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Corruption and the Impact on the Economic
Growth
Shera, Adela . Journal of Information Technology and Economic Development ; Beverly Hills
Vol. 2, Iss. 1, (Apr 2011): 39-53.
ProQuest document link
ABSTRACT

Corruption, like cockroaches, has co-existed with human society for a long time. Corruption has received
significant attention among economists and international financial institutions during the last few decades, given
its implications for economic growth. There is an increasing volume of literature on the relationship between
corruption and economic growth, and the general conclusion is that corruption slows down the long-term growth
of an economy through a wide range of channels but also that it can have positive or beneficiary effect over
economic growth. It hampers economic growth, disproportionately burdens the poor and undermines the
effectiveness of investment and aid. Theoretical studies suggest that corruption may counteract government
failure and promote economic growth in the short run, given exogenously determined suboptimal bureaucratic
rules and regulations. As the government failure is itself a function of corruption, however, corruption should have
detrimental effects on economic growth in the long run. In this paper we will analyze and present: First, we will list
a number of possible causes and consequences of corruption, derived from a review of the recent empirical and
theoretical literature. Second, we will propose a model that can help explain the relationship between corruption
and the economic growth. In the third section, we will introduce several measures of corruption, certain empirical
correlations and their policy implications, we will then conclude in the last section.
FULL TEXT

Headnote
ABSTRACT
Corruption, like cockroaches, has co-existed with human society for a long time. Corruption has received
significant attention among economists and international financial institutions during the last few decades, given
its implications for economic growth. There is an increasing volume of literature on the relationship between
corruption and economic growth, and the general conclusion is that corruption slows down the long-term growth
of an economy through a wide range of channels but also that it can have positive or beneficiary effect over
economic growth. It hampers economic growth, disproportionately burdens the poor and undermines the
effectiveness of investment and aid. Theoretical studies suggest that corruption may counteract government
failure and promote economic growth in the short run, given exogenously determined suboptimal bureaucratic
rules and regulations. As the government failure is itself a function of corruption, however, corruption should have
detrimental effects on economic growth in the long run. In this paper we will analyze and present: First, we will list
a number of possible causes and consequences of corruption, derived from a review of the recent empirical and
theoretical literature. Second, we will propose a model that can help explain the relationship between corruption
and the economic growth. In the third section, we will introduce several measures of corruption, certain empirical
correlations and their policy implications, we will then conclude in the last section.
Keywords: Corruption, Economic Growth, Corruption Model, Investment, Bureaucratic Rules and Regulations.
(ProQuest: ... denotes formulae omitted.)
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INTRODUCTION
The significance of corruption lies in its ability to influence the very roots of an economy. Corruption erodes
property rights and so prospectively has significant consequences for both efficiency and equity. It strains political
institutions and thus also threatens democracy and the social, political, and economic benefits attributed to it. It is
often undertaken in secret and consequently complicates the nature of economic exchange. The academic
literature remains indefinite however about the impact of corruption on economic development. Some early
authors argued that corruption has the potential to improve efficiency and help growth. Leff (1964) and Huntington
(1968), for example, viewed corruption as the necessary -grease" to lubricate the stiff wheels of rigid government
administration. Similarly, other authors viewed corruption as working like piece-rate pay for bureaucrats, inducing a
more efficient provision of government services. Lui (1985) demonstrates how bribes can minimize the costs
associated with queuing and government labor, and consequently enhance the efficiency of public administration.
Beck and Maher (1986) show a similar result when even under imperfect information the lowest cost firm is always
the winner of a bidding procedure. More recently, Acemoglu and Verdier (1998) establish that in a situation where
public officials are required to uphold property rights and enforce contractual arrangements, the costs associated
with ensuring that public officials are not corrupt can be too high for the prevention of all corruption to be optimal.
The arguments above in favor of the efficiency effects of corruption are heavily dependent on static and partial
perspectives of the context in which corruption is taking place (Bardhan, 1997; Kaufmann, 1997; Kaufmann and
Wei, 1999; Seyf, 2001; Aidt, 2003). For instance, Myrdal (1968) points out that instead of speeding up procedures,
corrupt officials actually have an incentive to cause greater administrative delays in order to attract more bribes.
Thus, -efficient corruption" arguments ignore the enormous degree of discretion that bureaucrats have.
Bureaucrats are able (and willing) to create, proliferate and reinterpret regulations in order to extract the maximum
amount of corruption available (Kaufmann, 1997: 115).
Recent literature therefore views corruption as much more than a price mechanism (see Jain, 2001). Murphy,
Shleifer and Vishny (1991), for example, argue that corruption causes the reallocation of talent away from
entrepreneurial activities towards unproductive rent-seeking activities, as the most talented people compete for
the greatest payoffs available within the economy. Accordingly, the effects of corruption are multifaceted and not
as straightforward as many of the early authors portrayed. Previous empirical research on corruption has
commonly found that corruption impedes economic growth (Mauro, 1995, 1997, 1998; Tanzi, 1998; Kaufmann and
Wei, 1999; Gupta et al., 2000; Li et al., 2000; Gupta et al., 2001; Gupta et al., 2002; Pellegrini and Gerlagh, 2004).
Pellegrini and Gerlagh (2004: 429) note that ?it is a common finding in the literature that corruption hinders
economic growth.' Svensson (2005: 39) adds that most, although not all, of the theoretical literature, as well as
micro evidence, appear to suggest that corruption severely hampers development.
Rock and Bonnett (2004) heck the robustness of the negative effect of corruption on growth and investment using
four different corruption measures. They find that corruption slows growth and/or reduces investment in most
developing countries but in large East Asian newly industrialized economies (China, Indonesia, South Korea,
Thailand, and Japan) corruption significantly promotes economic growth. On the other hand, Meon and Sekkat
(2005) find a significant negative impact of corruption on growth. This impact is not only independent from
corruption's effect on investment but also tends to worsen as the quality of governance deteriorates. Such results
not only contradict the -greasing-the-wheels" view but support the contrary hypothesis that corruption -sands-the-
wheels". These results, however, have been challenged by a recent study by Meon and Weill (2008). These authors
analyze the interaction between aggregate efficiency, corruption, and different dimensions of governance and
report a detrimental effect of corruption in economies with effective institutions but a positive association
between corruption and efficiency in economies where institutions are ineffective. These results somewhat
contradict Lambsdorff's (2003) findings that support the notion that corruption lowers the productivity of capital.
However, Lambsdorff also found that once bureaucratic quality was included into the regressions, the influence
exerted by corruption became insignificant. Two further studies have sought to introduce nonlinearities into the
corruption/growth relationship. Mendez and Sepulveda (2006) studied the effects of corruption on long-run growth

