Tài liệu The effect of corruption on economic growth in southeast asia countries

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE EFFECT OF CORRUPTION ON ECONOMIC GROWTH IN ASIAN COUNTRIES BY LE KIM DUNG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, Dec 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE EFFECT OF CORRUPTION ON ECONOMIC GROWTH IN ASIAN COUNTRIES A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY LE KIM DUNG Academic supervisor Dr. TRUONG DANG THUY HO CHI MINH CITY, Dec 2016 I. CERTIFICATION I confirm that this paper, namely “The effect of corruption on economic growth in Asian countries” is my own work. Where material has been used from other sources it has been properly acknowledged and referenced. If this statement is untrue I understand that I will have committed an assessment offence. I have read the Regulations of Vietnam – Netherlands Programme for M.A In Development Economics and I am aware of the potential consequences of any breach of them. Signature: Name: Le Kim Dung Date: Ho Chi Minh City, Dec 2016 II. ACKNOWLEDGEMENT I would like to express my gratitude to interesting and extensive Vietnam– Neitherlands Master Program in Development Economics, as well as honest thanks to many people who built and developed this program such as management board, lecturers, tutors, and librarians. Fulfillment this course, I acquired useful knowledge, approached new things, were straightforward to expess ideas. I would like to extend my special thanks to Dr. Truong Dang Thuy, the academic supervisor who always read and correct my thesis carefully. His valuable comments, guidances, and encouragement help me to improve the quality of my thesis and complete it timely. I also would like to take this opportunity to express my thanks to Dr. Nguyen Trong Hoai, Dr. Pham Khanh Nam, other professors, tutors and course co-instructors of Economics University who, through their valuable lectures and advices, help me during the course. Finally, many thanks and gratefulness are given to my dear family, my warm friends for their encouragement in many ways that strongly support me during my study stage. III. CONTENTS Certifications……………………………………………………………………………….. I Acknowledment...................................................................................................................... II Contents………………………………………………………………………………… III List of tables………………………………………………………………………………. IV List of figures.......................................................................................................................... V Abstract………………………………………………………………………………… 1 CHAPTER 1: INTRODUCTION............................................................................................ 2 1.1 Research problem ................................................................................................................ 2 1.2 Research objectives and research questions ........................................................................ 5 1.2.1 Research objectives .................................................................................................... 5 1.2.2 Research questions ..................................................................................................... 5 1.3 Thesis Structure ................................................................................................................... 5 CHAPTER 2: LITERATURE REVIEW ............................................................................... 7 2.1 Theoretical concepts related to economic growth and corruption ........................................ 7 2.2 Effect of corruption on economic growth: theoretical literatures ......................................... 9 2.3 Effect of corruption on economic growth: empirical studies ............................................ 11 2.3.1 The single equation approach ................................................................................... 11 2.3.2 The system of equations approach ........................................................................... 13 CHAPTER 3: METHODOLOGY AND DATA .................................................................. 21 3.1 General methods ................................................................................................................. 21 3.1.1 Conceptual framework for the study ........................................................................ 21 3.2 Research models and econometric methodology................................................................ 25 3.2.1 Research models ....................................................................................................... 26 3.2.2 Econometric methodology: ....................................................................................... 29 3.3 Data .................................................................................................................................... 31 CHAPTER 4: ESTIMATION RESULT ANALYSIS AND DISCUSSION ...................... 34 4.1 Descriptive statistics analysis on the dataset ...................................................................... 34 4.2 Regression results and discussion ....................................................................................... 42 4.2.1 Effects of corruption on economic growth directly.................................................. 42 4.2.2 Effects of corruption on economic growth indirectly through transmitions channels .................................................................................................................................... 44 CHAPTER 5: CONCLUSION, LIMITATION AND FUTURE RESEARCH ................. 52 5.1 Conclusion ......................................................................................................................... 52 5.2 Limitations and future research ......................................................................................... 52 5.2.1 Limitations ................................................................................................................ 