Government spending, corruption and economic growth

d'Agostino, Giorgio and Dunne, Paul J. and Pieroni, Luca (2012): Government spending, corruption and economic growth.

Abstract

This paper considers the effects of corruption and government spending on economic growth. It starts from an endogenous growth model and extends it to account for the detrimental effects of corruption on the potentially productive components of government spending, namely military and investment spending. The resulting model is estimated on a sample of African countries and the results show, first, that the growth rate is strongly influenced by the interaction between corruption and military burden, with the interaction between corruption and government investment expenditure having a weaker effect. Second, allowing for the cyclical economic fluctuations in specific countries leaves the estimated elasticities close to those of the full sample. Third, there are significant conditioning variables that need to be taken into account, namely the form of government, political instability and natural resource endowment. These illustrate the cross country heterogeneity when accounting for quantitative direct and indirect effects of key variables on economic growth. Overall, these findings suggest important policy implications.

• Item Type: MPRA Paper
• Language: English
• Keywords: corruption; military spending; development economics; panel data; Africa
• Subjects: D - Microeconomics > D7 - Analysis of Collective Decision-Making > D73 - Bureaucracy ; Administrative Processes in Public Organizations ; Corruption; H - Public Economics > H5 - National Government Expenditures and Related Policies; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O57 - Comparative Studies of Countries

References

Acemoglu, D. and Verdier, T. (1998), ‘Property rights, corruption and the allocation of talent: A general equilibrium approach’, Economic Journal 108(450), 1381–1403.

Ahn, S. C. and Schmidt, P. (1995), ‘Efficient estimation of models for dynamic panel data’, Journal of Econometrics 68(1), 5–27.

Ahn, S. C. and Schmidt, P. (1997), ‘Efficient estimation of dynamic panel data models: Alternative assump- tions and simplified estimation’, Journal of Econometrics 76(1-2), 309–321.

Aidt, T. S. (2003), ‘Economic analysis of corruption: a survey’, Economic Journal 113(491), 632–652.

Alesina, A. (1996), ‘Political instability and economic growth’, Journal of Economic Growth 1(2), 189–211.

Alexeev, M. and Conrad, R. (2009), Assessment of tax reform results in russia: Comparative analysis, Working Papers - Unpublished 0001, Gaidar Institute of Economic Policy, Moscow, Russia.

Arellano, M. and Bond, S. (1991), ‘Some tests of specification for panel data: Monte carlo evidence and an application to employment equations’, Review of Economic Studies 58(2), 277–97.

Arellano, M. and Bover, O. (1995), ‘Another look at the instrumental variable estimation of error-components models’, Journal of Econometrics 68(1), 29–51.

Auty, R. M. (2001), ‘The political economy of resource-driven growth’, European Economic Review 45(4- 6), 839–846.

Barro, R. J. (1990), ‘Government spending in a simple model of endogenous growth’, Journal of Political Economy 98(5), S103–26.

Barro, R. J. (1991), ‘Economic growth in a cross section of countries’, The Quarterly Journal of Economics 106(2), 407–43.

Barro, R. J. (1999), ‘Notes on growth accounting’, Journal of Economic Growth 4(2), 119–37.

Baum, C. F., Schaffer, M. E. and Stillman, S. (2003), ‘Instrumental variables and gmm: Estimation and testing’, Stata Journal 3(1), 1–31. Besley, T. J. and

Kudamatsu, M. (2007), Making autocracy work, CEPR Discussion Papers 6371, C.E.P.R. Discussion Papers.

Blomberg, S. B. (1996), ‘Growth, political instability and the defence burden’, Economica 63(252), pp. 649–672.

Blundell, R. and Bond, S. (1998), ‘Initial conditions and moment restrictions in dynamic panel data models’, Journal of Econometrics 87(1), 115–143. 36

Bond, S. (2002), Dynamic panel data models: a guide to microdata methods and practice, CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.

Brunnschweiler, C. N. and Bulte, E. H. (2009), ‘Natural resources and violent conflict: resource abundance, dependence, and the onset of civil wars’, Oxford Economic Papers 61(4), 651–674.

Chang, R., Kaltani, L. and Loayza, N. V. (2009), ‘Openness can be good for growth: The role of policy complementarities’, Journal of Development Economics 90(1), 33–49.

Collier, P. and Hoeffler, A. (2009), ‘Testing the neocon agenda: Democracy in resource-rich societies’, Euro- pean Economic Review 53(3), 293–308.

d’Agostino, G., Pieroni, L. and Dunne, J. P. (2011), Corruption, military spending and growth, Discussion Papers 1103, University of the West of England, Department of Economics.

De La Croix, D. and Delavallade, C. (2007), ‘Corruption et allocation optimale de l’investissement public’, Revue conomique 58(3), 637–647.

De La Croix, D. and Doepke, M. (2009), ‘To segregate or to integrate: Education politics and democracy’, Review of Economic Studies 76(2), 597–628.

Deaton, A. and Miller, R. (1996), ‘International commodity prices, macroeconomic performance and politics in sub-saharan africa’, Journal of African Economies 5(3), 99–191.

Delavallade, C. (2005), ‘Corruption and distribution of public spending in developing countries’, Journal of Economics and Finance 30(2).

Delavallade, C. (2007), Why do north african firms involve in corruption ?, Documents de travail du Centre d’Economie de la Sorbonne v07002, Universit ́e Panth ́eon-Sorbonne (Paris 1), Centre d’Economie de la Sorbonne.