by incorporating measures of political freedom as a key determinant of the relationship. They found evidence of a
non-monotonic relationship between corruption and growth after controlling for several other economic variables.
They show that corruption has a beneficial impact on long-run growth at low levels of incidence but is destructive
at high levels, indicating that the growth- maximizing level of corruption is significantly greater than zero.
This effect, however, was found to be robust only in a subsample of countries that have achieved a high degree of
political freedom. Aidt, Dutta and Sena (2008) undertook a similar exercise but instead of splitting their sample of
countries according to some chosen level of governance quality, they allowed the data to determine if two regimes
exist. They found two governance regimes. In the regime with high quality institutions, corruption is found to have
a significant negative impact on growth, while in the low quality intuitional regime no corruption effect on growth is
observed. In summary, these empirical studies show that relatively little is confidently known about the
macroeconomic effects of corruption.
These authors also find richer countries with long exposure to democracy to be less corrupt. Moreover, protestant
traditions, political instability, press freedom, and public sector wages are also found to be associated with
corruption. Factors such as common law system, ethno linguistic fractionalization and decentralization which
were previously found to have a significant association with corruption are no longer found to do so. Accordingly,
the literature contains a fairly stout list of variables that explain the variation in corruption levels. On the other
hand, corruption is found to promote growth by reducing government size and, less robustly, by increasing trade
volume. The cumulative result of these partial effects provides an overall moderate negative impact of corruption
on growth.
This paper aims at explaining the impact of corruption as a determinant factor on economic growth. The issue is
very important for public authorities in order to base their financial decisions, the ultimate objective being to insure
economic growth. Many studies try to find the relationship between corruption and economic growth.
Some economists state that corruption may also have a positive effect on the economic growth provided that
public authorities' decisions are improper (Acemoglu and Verdier, 1996). Del Monte and Papagni (2000) considers
that in order to estimate the entire impact of corruption on economic growth it is necessary to quantify two
effects: a direct effect resulting from the exploitation of public investments and an indirect effect determined by
the allocative inefficiency of public investments decisions. A number of studies have shown that corruption
affects economic growth through both domestic and foreign investments. Shleifer and Vishny (1993) and Bardhan
(1997) suggest that corruption has some sort of distributional effects, as it promotes redistribution of resources.
Leff (1964) and Huntington (1968) suggest that corruption increases economic growth for a number of reasons
including helping entrepreneurs to avoid bureaucratic delay by bribing officials. Lui (1965) suggest corruption
minimizes waiting costs thus reducing inefficiency in economic activity. Beck and Maher (1986) and Lien (1986)
maintain that allocation efficiency can exist even where corrupt officials grant bids to the highest bidder. Final
remarks: The corruption effect on economic growth is induced by other channels too, such as public and private
consumption, private direct investments, and portfolio investments (Lambsdorff, 2003; Habib and Zurawicki,
2003). Corruption is a phenomenon that affects, independently or correlatively, all the determinants of the
economic growth. Corruption is efforts to secure wealth or power through illegal means for private gain at public
expense; or a misuse of public power for private benefit. Corruption like cockroaches has co- existed with human
society for a long time and remains as one of the problems in many of the world's developing economies with
devastating consequences. Corruption as a phenomenon, is a global problem, and exists in varying degrees in
different countries (Agbu, 2001). Corruption is not only found in democratic and dictatorial politics, but also in
feudal, capitalist and socialist economies. Christian, Muslim, Hindu, and Buddhist cultures are equally bedeviled by
corruption (Dike, 2005). Corruption practices are not an issue that just began today; but the history is as old as the
world (Lipset and Lenz, 2000). It is a canker worm that has eaten deep in the fabric of the nation. It ranges from
petty corruption to political/bureaucratic corruption or Systemic corruption (International Center for Economic
Growth, 1999). Corruption is endemic as well as an enemy within (Agbu, 2003).
What is corruption?

The corruption is an often used, but very rarely defined phenomenon of the social life. Corruption or level of
corruption is widely used in public discourse and usually hold a two fold common-sense meaning. On one hand it
stands for those illegal practices, in which citizens or organizations bribe officials in charge for awarding
permissions, contracts, or to escape punishment or fines for offences they committed. In a simpler definition:
Corruption is to obtain privileges against law or against the rules of some bureaucracy. This is the narrow
definition of corruption. Many scholars argue, however, that corruption is a broader phenomenon, or rather, a
hardly definable set of phenomena, including achieving several advances through personal networking; paying
gratitude money or giving gifts for usual services, what are already reimbursed from customers or state resources.
Viewed most broadly, corruption is the misuse of office for unofficial ends (Klitgaard, 19981). Usually the first,
narrow definition of corruption is primarily considered as dangerous, illegal, immoral, and furthermore: totally
illegitimate in today is developed or transforming societies (and economies). However, researches indicate that the
narrow defined corruption closely correlate with the level of the broader phenomena of corruptive activities or
deeds, which are just morally corrupt (Johnston, 1994). Therefore previous researches suggest measuring both
types of corruption to get a reliable and useful resource in estimating actual level of corruption in a specific
country, even across counties.
But there is another problem with the broad definition; it is largely dependent on culture, historic age, actual social
climate, and social groups, which activities can be perceived as corruptive. Whereas the narrow definition can
usually be read from the more or less uniform laws throughout the countries, the definition, and even more the
structure - the patterns - of those what we call corruptive activities, are deviating in a wide and rather undiscovered
range (Heidenheimer, 1989). Heidenheimer has outlined corruption as ranging from white through gray to black,
depending upon patterns of elite and mass opinion in several kinds of communities. This extended definition of
corruption is reflected in the fact that the majority of the respondents in our pilot study perceive to live in a social
milieu where they personally know people who are corrupt. If a research wants to measure corruption, it has the
assumption that there is a finite number of different corruptive activities what research can count. Interestingly the
point that Johnston drew attention to is like the chaotic processes in natural science (see Gleick, 1987); the closer
look we take on these activities the more complex these things appear to be, and one-by-one definitive
categorization is impossible, simply because of the infinite complexity of the cases under investigation. Still,
corruption is measured and will continue to be measured increasingly, moreover, these measurements do not lack
at least common sense validity and reliability, so these abstract heuristic problems must be solved if possible; we
stress that there are researchers who are investigating this issue from a quantitative approach. The main
consequence, however, is that the exact volume of the corruption cannot be measured in any society, due to
infinity of definitions and secrecy problems.
How to Define Corruption?
Let us cite here the typology of corruption according to Heidenheimer. He isolated three ideal-types of corruption
in his cited work (Heidenheimer, 1989), these types are:
* public office-centered
* market-centered, and
* public interest-centered
In the followings we try to illustrate these three types of corruption with the help of classical authors of corruption-
literature.
Public Office-centered corruption: [Corruption is] behavior which deviates from the formal duties of a public role
because of private issues regarding (close family, personal, private clique) pecuniary or status gains; or violates
rules against the exercise of certain types of private-issues regarding influence. (Nye, 1967)
Market-centered corruption: A corrupt civil servant [or business administrator - added by Gallup] regards his
(public) office as a [separate] business, the income of which he will seek to maximize. The office then becomes a
maximizing unit. The size of his income depends upon the market situation and his talents for finding the point
maximal gain on the public [or clients'] demand curve. (van Klaveren, 1957)