52 5.2.2 Suggestion for future research .................................................................................. 53 REFERENCES…………………………………………………………………….…...55 APPENDIX Appendix A : Summary of empirical studies………………………………….…….63 Appendix B : Sample of countries.………………………………………………….68 Appendix C : Regression results…………………………………………………….69 IV. LIST OF TABLES Table 1: Expected sign of selected variables………………………….………….……….25 Table 2: Model specification of growth and transmission channel equations……….……29 Table 3: Summary of Variables ……………………………………………….…………32 Table 4: Descriptive statistics and correlations of selected variables………….………….36 Table 5: Correlations of selected variables…………………………………….………….37 Table 6: Results of Pooled OLS, Fixed effect model (FEM), and Random effect model (REM) in GDP regression model (Model 1)………………………………………………42 Table 7: Results of 3SLS regression in a system of structural equations…………………46 Table 8: Consequence of Corruption on Economic growth through transmission channels………………………………………………………………………………..…..47 V. LIST OF FIGURES Figure 1: The effect of Corruption on Economic growth………………………………….21 Figure 2: Scatter graph between Economic growth (GDP) and Corruption (CPI)………...37 Figure 3: Scatter graph between Economic growth (GDP) and Political Instability (PI)…………………………………………………………………………………………38 Figure 4: Scatter graph between Economic growth (GDP) and Investment (I)…………..38 Figure 5: Scatter graph between Economic growth (GDP) and Human Capital (HC)……39 Figure 6: Scatter graph between Economic growth (GDP) and Trade Openness (OPEN)..39 Figure 7: Scatter graph between Economic growth (GDP) and Government Expenditure (GOV)…………………………………………………………………………………..…39 Figure 8: Scatter graph between Corruption (CPI) and Investment (I)………………...…40 Figure 9: Scatter graph between Corruption (CPI) and Human Capital (HC)………….…40 Figure 10: Scatter graph between Corruption (CPI) and Political Instability (PI)……...…41 Figure 11: Scatter graph between Corruption (CPI) and Government Expenditure (GOV)41 Figure 12: Scatter graph between Corruption (CPI) and Trade Openness (OPEN)……….41 ABSTRACT Many theoretical and empirical studies suggest that economic growth depends on various factors such as physical capital, human capital, openness to trade, macroeconomic conditions, corruption perceptions, education, and population growth. This study focuses on summarizing these studies and examining the total impact of corruption on economic growth. Based on panel data included thirty Asian countries over the observation period 1996-2014, this paper applies both ordinary least square (OLS) technique and three-stages least square (3SLS) technique to determine how corruption impacts on economic growth directly and indirectly through five possible transmission channels: investment, human capital, political instability, government expenditure, and the openness of international trade. In consistency with findings of the previous empirical researches, this paper concludes that the effect of corruption on the economic development of thirty Asian countries is significantly negative. Keywords: economic growth, corruption, investment, human resource, political instability, government expenditure, openness to trade. LE KIM DUNG Page 1 CHAPTER 1: INTRODUCTION 1.1 Research problem During the past few decades, various researchers have tried to identify what are the most important determinants of economic growth, and why some nations have experienced quick long-term income growth rates while others have not. A fundamental cause for this study is the lack of a final agreement about the engine of growth because there are many factors that influence the development of the economy. Indeed, two most popular growth theories, the neoclassical growth theory by Solow (1956) with the cruciality of investment activities and the endogenous growth theory by Romer (1986) and Lucas (1988) focusing on labor and the capacity of innovation lead to various extensions and country developments later. These developments raise a big discussion about the most important sources of growth. While some researchers refer to factors such as labor, capital, investment, technological progress, government spending, and openness of trade economic freedom; the others are referring to institutions, democracy, rule of law, geography factors, and corruption. In searching for the important growth determinants, a lot of economists focus on corruption, for example, Left (1964), Becker (1968), Lui (1985), Manion (1996), Kaufmann and Wei (1999), Haque and Kneller (2009), Mohamed Dribi (2013), Diaby and Sylwester (2014), Pak Hung Mo (2014). Even then, their lituratures have not approached to the last concord about the effects of corruption on economic growth. Some papers stated that with a suitable level of corruption, the correlation between corruption and economic development is positive. In the country that has wordiness, sophisticated, unclear administrative procedures, corruption is needed for completing an economic operation quickly such as building a house, application for licenses, organizing a company. It can shorten businessman wasting time for queuing in line and paperwork (Lui, 1985). The “efficient grease” hypothesis stated that corruption improve economic effiency, and firms give more bribes should have approach capital with lower cost easily. Corruption is also a side effect of an LE KIM DUNG Page 2 emerging country and a free open market economy. Manion (1996) clarified that: to avoid costly delays, applicants make corrupt overpayments to officers for enterprise licenses to which they are fully entitled. In making such payments, bureaucrats enhance their income base. When administration staff have high income, they spend more for goods and services so the economy will grows. In addition, undeveloped states can not deal with corruption without having achieved the high level of economic development necessary. If not, the governmet will spend a lot of labor force, time, and money to reduce corruption. However, a numerous evidences on significant negative corellation between corruption and economic growth