Does Corruption Affect Growth? Essay Example

Does corruption affect growth?

“Does corruption affect growth?” This is the primary question Paolos Mauro and Mshfiq Swaleheen attempt to answer. Both authors argue that it does impact growth but for different reason. Mauro initially entertains the notion that corruption can improve economic growth through creating what he calls “fast money” that can cut through bureaucracy. He later dispels this notion and finds that effect corruption has on diminishing foreign direct investments is so substantial that it counters any positive benefits that might arise from it (Maruo, pp.681). His argument is further supported by Freckleton, Wright, and Craigwell who come to the same conclusion using a sound econometric model to prove the finding. Swaleheen, on the other hand, finds that corruption negatively impacts economic growth but he attributes it to internal factors. The author utilizes an econometric model that reveals the negative impact is caused by the sphere of influence manipulation that occurs when public officials abuse corrupt systems of government to impact the way economies are structured. Both authors argue that how vulnerable the economy and government are to corruption plays a significant role in just how much the growth is influenced. They also argue that reliable econometric models are hard to come by in assessing the depth of corruption from case to case.

In Mauro’s 1995 study on corruption and growth the author attributes the relationship corruption has with foreign direct investment is the primary cause of a decline in economic growth. Swaleheen’s study focuses primarily on endogenous corruption and ultimately internal factors that influence economic growth. In this way, he does not take the same approach as Mauro attributing the impact to foreign influences.  The author notes that, “the incidence of corruption and its effect on output and growth are influenced by how the market for corruption is organized and by the nature of services provided by public officials” (Swaleheen, pp.28). The author further points out that it largely depends on how reliant the particular economy of a region is on public officials. For example, instances where public official utilize their sphere of influence to monopolize power and authority corruption can be extremely harmful to growth (Swaleheen, pp.28). On the other hand, in situations where public officials do not have authority that can be expanded into greater spheres of influence, like they provide services such as granting licenses for business in a particular sector, the impact is not as relevant. The econometric model the author uses is shown below:

Fig1: Structural Econometric Model (Swaehen, pp.27)

In Swaehen’s econometric model, g identifies the real capita GDP growth rate and CORR symbolizes incidents of corruption. The primary education enrollment rate (PEDU), the growth rate of population (POP), and secondary education (SEDU) are all accounted for using the variable X¹; while the X² variable accounts for POLSTAB (political stability), INV (investment-GDP ratio), OPEN (the trade-GDP ratio), and GE (government expenditure as a share of GDP). The main reason why this econometric model is effective is that it accounts for the varying nature of corruption from case to case. Swaehen is keen to note that due to the fact that corruption happens in private, it is not easily observable. This means that in order to assess its impact on economic growth, reliable measures must be assessed that can account for the depth and frequency of corruption across countries over time (Swaehen, pp.30).

Méndez and Facundo take a look at how political regimes can impact these factors. The authors find that corruption and its effect is not independent of alternative political and institutional elements. They state that this is important because, “by itself as it suggests that corruption might not be an inherent evil of developing economies but the consequence of other government policies, or socio-political circumstances; and thus, that public policies designed to eliminate corruption alone might not be optimal for growth” (Mendez and Facundo, pp.97). In Freckleton, Wright, and Craigwell’s study on economic growth, foreign direct investment, and corruption the authors support Mauro’s claim that corruption impacts the nature of foreign direct investment of countries, which in turn negatively impacts the economic growth of that country. The authors come to this conclusion using the following econometric model:

(Freckleton, Wright, and Craigwell, pp.643)

Using the above model, the authors find that real GDP output is largely reliant on the level of institutional corruption as it impacts the access investors and vital sectors have to resources. Ultimately the finding of their stud is that lower levels of corruption have a much greater influence on foreign direct investment in developing countries than it does in developed ones (Freckleton, Wright, and Craigwell, pp.643).

Conclusion

In sum, I think the arguments and findings of all four studies make sense. Popular consensus shares the belief that there is some level of corruption within all governments that in some way contribute to health economies. It makes perfect sense that in large developed countries where some level of corruption might assist economic growth on the surface to progress, the same level of corruption could completely cripple an economy in a developing country from achieving the foreign direct investment it needs to survive. In this regard, both Mauro and Swaleheen make sound arguments that when cross analyzed are applicable to the discussion as a whole.

Work Cited

Freckleton, Marie, Allan Wright, and Roland Craigwell. “Economic growth, foreign direct investment and corruption in developed and developing countries.” Journal of economic studies 39.6 (2012): 639-652.

Mauro, Paolo. “Corruption and growth.” The quarterly journal of economics (1995): 681-712.

Méndez, Fabio, and Facundo Sepúlveda. “Corruption, growth and political regimes: cross country evidence.” European Journal of Political Economy 22.1 (2006): 82-98.

Swaleheen, Mushfiq. “Economic growth with endogenous corruption: an empirical study.” Public Choice 146.1-2 (2011): 23-41.