Public Interest-centered corruption: The pattern of corruption can be said to exist whenever a power holder who is
charged with doing certain things, i.e., who is responsible functionary or officeholder is, by monetary or other
rewards not legally provided for, induced.
CAUSES, CONSEQUENCES, AND CHALLENGES OF CORRUPTION IN ALBANIA
Origins of Corruption
Corruption has received significant attention among economists and international financial institutions during the
last few decades, given its implications for economic growth. There are two schools of thought relative to
corruption-economic growth nexus. One school of thought holds that corruption has beneficial effect on economic
growth. The supporters of this view argue that corruption (i.e. payment of bribery to bureaucrats in many forms)
acts like oil that greases and facilitates the engine of economic growth as it helps government officials to make
the process of project approval more efficient. Hence, the proponents of this view including Leff (1964),
Huntington (1968), Summer (1977), and Acemoglu and Verdier (1998) suggest that corruption introduces
efficiency in the economy and affects economic growth positively.
The second school of thought maintains that corruption negates economic growth as it adds to the cost of
business and introduces significant uncertainty in the decision making process. The proponents of this view
including Murphy et al, (1993), Gould and Amaro-Reyes (1983), United Nations (1990), Mauro (1995), Mo (2001),
and Monte &Papagni (2001) suggest that corruption is disadvantageous to businesses and innovators, especially
those that lack the necessary cash flows and established lobbying power to either bribe or lobby the bureaucrats.
It is very easy to talk about corruption, but like many other complex phenomena, it is difficult to define corruption
in concise and concrete terms. Not surprising, there is often a consensus as to what exactly constitutes this
concept. There is always a danger as well that several people may engage in a discussion about corruption while
each is talking about a different thing completely.
The culture of corruption in Albania has origin in several centuries of rule by the Ottoman Empire, as well as in the
communist era from 1944 to 1990, and the transformation of the political economy in Albania in recent years has
created a fertile ground for its development. When examining the causes of corruption in transitional. Albania, it is
necessary to understand the unprecedented and ongoing nature of its political, economic and social
transformation. Albania experienced a rigid form of communist dictatorship; and as a result of transformation of
the political system from totalitarian rule to a democratic rule, corruption in Albania has been radical and extreme.
Huntington (1968) argued that periods of political modernization are associated with increasing incidences of
corruption because institutions that support the new government structures are not in place. On this basis, the
causes of corruption in Albania are closely related to the absence of some institutions and the lack of development
of others that can support the democratic governing structure and the market economy.
Causes of Corruption
* Personal Motivations in Corruption
People offer bribes because they want an unfair advantage over others-to pay lower taxes, to get an appointment
or promotion, to win a contract, or to get something done quickly. They also may offer bribes to avoid a fine or
penalty. People seek bribes for several reasons that are special for them. For example:
*Politicians seek money to use for patronage. They may argue that to stop such payments could bring political
instability and unrest.
*Politicians and officials who fear loss of office seek corrupt benefits as -insurance", especially if they can expect
no pension.
*Officials need extra money to maintain their standards of living if salaries have not been raised to match inflation,
to meet commitments for housing, car, school fees, etc.
*Employees feel resentment over bad management or pay levels they think unfair. This may make them feel
justified in making false expense claims or taking bribes.
*Employees who refuse to participate in a corruption -racket" may be suspected and under threat from their
colleagues or superiors.

*Some seek status, not only for having more riches than their colleagues but because corrupt officials may be
admired by friends and family for their skills in outwitting authority.
* Bad Systems
We have just considered what causes individuals to pay or take bribes. Some of these answers reflect morality,
about good and bad people. But more often, the underlying reason that people get involved in corruption is that
systems don't work well and create bad incentives. What causes corruption is:
First, a clear opportunity, such as the envelope of cash sitting in the parking lot. This kind of opportunity in the
government could be a government-run mining company with no competitors, or a long list of licenses and fees
required for shipping goods into or out of the country.
Second, what causes corruption is little chance of getting caught. This lack of accountability comes primarily from
a) a lack of transparency, for example, when public officials do not inform about or explain what they are doing,
including a declaration of their wealth, houses, and cars and b) weak enforcement, when law agencies do not
impose sanctions on power holders who have violated their public duties. This is the case, for example, when
judges are in the pay of the ruling party or there are too few police officers to enforce the law.
Third, what causes corruption are bad incentives, such as a clerk not earning enough to live on or not being sure
that he will have a job tomorrow so that he supplements his income with bribes. In extreme cases, people do not
have an incentive to perform their official duties, but actually pay for their jobs with the understanding they will
make money through bribes.
Fourth, what cause corruption are attitudes or circumstances that make average people disregard the law. People
may try to get around laws of a government they consider illegitimate (for example, not paying taxes to the
government in Albania). Poverty or scarcity of goods (such as medicine) may also push people to live outside the
law. So, corruption is not just about ethics. It's also about how the government is set up and managed.
Consequences of corruption
When analyzing the consequences of corruption, there are two important considerations. First, there are many
forces that affect a country's well being, It is important to acknowledge that corruption is not to blame for all the
dysfunctional aspects of a political economy. The best approach is to look at what would occur without corruption
in an existing situation, rather than comparing the present state - which might have several dysfunctional aspects-
to an ideal political and economic circumstance. However, determining what would occur without corruption is a
difficult task since the effects of corruption are very difficult to isolate and measure (Johnston 1997). Second
important corruption feedback effects occur between corruption and the economy, corruption and politics and
corruption and society. Understanding these feedback relationships is crucial to evaluating whether the impact of
corruption will move a country into a vicious spiral leading to further decay or move it into a virtuous cycle with
controlled corruption. In Albania, corruption, in any form, compromises the hope for building a decent society and a
sustainable democracy. This compromising effect is not directly related to the illicit nature of corruption as a
deviation from the -rules of the game", but rather to the undermining of democracy in terms of the values that it
embodies, such as representation, open debate, accountability and equality (Rose and Ackerman 1997, Johnston
1997; Johnston 2001).
Rose Ackerman (1997) acknowledged that systematic corruption leads citizens to believe that -government is for
sale to the highest bidder" (p.45). Corruption in Albania has undermined state credibility and the trust that citizens
have in state institutions. The lack of trust in politicians has, in turn, diminished the support and participation of
citizens in the reform process in general, and the Anti - Corruption plan in particular. From economic theory, one
would expect corruption to reduce economic growth by lowering incentives to invest (for both domestic and
foreign entrepreneurs). In cases where entrepreneurs are asked for bribes before enterprises can be started, or
corrupt officials later request shares in the proceeds of their investments, corruption acts as a tax, though one of a
particularly pernicious nature, given the need for secrecy and the uncertainty as to whether bribe takers will live up
to their part of the bargain.
Corruption could also be expected to reduce growth by lowering the quality of public infrastructure and services,