are showed in many empirical researches after managing the vital determinants of economic like government expenditure, human capital, trade openness, investment, political instability, including Mauro (1995), Mauro (1996), Pak Hung Mo (2001), Pellegrini and Gerlagh (2004), Lorentzen, Mc Milan and Wacziarg (2008), Pellegrini (2011), Marie Chene (2014). For instance, the causual association between corruption and growth has been investigated in the study of Mohamed Dridi (2013) by employing the Channel Methodology (method which was developed by Tavares and Wacziarg in 2011). Based on cross-country data including 82 developed and developing countries for a period of 1980-2002, the author found that corruption affects the economic growth negatively. The empirical result indicated that one point increased in the corruption index will generate 0.9 percent decreased in the annual growth rate via human resources, government spending, investment, inflation, political condition, and openness. The paper futher concluded that human resources and political situation are the most crucial transmission channel through which corruption transmits its negative impact on economic growth. Unlike Mohamed Dridi, Mo (2001) used the decomposition method and found that the political instability accounts for 53 percent of the total corruption effect on growth. Furthermore, using cross-coutry regression, Mauro (1996) showed the strong negative effects of corruption on growth in 94 countries with observations period from 1960 to 1985. Mauro (1996) concluded that LE KIM DUNG Page 3 corruption reduces investment, especially in private sector, and declines the government expenditures in developing education seen as the vitual element of growth. With the data from Global Competiveness Report Serveys in the year 1996 and 1997, based on Stackelberg game theory, Kaufmann and Wei (1999) checked the relationship between bribe payment and effective bureaucratic molestation. They found that no evidences support for the “speed money” hypothesis, expressed differently, they refuted “efficient grease” thesis, so corruption reduces economic growth. Besides, the correlation between corruption and economic growth is still uncertain in some findings from previous papers (Andvig and Moene, 1990; Ehrlich and Lui, 1999; Aidt et al, 2008; Haque and Kneller, 2009; Leite and Weidmann, 1999). By employing Threshold model with 54 developed and developing countries data set observed from 1980 to 2003, Haque and Kneller (2009) stated about Threshold effects. Firstly, there is existence of a strong mutual negative relationship between corruption and economic growth. Secondly, corruption is changeable and this relationship depends on the culture of corruption, any changes in culture tends to the destruction of the threshold. Thirly, because of almost resources belongs to the state, government principally concerns with corruption, so development traps move up. Ehrlich and Lui (1999) also showed the non-linear correlation between corruption and economic growth. Therefore, in contributing to the discussion, this thesis aims at providing a general look at the corruption and economic growth through revisiting the most popular theoretical and empirical studies. This study also re-examines the impacts of corruption on economic growth in Asian countries by applying various econometric techniques. A new data set is collected and analyzed by formulating some economic growth equations with possible transmition variables of corruption. The results will support further evidences on the casual relationship between corruption and growth. LE KIM DUNG Page 4 1.2 Research objectives and research questions 1.2.1 Research objectives This paper mainly focuses on the core objective is re-examining the effects of corruption on economic growth in Asian countries for the period from 1996 to 2014. This thesis tries to understand, identify, and explain how corruption will affect economic growth directly and indirectly via transmition channels in the sample. 1.2.2 Research questions As above mentioned, this thesis tries to address the relationship between corruption and economic growth. Therefore, the questions should be raised as follows: - Does corruption impact (promote or impede) the economic growth in Asian countries directly and indirectly? - How are corruption effects on economic growth via five possible transmission channels: investment, human capital, political instability, government expenditure, and openness to trade. 1.3 Thesis Structure This thesis is divided into five chapters. Chapter 1: Introduction presents numerous conclusions about the correlation between corruption and economic growth from various theoretical and empirical researches. Besides, it explains what vital objectives are, what research questions should be raised to answer in this paper. Chapter 2: Literature review provides a general review of economic theories associated to the causal correlation between corruption and economic growth. This part describes theoretical framework and empirical studies consistent with this issue. In addition, the definitions of the variables used in the model are mentioned in this chapter. Chapter 3: Methodology is concerned about the general methods and how to check effects of corruption on economic growth directly and indirectly, which mainly involves in the following points: LE KIM DUNG Page 5 - analytical framework for the problem to be investigated - appropriate models with variables to be described for the issue - data sources and sample to be used to estimate the existence the corruption – economic development relationship - research methodology and technique for processing and analyzing data set. Chapter 4: Empirical Findings focuses on presenting the estimation results about influences of corruption on growth. Chapter 5: Conclusions, Limitation and Future research comes to the main findings achieved in the previous chapter. Accordingly, this part points out the limitations and further studies concerning the relationship between corruption and economic growth.. LE KIM DUNG Page 6 CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical concepts related to economic growth and corruption Definition of economic growth Economic growth is an expansion in productive capacity of commodities and services, and average national income level in a period of time, compared with an another period (Perkins et. al., 2006, p. 12) In comparison of economic growth from two countries, Gross Domestic Product (GDP) or Gross National Product (GNP) are in common use. GDP and GNP can be caculated in nominal denomination, which includes inflation, or in real denomination, which is adjusted inflation. Theories of economic growth Despite the absence of a dominant theory, almost all economic growth researches argue that differences in level of income across the countries around the world are due to differences in factor endowment, factor productivity, technology, the combination of any two factors, or all the above. In the first growth theory, and perhaps the most popular theory, Solow (1956) found that capital has less contribution to economic growth than expected, leaving a large residual unexplained, even after taking account for effective labor. Besides the research of Solow, growth theory moved into two separate directions. In one direction, some economists raised concerns on the correctness of the aggregate production function employed by Solow. As one of the most notably researches within this direction, Lewis (1954) introduced his dual sector model which explained the economic growth by the transition of labor force between two sectors, from the traditional agriculture section to the modern industry section. In the other direction, many economists turned their attention to seeking an explanation of why the effect of exogenous technical change (Solow residual) being so large in reality, quite different from the theoretical prediction. In explaining why growth rates differ, they focused on the interactions of political and economic factors. The most LE KIM DUNG Page 7 notable works in this trend included the literature by Lucas (1988), Romer (1989), Mankiw, Romer, and Weil (1992). These efforts mainly tried to adjust labor for quality and led to various endogenous growth theories. Endogenous growth theories included some additional variables into the neoclassical production function of Solow such as human capital, R&D. By including human capital into the neoclassical production function, the cross section study by Mankiw, Romer and Weil (1992) has explained about eighty percent of the variation in the growth rate. Although endogenous growth theory has pointed some vitual elements of the Solow residual, Robert J. Barro (1991), Barro and his colleague (1995) has identified some another factors and used as a benchmark for subsequent empirical works. In details, these economists checked the significance of human resouces, government policies, quality of institution, trade openness, freedom, development aid, reforms of finance. Concept of corruption In term of definition, corruption is a complex phenomenon. Generally, corruption is the misuse of entrusted authority for extra positive personal benefit (Transparency International website). In term of typology, corruption divided into three categories as grand corruption, bureaucratic corruption and political corruption determined by the sector where it happens and how much money paid off. -Grand corruption (nearly the same meaning as political corruption) comprises about activities involving high level of public area that falsify government policies or the central operating of the nation. This kind of corruption is centralized and can affect all citizens in the country. -Bureaucratic corruption (or petty corruption) refers to the small amount of money which ordinary citizens pay for public bureaucrats to access basic commodities or sevices in places like public hospitals, schools, police departments, licensing authorities, taxing authorities, and other agencies. This type of corruption has also been called “low-level” or “street-level” corruption. It is decentralized that LE KIM DUNG Page 8 the exact bribes taken are not arranged. It just makes bureaucrats speed up the procedure or skip legal penalties. -Political corruption is defined as the situation in which political decision makers abuse their position to influence policies, organizations and processes in the allocation of public resources and investment in order to strengthen their jurisdiction, position and wealth. This type of corruption is also considered as having impact on the result of election voted by legislators. In term of measurement, the most popular corruption measures used in most empirical researches are the Corruption Perception Index (CPI), Bribe Payers Index (BPI), Global Corruption Barometer (GCB), and National Intergrity System assessments (NIS) recored by Transparency International institution; the Control of Corruption Index(CC) caculated by the Worldwide Governance Indicator group; the Corruption Index (CI) produced by the International country risk guide. CPI will be also employed in this study. This indicator has a limitation in scope. It just indicated perceptions of the extent of public sections corruption, such as administrative category, political category. 