Corruption's Effect on Growth and its Transmission Channels

Abstract

SUMMARY: A common finding of recent theoretical and empirical literature is that corruption has a negative effect on economic growth. In the paper, through growth regression analysis, we estimate the direct and indirect effects of corruption on economic growth. The indirect transmission channels, specifically investments, trade policy, schooling, and political stability, analysed in our study prove to be significant in explaining the deleterious effect of corruption on growth rates. We find that one standard deviation increase in the corruption index is associated with a decrease in investments of 2.46 per centage points, which in turn decreases economic growth by 0.34 per cent per year. The second, by importance, transmission channel is openness: a standard deviation increase in the corruption index is associated with a decrease of the openness index by 0.19, resulting in a decrease in economic growth by 0.30 percent per year. Jointly, the transmission channels explain 81 per cent of the effect of corruption on growth. While combating corruption is a long‐term task, an understanding of the transmission channels, through which corruption affects the economy, may suggest ways to limit corruption's negative, but indirect, effects on growth.