decreasing tax revenue, causing talented people to engage in rent-seeking rather than productive activities, and
distorting the composition of government expenditure (discussed below). At the same time, there are some
theoretical counter arguments. For example, it has been suggested that government employees who are allowed to
exact bribes might work harder and that corruption might help entrepreneurs get around bureaucratic
impediments.
One specific channel through which corruption may harm our economic performance is by distorting the
composition of government expenditure. Corrupt politicians may be expected to spend more public resources on
those items on which it is easier to exact large bribes and keep them secret-for example, items produced in
markets where the degree of competition is low and items whose value is difficult to monitor.
Corruption has aggravated the problem of inequality and poverty in Albania, and has further marginalized socially
vulnerably groups. Poverty trends in Albania have been made worse by skewed income distributions during the
transition. One third of Albanians live in poverty and one fifth in extreme poverty (Treichel).
Can corruption be measured?
Yes, corruption can be measured. This is evidenced by several studies in literature where several different
approaches have been used in modeling corruption. Although the old myth that corruption by its -intrinsic nature"
is impossible to measure delayed the emergence of serious empirical analysis of corruption (Kaufman, 1997). In
the past, there was a consensus that real magnitude of corruption cannot be measured. But the obvious
difficulties in measuring corruption have not kept a number of entrepreneurs, multilateral development banks, and
academics from attempting to do so (Farida and Ahmadi-Esfahani, 2007). Conceptually, it is often difficult to
accept the many limitations of the various measures of corruption. All widely used 'scientific' methods in the field
of corruption evaluation hold value in achieving the goal, that is, to estimate the spread and map the structure of
corruption. First, the general perception is regularly used as a sensitive core indicator to measure corruption
through the feeling such as 'lack of justice' in public transactions (Akerlof 1985). On the other hand, the incidence-
based approach is more independent from media agenda, and the general sense of society and the most cited and
probably respected cross-country comparison of the -Transparency International Framework", corruption is
primarily based on expert evaluation.
The approach taken now is to transform the computation of corruption perception index (CPI) as a common index
derived from different general polls and expert interviews (Knack 1995, Murphy 1993, Bardhan 1997, and
Mandapaka 1995).
In general, experience-based indicators appear to offer the greatest potential for comparability, since they avoid
some of the problems associated with perception-based indicators. Corruption is often modeled as a principal -
agent problem. A principal delegate some decision power to an agent, where the principal's rules of preference in
exercising the power are known to the agent. The principal's problem is that the agent may serve his/her own
interests rather than the principal's (Bardhan 1997). The influence of corruption on economic growth has been
modeled using economic growth models (Krueger 1974; Murphy 1993; Mandapaka 1995; Mauro 1995). In addition,
corruption has been modeled using the game theoretic approach with three players: principle, agent, and hidden
principal (Andvig 1990; Laffont 1991; Basu 1992; Mookherjee 1995; Acemoglu 2000). In addition, SWARM (as
programming language) has also been widely used method (Turnovsky 1995; Jain 1998; Stapenhurst 1999) to
simulate corruption models, and analyse the dynamic and evolutionary process of corruption on various
parameters.
Nonetheless, despite these major improvements, corruption assessment is still today facing the same obstacles
that it did years ago. Notwithstanding increased complexity of indicators, the challenges remain unaltered through
time. Certainly, every indicator has to cope with its own problems, and modern aggregate measurements reveal
new dares. However, all these setbacks can be gathered under a few -but persistent- major problem groups. Hence,
I have identified four main problem-types that summarize the challenges of corruption measurement: (1) the
perception problem, (2) the error problem, (3) the insufficiency problem, and (4) the actionable problem.
Substantial literature provides empirical evidence that corruption hampers the investment climate, and in