2.2 Effect of corruption on economic growth: theoretical literatures Owning to rent-seeking, queue model, and transaction cost theory, corruption has an effect on output through capital, labor, and other economic factors. It reduces productive work so declines actual wealth creation, losts government revenue, lowers income equality through inefficient allocation of resources includes capital and labor. - Rent Seeking: “Rent Seeking” is one of the most important concept involves in corruption. Gordon Tullock originated this concept in 1967, and it was introduced in 1974 by Anne Krueger. Klostad and Soreide (2009) stated that individuals and groups are said to seek rents when they try to get extra profits for themselves through the political arena instead of allocation their time and skills at the right way. LE KIM DUNG Page 9 Bade, R. and Parkin, M. (2013) supported that rent seeking activities as bribery, lobbying, and other political activities aiming to collect the benefits from international trading and get the profits during the process. Because of rent seeking culture (tariff on a good, restrictions on import, quota on import), the misallocation of resources makes a deadweight loss in which no-one can obtain surplus and social benefits decrease. Higher price leads to lower output. It means economic growth reduces. - Queue Model: Queueing theory was developed by Agner Krarup Erlang in 1909. This model is constructed to predict queue lengths and waiting time for a good or service. This model applied for companies, shops, offices, and hospitals. Lui (1985) developed this model to illustrate the circumstance in which bureaucrats issue business licenses to firms and grant privileged treatment to people who suborn the relevant administrators in order to expedite the proceduces. For example, if business entity would like to establish a company or set up a factory, there paperwork would be reduced and a license will be granted quickly and easily through bribery. It can express differently, corruption has a positive relationship with the growth rate. - Transaction Cost Theory: Lambsdorff (2002) metioned that transaction cost of legal contract include seeking partners and information costs, bargaining and determining appropriate contract condition costs, policing and enforcement of contract term costs. These costs of corruption agreements needs to be concealed. So, most corrupt contracts are discussed through broker. Lambsdorff (2002) also mentioned that if parochial corruption exists in a market to trade goods and services, the total transaction cost will rise because there need to be more expenses to find potential contractors. The accelerating costs come from searching potential partners, quality appraisal, product and individual ability evaluation as well as eagerness to abide by corrupted products. The search for partners will stop when the costs reaching marginal transaction cost of searching LE KIM DUNG Page 10 one additional partner, which is equal to the estimated profit generated from a potentially superior dealing with another competitor. This means that the higher the marginal transation cost is, the fewer potential collaborator to be sought. As a result, entrepreneur can save the capital and invest in another project. When the project continues, this will allow to hire more workers for system operations and enhance the productivity of goods and services. It enhances economic growth as well. 2.3 Effect of corruption on economic growth: empirical studies There are two approaches analyzing the impacts of corruption on growth. One is a single equation approach. The other is a system of equations approach. The former is done by introducing corruption variable into the growth function, which allow to estimate the total impacts. The latter uses a system of inter-related equations, which allow for separating the direct and indirect correlation of corruption on growth. 2.3.1 The single equation approach Corruption is a debatable issue that occurs all over the world regardless the nations are rich or poor, developed or undeveloped, democracy or dictatorship, socialistic or capitalistic. Many economists have tried to identify the correlation between corruption and economic growth, but their lituratures have not come to the final agreement yet. Some reseachers demonstrated that the suitable level of corruption has a positive effect on country development. Leff (1964) with “grease the wheel” hypothesis proved that corruption might raise economic growth because of removing government-imposed rigidities and interfering with other economic decisions favourable to growth. Lien (1986) with Competitive bribery game and Lui (1985) with Equiblirium queuing model also suggested that corruption may be enhance economic growth. In contrast, the concern about the bad impacts of corruption on economic growth has increased rapidly in both developing and developed countries. Various empirical studies have shown up on this issue, including Mauro (1995), Tanzi (1998), Aidt (2003), Akai N. et al (2005), Boris P. et al (2008). These studies LE KIM DUNG Page 11 suggested that private firms who win government’s contracts by high paying are not necessarily economically competitive firm and such un-optimal use of human resource will destroy economic growth. Moreover, private companies were often forced to make side-payments to corrupted government officials and that cost was often huge for small-scaled but emerging firms, which can be the driving force for growth of the economy. With the dataset of 21 Africa countries covering the period 1993-1999, Kwabena Gyimah-Brempong (2002) modified the growth equation in a linear form include corruption as an independent variable: g = αo + α1k + α2edu + α3x + α4corrupt+α5y0 +α6govcon + εi where: g: rate of economic growth of real income (dependent variable) εi : stochastic error term αi: coefficients to be estimated k (investment rate), edu (educational ettainment of the adult population), x (growth rate of real export), corrupt (corruption), govcon (government consumption), yo (initial level of income) are explanatory variables Employing OLS regression method, Kwabena Gyumah-Brempong (2002) concluded that corruption affects economic growth negatively and significantly. Using growth rates of GDP per capita for the period 1960-1985 (from Summers and Heston – 1988 dataset source) and Business International’s 1984 corruption index, Mauro (1995) applied a simple regression with instrumental variables (ethnolinguistic fractionalization) and also showed that the standard deviation of corruption index has negative correlation with the annual growth rate of GDP per capita significantly. But without control variables, this result is not robust. After controlling for other variables, including secondary education in 1960, government expenditure, assassinations, investment, political instability index, the effect of corruption on growth becomes insignificant. LE KIM DUNG Page 12