Causes of corruption : an empirical investigation in a cross-country framework : a thesis presented in fulfilment of the requirements for the degree of Doctor of Philosphy in Economics, Massey University, Turitea campus, Palmerston North, New Zealand
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Date
2009
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Massey University
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Abstract
In recent years corruption has come to be considered as a pervasive phenomenon, and
a major obstacle in the process of economic development. However, there exist few
studies that discuss the factors that cause corruption and why some countries are more
corrupt than others. This research contributes to that rather scanty literature and
focuses on the causes of corruption. More importantly, the study empirically
investigates various causes of corruption, in particular the role of economic
development, democracy and economic freedom in explaining the observed variations
in corruption across countries, and the nexus between democracy and economic
freedom in combating corruption.
The study first tests the reliability of the recent quantitative innovations in the study of
corruption in terms of the Corruption Perception Index, constructed by Transparency
International. Using theoretical and empirical analysis, various hypotheses regarding
corruption and its determinants are examined using panel data for 100 countries during
the period 1995 to 2004. The empirical findings show that the subjective indexing
process of corruption perception eventually converges to a common consensus. In
evaluating the relationship between economic development and corruption, the results
suggest that income per capita, education, unemployment, income inequality,
economic freedom and democracy are among the factors which determine and help
explain the cross-country differences in corruption. Furthermore, the assessment of the
relationship between democracy and corruption shows that an ‘electoral democracy’,
represented by ‘political rights’, is not in itself sufficient to reduce corruption. Instead,
for low levels of corruption to exist, the presence of an advanced fully-formed mature
democracy is required.
A characteristic of a mature democracy is the existence of an environment where the
probability of being caught, if acting corruptly, is very high. In addition, the
examination of the interaction between economic freedom and democracy suggests
that economic freedom reduces corruption in any political environment, and the effect
is substantially larger with a high level of democracy. The interesting and important
findings of the analysis indicate that there exists a non-linear relationship between
corruption and the level of income as well as democracy. The findings suggest that
developed countries have succeeded in controlling corruption through higher levels of
economic development along with the economic and political freedoms that their
peoples enjoy.
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Keywords
Political corruption, Economic development, Economic freedom, Democracy