particular foreign direct investment (Mauro, 1995; Tanzi and Davvodi 1997; Wei,1997a and Wei 1997b). In Albania
the poor capacity to protect and enforce property rights and basic contracts that results from corruption in the
judicial system is a serious impediment to attracting FDI. Murphy et al (|1991) showed how corruption alters
entrepreneurs' incentives to engage in rent seeking activities instead of productive activities, thereby reallocating
labor talent and affecting investments and growth in the economy. The entrepreneur is more vulnerable in a
corrupt economy due to the clandestine nature of the corruption activity (Murphy 1993). The persuasive corruption
in Albania has dampened the business climate, distorted the sense of fairness and competitiveness driven
resources away from productive activities, and slowed wealth creation. In other words, corruption has affected
economic growth. In general, the overall experience with corruption transactions has declined from 2005 to 2009.
Out Of 10 ways in which an individual could be victimized, the average number of ways of victimization experience
for 2009 is 1.29, a decrease from 1.7 in 2005. From the 10 scenarios presented, the percentage of people who
declared at least one experience with corruption as decreased from 66.5% in 2005 To 57.1% in 2009.
Why do countries judged to be corrupt experience slow economic growth? Is it that corruption harms growth or
simply that low growth leads consultants to give bad corruption grades to a country? To deal with this issue, one
can take variables (such as a country's colonial history or the extent to which its population is divided along ethno
linguistic lines) that happen to be correlated with corruption but have no effect on economic growth or government
spending other than through their impact on the efficiency of institutions, and use them as instrumental variables
in the regression analysis. Through this statistical trick, it is possible to get around problems relating to the
subjectivity of the corruption indices, and it can be shown that corruption-together with other forms of institutional
inefficiency-causes low economic growth.
Corruption is most prevalent where there are other forms of institutional inefficiency, such as political instability,
bureaucratic red tape, and weak legislative and judicial systems. This raises the question of whether it can be
established that corruption, rather than other factors correlated with it, is the cause of low economic growth.
Regression analysis provides some evidence that if one controls other forms of institutional inefficiency, such as
political instability, corruption can still be shown to reduce growth.
Nevertheless, it is hard to show conclusively that the cause of the problem is corruption alone, rather than the
institutional weaknesses that are closely associated with it.
The truth is that probably all of these weaknesses are intrinsically linked, in the sense that they feed upon each
other (for example, red tape makes corruption possible, and corrupt bureaucrats may increase the extent of red
tape so they can extract additional bribes) and that getting rid of corruption helps a country overcome other
institutional weaknesses, just as reducing other institutional weaknesses helps it curb corruption.
All types of corruptions mentioned in the paper seem to be present in the Albanian system. Corruption exists in all
its forms today in Albania. However, bureaucratic corruption and political/grand corruption have a particularly high
incidence in Albania due to the fact that power is concentrated primarily in the executive branch. From the bribing
of public officials, to the abuse of tenders, in faulty privatization, in the rewarding of public contracts, in purchasing
of positions, in formation of monopolies on basic goods, in discriminatory application of laws and taxes against
competitors, in illegal funding of political parties and electoral competition and in the outright theft of state
property and revenue. The foundation for the grand corruption we see today in Albania is also based on the
collapse of Communism. Corruption occurs in every political system, and many of its expressions are the same
throughout the world, yet it has a distinctive profile in the post-communist states such as Albania. Part of this
distinctiveness is linked to the nature of the former regimes. The antecedent former communist regimes were
characterized by monopolies of all kinds, political, economic, and social. These features are today perversely
blended with the worst features that the capitalist society bears. The new born democracy in Albania found itself
unprepared to face the challenges derived from classical criminal activity, especially organized crime. In its efforts
to accumulate wealth, the criminal groups, encouraged by democratic changes, attacked the weak governmental
barriers that represented a threat to its activities and goods. The notion of rising quickly from poverty to easy
money-making by any means became a fashionable part of the so-called new society, which was quickly exploited

by the criminal groups in creating pyramid schemes.
The government of that time tolerated, if not sponsored, these -investment" schemes in order to create the illusion
of economic prosperity and to persuade the voters to give its continued backing. But the collapse of these
schemes in 1997 caused a very serious economic, political and social reaction followed by acts of violence, ending
up in a total collapse of state institutions and putting at risk the integrity and national security of Albania. This very
extreme experience showed clearly, inter alia, what could be the impact of political corruption on a large scale.
Senior state officials and political party leaders from a wide spectrum had strong connections with these
fraudulent schemes and actively supported them. The leaders of these pyramid schemes took part in electoral
campaigns in support of one party or the other. Even though Albania went through this very serious crisis, lessons
learned did not really serve to change the corruption-oriented frame of mind of the political class. Also examples of
the bureaucratic corruption include bribe to judges, payments in commercial and criminal courts, payoffs to official
inspectors for overlooking violations of existing regulations such as those relating to tax evasion, and grease
payments to obtain licenses, to obtain property rights in the privatization process, to smooth customs procedures,
and to win public procurement contracts. The corruption continued unabated and the situation became worse. The
fight against corruption was used politically to fight political opponents and to protect the political and economical
interests of one group against another.
Transparency International (TI) has published the Corruption Perception Index (CPI) each year and the CPI
captures the public's perceived level of corruption among public officers and politicians for a group of countries. TI
defines corruption as the abuse of public office for private gain. The CPI score relates to perceptions of the degree
of corruption as seen by business people, academics, and risk analysts and ranges between zero (highly corrupt)
and ten (highly clean) (Transparency International). In 1999, TI ranked Albania 84 out of 99 countries; the CPI score
is 2.3 with a standard deviation of 0.3 and five surveys were run. In 2002, TI ranked Albania 81 of 102 countries; the
CPI score is 2.5 with a standard deviation 0.8; three surveys were conducted. In 2003, TI ranked Albania 92 out of
133 countries; the CPI score is 2.5 with a standard deviation 0.6; five surveys were conducted. Although there is an
improvement of the CPI score in 2002 compared to 1999, the standard deviation is substantially larger, while no
improvement is indicated in 2003. For the year 2007, the CPI score was 3.4 and Albania was ranked 85 out of 193
countries included in the survey. Also for the year 2008 and 2009 the CPI score for Albania was 3.2 and 2.4
respectively so we can see that there is a decline in the corruption level during these year which is due to the war
that the government is fighting against corruption.
MODEL AND THEORETICAL FRAMEWORK
Various theories of economic growth ranging from the classical to the endogenous theories were propounded to
identify and explain the various variables influencing growth. While the classical theorists laid much emphasis on
capital as major determinant of economic growth, neoclassical extended the Harrod-Domar classical formulation
by the inclusion of labor and the introduction of a third independent variable, technology, to the growth equation,
(Solow, 1956 and Swan, 1956). Two major drawbacks of this theory include (i) the impossibility of analyzing the
determinants of technological progress within its framework. (ii) the failure of the model to explain the large
differences in the residuals across countries with similar technologies. These led to a widespread discontentment
with the neoclassical models (Todaro, 2003)
Endogenous Growth Models were developed as a response to the criticisms of the neoclassical growth model and
to offer better explanation of the process of long-run economic growth. The theory views innovation brought about
by investment in knowledge generation as the driving force of long term economic growth (Romer, 1986). More
importantly, variants of endogenous growth models including Lucas (1988) Model, Jones and Manelli (1990)
Model, Barro (1990) Model, AK models of Rebelo (1991) etc, have demonstrated that policy variables can have
significant impact on long-run economic growth. This paper adopts the famous Barro (1990) model which is an
outgrowth of Ram (1986) model. This is because the model permits the inclusion of a wider range of policy
variables including corruption. The model assumes that the economy is comprised of public sector (G) and Private
sector (P). The model also assumes that government levies an income tax and runs a balanced budget.