Devarajan, S., Swaroop, V. and Heng-fu, Z. (1996), ‘The composition of public expenditure and economic growth’, Journal of Monetary Economics 37(2-3), 313–344.

Dollar, D. and Kraay, A. (2004), ‘Trade, growth, and poverty’, Economic Journal 114(493), F22–F49.

Dreher, A. and Herzfeld, T. (2005), The economic costs of corruption: A survey and new evidence, Public Economics 0506001, EconWPA.

Gleditsch, K. S. and Ward, M. D. (1997), ‘Double take: A reexamination of democracy and autocracy in modern polities’, The Journal of Conflict Resolution 41(3), pp. 361–383.

Goldsmith, B. (2003), ‘Bearing the defense burden, 1886-1989: Why spend more?’, Journal of Conflict Resolution 47, 551–573. 37

Gupta, S., de Mello, L. and Sharan, R. (2001), ‘Corruption and military spending’, European Journal of Political Economy 17(4), 749–777.

Hewitt, D. (1992), ‘Military expenditures worldwide: Determinants and trends, 19721988.’, Journal of Public Policy 12, 105–152.

Hsiao, C. (2003), Analysis of Panel Data, Cambridge University Press. Huntington, S. P. (1968), Political Order in Changing Societies, New Haven, CT, Yale University Press.

Jong-A-Pin, R. (2009), ‘On the measurement of political instability and its impact on economic growth’, European Journal of Political Economy 25(1), 15–29.

Kaufmann, D., Kraay, A. and Mastruzzi, M. (2009), Governance matters viii : aggregate and individual governance indicators 1996-2008, Policy Research Working Paper Series 4978, The World Bank.

Kaufmann, D., Kraay, A. and Mastruzzi, M. (2010), The worldwide governance indicators : methodology and analytical issues, Policy Research Working Paper Series 5430, The World Bank.

Levine, R. and Renelt, D. (1992), ‘A sensitivity analysis of cross-country growth regressions’, American Economic Review 82(4), 942–63.

Loayza, N. V., Oviedo, A. M. and Serven, L. (2005), The impact of regulation on growth and informality - cross-country evidence, Policy Research Working Paper Series 3623, The World Bank.

Mankiw, N. G., Romer, D. and Weil, D. N. (1992), ‘A contribution to the empirics of economic growth’, The Quarterly Journal of Economics 107(2), 407–37.

Mariani, F. (2007), ‘Migration as an antidote to rent-seeking?’, Journal of Development Economics 84(2), 609–630.

Mauro, P. (1995), ‘Corruption and growth’, The Quarterly Journal of Economics 110(3), 681–712.

Mauro, P. (1997), Why worry about corruption?, MF Economic Issues 6, International Monetary Fund.

Mauro, P. (1998), ‘Corruption and the composition of government expenditure’, Journal of Public Economics 69(2), 263–279.

Mo, P.-H. (2001), ‘Corruption and economic growth’, Journal of Comparative Economics 29(1), 66–79.

Morekwa, N. E. and Schoeman, N. J. (2006), The determinants of the structure of public spending in africa, in ‘11th annual conference of the african econometrics society, The United Nations African Institute for Economic Development and Planning’.

Ndulu, B. J., O’Connell, S. A., Bates, R. H., Collier, P., Soludo, C. C., Azam, J.-P., Fosu, A. K., Gunning, J. W. and Njinkeu, D., eds (2007), The Political Economy of Economic Growth in Africa, 1960-2000, Vol. 2, Cambridge University Press.

Pellegrini, L. and Gerlagh, R. (2004), ‘Corruption’s effect on growth and its transmission channels’, Kyklos 57(3), 429–456.

Raddatz, C. (2007), ‘Are external shocks responsible for the instability of output in low-income countries?’, Journal of Development Economics 84(1), 155–187.

Rao, V. (1984), ‘Democracy and economic development’, Studies in Comparative International Development 19, 67–81.

Roodman, D. (2009), ‘A note on the theme of too many instruments’, Oxford Bulletin of Economics and Statistics 71(1), 135–158.

Rose-Ackerman, S. (n.d.), Corruption and the Global Economy, Institute for International Economics, Wash- ington, D. C., chapter The Political Economy of Corruption, pp. 31–60.

Sandler, T. and Keith, H. (1995), The Economics of Defense, Cambridge University Press. Sargan, J. D. (1958), ‘The estimation of economic relationships using instrumental variables’, Econometrica 26(3), pp. 393–415.

Shleifer, A. and Vishny, R. W. (1993), ‘Corruption’, The Quarterly Journal of Economics 108(3), 599–617.

Svensson, J. (2005), ‘Eight questions about corruption’, Journal of Economic Perspectives 19(3), 19–42.

Tanzi, V. (1998), Corruption around the world - causes, consequences, scope, and cures, IMF Working Papers 98/63, International Monetary Fund.

Tauchen, G. (1986), ‘Statistical properties of generalized method-of-moments estimators of structural pa- rameters obtained from financial market data’, Journal of Business & Economic Statistics 4(4), 397–416.

Tornell, A. and Lane, P. R. (1998), ‘Are windfalls a curse?: A non-representative agent model of the current account’, Journal of International Economics 44(1), 83–112.

van der Ploeg, F. (2006), Challenges and opportunities for resource rich economies, CEPR Discussion Papers 5688, C.E.P.R. Discussion Papers.