The Effects of Corruption on Growth, Investment, and Government Expenditure

WP/96/98-EA

The Effects of Corruption on Growth, Investment, and
Government Expenditure by Paolo Mauro


The study of the causes and consequences of corruption has a long
history in economics, dating back at least to the literature on rent
seeking. However, related empirical work has been rather limited, partly
because the efficiency of government institutions--and corruption, in
particular--cannot easily be quantified.

Renewed interest in the topic has recently led a number of researchers
to attempt to quantify the extent to which corruption permeates economic
interactions by using indices sold by private rating agencies. These
indices are typically based on the replies to standardized questionnaires
by consultants located in a variety of countries. In spite of a number of
data limitations, the indices provide a wealth of information that has
enabled researchers to obtain a number of interesting results.

This paper has two main goals. The first is to list a number of
possible causes and consequences of corruption, with an emphasis on those
links that have been or--at least in principle--could be investigated
through the use of cross-country regression analysis. Simultaneously,
the paper provides a synthetic review of recent studies that make use of
cross-country regressions on corruption. These studies provide tentative
evidence that corruption may have considerable, adverse effects on economic
performance, suggesting that it is important for policymakers to pay
attention to this phenomenon. More interestingly, identifying possible
causes of corruption may suggest a number of ways to curb it.

The second goal of this paper is to present further results on the
effects of corruption on investment and economic growth by using a larger
data set to expand the analysis of Mauro (1995) and to present new evidence
on the relationship between corruption and the composition of government
expenditure. Even though the results need to be interpreted with caution,
corruption is found to lower investment and economic growth and to alter
the composition of government expenditure, specifically by reducing the
share of spending on education.