OLS, 2SLS

Pellegrini
Reyer

Cross countries

and

Corruption had all negative effects
on schooling, trade openness, and

Gerlagh

investment.

(2004)

political

But

corruption

instability

had

relationship.
confirmed

The
that

and

positive

final

result

corruption

had

negative impact on economic growth
Mina

GMM

33

African corruption also had negative impact

Baliamoune-Lutz

countries

and

1982 to 2001

Léonce

from on domestic investment and growth

Ndikumana

(2008)
Aliyu and Elijah ECM

Time series data in Corruption had negative relationship

(2008)

period 1986-2007 with human capital development.
in Nigeria

However corruption went the same
way

with

government

capital

expenditure and growth
Sriram
(2009)

Shankar System
equations

of Data

of

countries
1984 to 2005

81 Corruption had negative effects on
from investment,

human

capital,

and

political instability. "corruption is
found to foster growth by reducing

14 
 


government consumption and, less
robustly, increasing trade openness"
Ugur

and Meta-

Dasgupta (2011)

Corruption

analysis

had

negative

and

significant impact on growth. And
without transmission channels, the
paper found out that the direct effect
of corruption on non-low income
countries

was

higher

than

income countries
Table 2.1: Summary of literature reviews

Most of these practical researches used data of all countries on the world (except Mina
Baliamoune-Lutz and Léonce Ndikumana (2008) using African countries). And
popular method of examining is OLS. Some studies used 2SLS, GMM, ECM, system
of equations. As a result, most findings showed that corruption had total negative effect
on economic growth. However there are still some papers supporting for the hypothesis
“grease the wheels of growth” of corruption such as Meon and Weill (2008) and
Kaouthar Gazdar (2012). It means that in reality there are some cases where corruption
has positive relationship with economic growth.

15 
 

low


CHAPTER 3: CONCEPTUAL FRAMEWORK

The effect of corruption on economic growth will be divided into two parts. Firstly that
is direct effect of corruption on growth. Secondly that is indirect effect through
transmission of corruption on economic growth. This chapter will help us figure out
generally how corruption affects economic growth through direct and indirect ways.
3.1- DIRECT EFFECT
In this paper we consider effect of corruption on growth through two ways. The first
way is direct and the second way is indirect. There are not many papers finding out
direct effect of corruption on growth is significant. As in Lorenzo Pellegrini and Reyer
Gerlagh (2004), the direct effect of corruption on growth is not significant. Effect of
corruption on growth mainly goes through indirect effects and transmission channels.
Insignificant direct effect of corruption does not mean that there is not existing of
direct effect of corruption. As in Dzhumashev (2009), the author proved the significant
direct effect of corruption. In this paper corruption affects directly growth by
“distorting the publicly provided productive externality and by deteriorating the overall
business climate and perpetuating bad expectations about economic opportunities”. So
corruption affects negatively growth by direct way.
So according to the paper of Dzhumashev (2009), we expect that in this paper direct
effect of corruption on economic growth will be negative (corruption will inhibit
growth directly).

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3.2- INDIRECT EFFECTS
In this section we would like to find out how corruption affects economic growth by
the transmission channels. So first in this section we will list out and describe these
channels.
According to Sriram Shankar and co-authors (2009), corruption will affect growth by
five transmission channels such as government size, capital investment, openness,
human capital, and political instability.
3.2.1- Government size
As in Sriram Shankar and co-authors (2009), there are two different ideas about the
impact of corruption on government size. On one way, corruption makes government
size increase. On the other way, corruption reduces government size.
To some officials, they can corruption by the way of extending the government
expenditure. By that way they have more opportunities to make the corruption. They
also allocate the budget inefficiently because of their corruption. For these officials
expending more and more governmental budget is an opportunity to take more
corruption.
However for some other officials, narrowing public expenditure is the way to take
more corruption. They report lower budget that is available for consumption in order to
using more part of this budget or take corruption under various forms. Under this way,
limiting government size creates opportunities for take corruption.
So here it is up to every specific case to have a negative or positive effect of corruption
on government expenditure. This effect will result from empirical examination.

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