Department of “Duh”: Corruption Not Good For Growth

Believe it or not, the empirical evidence on the effect of corruption on economic growth isn't clear. The same can also be said for democracy and democratic institutions. In a new article on VoxEU, Campos and Dimova review the literature (excerpts):

Corruption does sand the wheels of growth

Does corruption sand or grease the wheels of economic growth? This column reviews recent research that uses meta-analysis techniques to try to provide more concrete answers to this old-age question. From a unique, comprehensive data base of 460 estimates of the impact of corruption on growth from 41 studies, the main conclusion that emerges is that there is little support for the “greasing the wheels” hypothesis…

…Those in favour of the greasing hypothesis argue that corruption facilitates trade that may not have happened otherwise and that it promotes efficiency by allowing private sector agents to circumvent cumbersome regulations...

…Opponents of this view, meanwhile, have built a solid theoretical rebuttal by arguing that the greasing effect of corruption is only possible as a second best option in a bad institutional setting...

...Yet the empirical evidence on the economic consequences of corruption is still inconclusive...For example, the literature still provides support to phenomena such as the so-called Asian paradox (a positive correlation between corruption and growth in a number of fairly successful Asian economies, including China) even after accounting for the crucial intermediate effect of institutions that shape the more recent versions of the greasing the wheels hypothesis...

...For the sample as a whole, we find evidence for a bias in favour of negative and statistically significant results but different methodologies generate conflicting answers as to whether the bias is so severe as to obscure a genuine relationship between corruption and growth. The ambiguity recedes somewhat when the data is split into samples of published and unpublished papers. The results from the various techniques support the view that despite the bias, published research unveils a genuine negative relationship between corruption and growth and, interestingly, that is not the case among results in unpublished research...

...The cross-country macro-econometric evidence provides rather limited support to the view that corruption greases the wheels of growth, with trade openness and institutional quality appearing to be crucial factors in mediating the effects of corruption on growth. In terms of future research, both data quality and the standards of the econometric modelling remain huge concerns in this area.

What’s interesting (to me anyway) is the methodological criticisms that the authors offer. For instance, quite a few of the papers sampled in this survey use Transparency International data, which doesn’t measure actual corruption, but rather the perception of corruption. That’s a fine distinction to make, but one that could fatally undermine any conclusions made about corruption’s real impact.