Government expenditures - public investment and public consumption are equal to taxes
T = G + (1- )G where denotes the ratio of government expenditures used to public investment;
Private consumption Cpr (t) = (1-s)(1-z)Y(t) where z is the tax rate, s is the saving rate.
Therefore
... Kpr(t) +Kpu(t) with Kpr (t) as private capital stock and Kpu(t) as public capital stock;
From here:
...
G = T = z(1- )Y where denotes the ratio from corruption
...
Equilibrium equation : ...
...
Steady state: ...
increases then (1- ) denominator decreases increase slope of H(k) so we have a new steady state equilibrium k*l
which is lower than k*.
Extension No 1:
a) Steady that k* (per capital capital in the case of corruption) is stable ; Assume k
...
If we have a higher corruption we have a decrease in the capital per capital stock because corruption reduces tax
revenue because it compromises the government's ability to collect taxes and. Corruption reduces the foreign
direct investments and also the economic growth.
CONCLUSIONS
The primary objective of this study is to critically assess the impact of corruption on economic growth in Albania.
To achieve this broad goal, the core channels through which corruption affects growth were identified in both the
literature and empirical studies. These channels include government capital expenditure, human capital
development and total employment.
The paper recommends that the government should intensify its efforts at re-orientating the society against ills of
corruption by establishing high ethical standards to which all and sundry must adhere. More stringent measures
should be put in place to reduce the possibility of diverting public funds into private pockets. For instance,
independent auditing and consulting firms can be involved to critically examine the records and projects being
carried out by the government officials to ascertain whether they are executed as planned. Finally, government
should increase its political will to eradicate corruption in the system. Present efforts are already yielding good
results but they should be strengthened and expanded in scope.
References
REFERENCES
Abed, G.T., &Davoodi, H.R. (2002). Corruption, Structural Reforms and Economic Performance in the Transition
Economies. Washington DC: International Monetary Fund.
Akai, N., Horiuchi, Y., &Sakata, M. (2005). Short-run and Long-Run Effects of Corruption on Economic Growth:
Evidence from State level Cross - Section data for the United States. Osaka: Osaka International University Press.
Akkihal, R., Smith, H., &Adkins, R. (1997). The Economics of Corruption in Developing Countries. The Coastal
Business Journal Volume 1, No 1
Amundsen, I. (2000). Corruption: Definitions and Concepts. Norway: Norwegian Agency for Development
Cooperation (NORAD), Michelson Institute (CMI)
Kaufmann, D. (1997). Corruption: some myths and Facts: An early inversion was published in foreign policy,
summer 1997 Pp. 114 - 131.
Mauro, P. (1995). Corruption and Growth. Quarterly Journal of Economic, Vol. 110, No 3.
Ram, R. (1986). -Government Size and Economic Growth: A New Framework and Some Evidence from Cross-
Section and Time -Series Data." American Economic Review. Vol 76: 191-203.

IDRA, Albania Corruption in Albania Summary of fndings Perception and Experience Survey 2009
International Monetary Fund. (1998), Roads to Nowhere: -How Corruption in Public Investment Hurts Growth."
Washington D.C.
Gupta, S.H. Davoodi, and R. Alonso Terme. (1998). -Does Corruption Affect Income Inequality and Poverty?" IMF
Working Paper 98/76. International Monetary Fund, Washington D.C.
Mo, Pak Hung. (2001). -Corruption and Economic Growth" Journal of Comparative Economics, 29, 66-79.
AuthorAffiliation
Adela SHERA, PhD Candidate
Department of Economics, Faculty of Economy
University of Tirana, Albania
adela_shera@hotmail.com
DETAILS
Subject: Studies; Economic growth; Correlation analysis; Corruption
Location: Albania
Classification: 1110: Economic conditions &forecasts; 9130: Experiment/theoretical treatment;

9176: Eastern Europe
Publication title: Journal of Information Technology and Economic Development; Beverly Hills
Volume: 2
Issue: 1
Pages: 39-53
Number of pages: 15
Publication year: 2011
Publication date: Apr 2011
Publisher: Global Strategic Management Inc
Place of publication: Beverly Hills
Country of publication: United States, Beverly Hills
Publication subject: Business And Economics, Computers
ISSN: 2153974X
Source type: Scholarly Journals
Language of publication: English

Document type: Feature
Document feature: Graphs Equations References
ProQuest document ID: 1737492874
Document URL: https://search.proquest.com/docview/1737492874?accountid=38885
Copyright: Copyright Global Strategic Management Inc Apr 2011
Last updated: 2015-11-30
Database: ABI/INFORM Global,ProQuest Central
LINKS
Corruption and total factor productivity: level or

growth effects?
Salinas-jiménez, Ma Del; Mar; Salinas-jiménez, Javier . Portuguese Economic Journal ; Heidelberg
Vol. 10, Iss. 2, (Aug 2011): 109-128.
ABSTRACT

This paper adopts a productivity-based perspective in order to study how corruption conditions the efficiency
levels of the economies and their TFP growth rate. It attempts to identify the channels through which corruption
can influence productivity growth, whether by conditioning improvements in relative efficiency levels or by shifting
the production frontier. The results point out that corruption negatively affects both the levels of efficiency at
which the economies perform and the growth rate of TFP, suggesting that the negative impact of corruption on
technological progress manifest through its influence on human capital .[PUBLICATION ABSTRACT]
FULL TEXT

Port Econ J (2011) 10:109128
DOI 10.1007/s10258-010-0059-3
ORIGINAL ARTICLE
Received: 25 February 2009 / Accepted: 5 July 2010 / Published online: 23 July 2010 Springer-Verlag 2010
Abstract This paper adopts a productivity-based perspective in order to study how corruption conditions the
efficiency levels of the economies and their TFP growth rate. It attempts to identify the channels through which
corruption can influence productivity growth, whether by conditioning improvements in relative efficiency levels or
by shifting the production frontier. The results point out that corruption negatively affects both the levels of
efficiency at which the economies perform and the growth rate of TFP, suggesting that the negative impact of
corruption on technological progress manifest through its influence on human capital.

Keywords Corruption Efficiency TFP growth
JEL Classification D73 H11 D24
1 Introduction
Studies on the relationship between corruption and economic activity have mainly focused on how corruption
affects investment or economic growth
M. d. M. Salinas-Jimnez (B)
Facultad de CC.Econmicas, Departamento de Economa, Universidad de Extremadura, Avda. de Elvas s/n,06071
Badajoz, Spaine-mail: msalinas@unex.es
J. Salinas-Jimnez
Facultad de Derecho, Departamento de Economa Aplicada IV, Universidad Complutense de Madrid, Ciudad
Universitaria, s/n, 28040 Madrid, Spaine-mail: fjsalinas@der.ucm.es
Corruption and total factor productivity: level or growth effects?
Ma del Mar Salinas-Jimnez
Javier Salinas-Jimnez
110 M.d.M. Salinas-Jimnez, J. Salinas-Jimnez
while its impact on productivity has received less attention. In this paper, a productivity-based perspective is
adopted in order to focus on the relationship between corruption and productivity. Thus, the aim of this work is to
identify the channels through which corruption can affect productivity growth, allowing for inefficiencies and
studying whether corruption conditions, on the one hand, the efficiency levels at which the economies perform
and, on the other, the Total Factor Productivity (TFP) rate of growth. Moreover, we try to identify the channels
through which corruption might affect productivity growth, whether by influencing improvements in relative
efficiency levels or by shifting the production frontier.
The empirical literature aimed at assessing the economic consequences of corruption was pioneered by Mauro
(1995) and Knack and Keefer (1995). Mauro (1995) shows that corruption reduces growth through its effect on
investment, but he found no significant relationship between corruption and growth once the regressions were
controlled for investment. This result contrasts with Knack and Keefer (1995)s, who find that the negative impact
of corruption on growth remains significant even when the investment ratio is introduced as a control variable.
This suggests that, besides the negative effect of corruption on investment, corruption impacts growth in a direct
way. In a later work, Mo (2001) also finds a significant relationship between corruption and growth when the
investment variable is included in the regressions, but this relationship turns insignificant when he controls for
human capital. Following a similar approach, Pellegrini and Gerlagh (2004) also find evidence favorable to a
negative impact of corruption on growth, but mainly through its effects on investment and trade. In sum, the
empirical evidence suggests that corruption conditions economic growth, with results that tend more to support
the existence of indirect effects through investment as against direct effects on productivity.1
However, the recent literature on economic growth points out that capital accumulation can not by itself explain
economic growth, but lays the emphasis on productivity (Easterly and Levine 2001; Caselli 2005). Focusing on the
effects of corruption on productivity, one also finds some work that centers on the determinants of cross-country
differences in productivity growth. Olson et al. (2000) adopt a growth accounting framework to calculate total
factor productivity (TFP) growth and then analyze which variables contribute to
1Most empirical studies point to a negative impact of corruption on economic growth (for an extensive revision of
the empirical literature on the consequences of corruption, see Jain 2001; or Aidt 2003). Nevertheless, despite the
general consensus on this negative impact of corruption, some researchers, including Leff (1964) and Huntington
(1968), have argued that corruption has a positive effect on growth since practices such as speed money would
enable individuals to avoid the bureaucratic delays often encountered in developing countries; some recent
empirical work supporting this idea can be found in Mon and Sekkat (2005).
Corruption and total factor productivity: level or growth effects? 111
explain its variation across countries. They use different measures of institutional quality, one of which is

corruption, and find that bad institutions significantly reduce productivity growth. Other contributions suggest that
corruption might lead to an inefficient allocation of public funds which negatively affects economic growth (Tanzi
and Davoodi 1997; Mauro 1998). Finally, an emerging field focuses on the analysis of productivity levels instead of
growth rates. This approach bases on the idea that the quantity of inputs and the efficiency with which these are
transformed are determined by the countrys institutions, which therefore condition the output level of the
economy. In this vein, Hall and Jones (1999) find that disparities in physical and human capital only partially
explain the differences in product per worker, a great part of them being due to differences in the Solow residual.
These authors find that differences in productivity are fundamentally due to the differences existing in what they
term social infrastructure.2 Lambsdorff (2003) studies how corruption affects the productivity level of capital,
finding support for corruption lowering productivity and suggesting that the negative impact of corruption on
capital productivity manifests via its correlation with a poor quality of the bureaucracy. Hence, institutional
variables seem to influence not only the growth rate of an economy but also its income or productivity levels
(Rodrik et al. 2004).
These contributions focusing on productivity generally adopt partial measures of productivitysuch as output per
worker or output per capitalor estimate productivity in a residual way from a growth accounting exercise. Recently,
the estimation of production frontiers and productivity indices has been used at the macroeconomic level.3 The
production frontier approach provides a benchmark technology and allows evaluating the performance of the
economies with regard to the best-practice frontier. This performance is evaluated by an efficiency measure that
relates the actual production of an economy to the optimal production given by the frontier for different sets of
inputs. One advantage of this approach is that, unlike partial productivity measures, several inputs are considered
to evaluate the performance of an economy. In turn, the use of productivity indices allows the decomposition of
productivity growth into efficiency changes, associated to movements of an economy towards the production
frontier, and technological progress, related to shifts of the frontier itself. Thus, the advantage of this approach
over the growth accounting framework is that, taking into account the existence
2These authors define social infrastructure as the set of institutions and government policies that influence the
individual incentives of economic agents. These incentives may foster productive activities, investment, or the
development of new techniques, or, on the contrary, they may lead to predatory behaviour such as corruption or
rent-seeking.
3See, for instance, the pioneering work by Fre et al. (1994) or, more recently, the work by Kumar and Russell (2002).
An analysis of the consistency of the efficiency frontier methods applied at the aggregate level can be found in
Weill (2006).
of inefficiencies, it allows for the decomposition of productivity growth into efficiency gains or catching-up and
technological change or innovation, a decomposition which is appealing to identify the sources of productivity
growth.
Some recent studies analyzing the effects of institutional quality on productivity have indeed considered the
possibility that the economies operate in an inefficient way. A stochastic frontier approach was adopted in the
work of Adkins et al. (2002), Klein and Luu (2003), Mon and Weill (2005) and Doucouliagos and Ulubasoglu (2005),
who study the relationship between such variables as economic and political freedoms, or different governance
indicators, and the estimated efficiency levels. In addition, using a non-parametric estimate of the production
frontier, Lall et al. (2002) and Cherchye and Moesen (2003) focus on studying the processes of convergence,
analyzing how different institutional variables contribute to convergence by favoring relative improvements in
terms of efficiency.
This paper attempts to add to previous literature by studying the relationship between corruption and productivity.
In particular, the motivation of the present work is to study whether corruption affects the economic results of a
broad sample of countries -including both developed and developing countriesfrom a productivity-based
perspective and allowing for inefficiency. A frontier approach is adopted in order to estimate the relative efficiency

levels with which the different economies perform and to decompose productivity growth into changes in
efficiency and technological progress. Then, in a second-stage, we study whether corruption conditions, on the one
hand, the efficiency levels at which the economies perform and, on the other, the rate of growth of TFP.
Furthermore, we also try to identify the channels through which corruption might affect productivity growth,
whether by influencing improvements in relative efficiency levels or by shifting the production frontier.
In accordance with these objectives, the structure of this paper is as follows: Section 2 discusses the relationship
between corruption and productivity, providing reasons for corruption affecting both the levels and growth rates of
TFP. In Section 3, the frontier approach used to estimate the levels of relative efficiency is presented, and
productivity growth is decomposed into efficiency gains and shifts of the production frontier by means of
Malmquist productivity indices. Section 4 focuses on the empirical analysis, regressing the efficiency level and
TFP growth estimates on several explanatory variables, one of which is corruption. Lastly, Section 5 presents the
main conclusions of this study.
2 Corruption and productivity: level vs. growth effects
The relationship between corruption and productivity could manifest itself in different ways. As Olson et al. (2000)
observe, the attainable level of production could be limited by the structure of incentives inherent in the
institutional or political framework, so that workers or enterprises might not have enough incentives to use the
available resources or technology in an efficient way. Thus, by altering the incentives, corruption may distort the
allocation of resources and their productivity. The allocation of capital goods could be inefficient because of
distortions in public decisions or in the choice of private investment projects, looking for large side payments or
low control mechanisms despite the productivity and demand of those projects. Moreover, the impact of
corruption on efficiency does not limit to a change in the allocation and use of capital goods but extends to the
diversion of time and abilities. This idea goes back to Krueger (1974), who points out that rent seeking, although
privately profitable, is a socially unproductive activity. The allocation of time and abilities could therefore suffer
from corruption since part of the efforts and skills would be devoted to rent seeking instead of productive
activities.
The above distortions would create a static loss in efficiency regarding the use of the existing resources.
Nevertheless, it does not imply that those distortions have dynamic effects on economic activity. In this regard,
Lambsdorff (2003) observes that even if corruption reduces productivity there might be no effect on growth. If a
neoclassical framework were adopted, productivity growth would not be affected by the composition of
investment or by particular changes of the initial conditions since the neoclassical paradigm assumes productivity
growth to be an exogenous process. However, within the endogenous growth theory different variables that
enhance productivity growth have been proposed. In endogenous growth models, technological progress results
from human capital accumulation (Lucas 1988); from investment on private (Romer 1986) and public (Barro 1990)
capital; or from innovation and R&D activities (Romer 1990; Aghion and Howitt 1992). Corruption could distort the
allocation of human resources or negatively affect innovation activities since the development of new products is
usually linked to obtaining permits and licenses and to the protection of innovations property rights, all of which
may be directly affected by corruption. In addition, a key issue of modern growth theory is the process of
technological diffusion between economies. The dispersion of knowledge allows for catch-up through the adoption
of the existing technology, but it depends on the capacity of the lagging economies to imitate or adopt
technological advances. In this regard, openness to trade (Grossman and Helpman 1991) and human capital
(Benhabib and Spiegel 1994, 2005) have been emphasized as channels for the transmission and adoption of
technology. Different variables have been suggested in modern growth theory as vehicles for innovation and
absorption of technology; and institutions having an impact on these variables could therefore condition
productivity growth. In this sense, Aidt et al. (2008) argue that corruption could reduce productivity growth through
two mechanisms: on the one hand, by its negative impact on innovation and, on the other, by reducing learning-by-
doing externalities, thereby limiting the possibilities of exploiting previous technology developed by other

economies. This distinction is interesting with respect to the channels
through which corruption can affect productivity growth, whether by shifting the production frontier through
innovation and technological progress or by conditioning gains in relative efficiency or catching-up through the
transmission and adoption of the existing technology.
3 Efficiency and TFP growth decomposition
The motivation for adopting a frontier approach is to consider the possible existence of inefficiencies when
evaluating the performance of an economy and to decompose TFP growth into technological progress and
efficiency gains. In order to study the efficiency with which productive inputs are employed, it is necessary to
estimate a production frontier which represents the maximum technically attainable level of production. An
economys relative inefficiency level will then be regarded as the difference between the level of production actually
obtained and the maximum potential product given by the frontier. With regard to productivity growth, it may be
due to a more efficient use of the inputs for a given productive capacity or to technological improvements allowing
an increase in that capacity. Thus, one of the advantages of adopting a frontier approach is that productivity
growth can be decomposed into technical progress (represented by a shift of the production frontier) and gains in
relative efficiency (represented by a movement towards the technological frontier). It also allows us to study
through which paths corruption can affect productivity growth. We shall use a non-parametric techniqueData
Envelopment Analysis (DEA)4to estimate the production frontier and the associated efficiency levels of each of the
economies. Variations in total factor productivity will be estimated by means of Malmquist productivity indices
which in turn are decomposed into technical progress and changes in relative efficiency, allowing one to analyze
which part of productivity growth is due to each of these factors.5
This analysis is illustrated in Fig. 1, which is based on the case of a single input (X) and a single output (Y) in order
to simplify the representation. The pairs (Xt, Yt) and (Xt + 1, Yt + 1) represent observed values for an
economy while the maximum potential production in periods t and t + 1
(points E and A) correspond to the reference technology (St and St + 1).
As one observes, productivity growth may be due to either an approximation to the frontier or to a shift of the
production frontier itself. The change in relative efficiency (term EC in Eq. 5 in the Appendix) represents
movements
4Data Envelopment Analysis is one of the most commonly used techniques among non-parametric approaches.
The advantage of the latter is their greater flexibility since they neither require a particular functional form to be
specified for the technology nor any assumption to be made about the distribution of the inefficiency term. A
complete survey of DEA techniques can be found in Charnes et al. (1994).
5A formal presentation of the Malmquist productivity indices and their decomposition is given in the Appendix.
Fig. 1 Decomposition of TFP growth
towards the frontier and is shown graphically by the distance OF-OE and OBOA. Likewise, technological change
(term TC in Eq. 5) is measured by the geometric mean of the shift of the frontier in period t (the distance OE-OC)
and t + 1 (the distance OD-OA).
The sample used in this study refers to 56 countries,6 both developed and developing, and covers the period
19801990. The data used to estimate the production frontier was obtained from the Penn World Tables (PWT).7 In
each case, a single outputthe Gross Domestic Productand two inputs capital and laborwere considered. Real GDP
and the capital stock variables were expressed in 1985 international prices and labor was measured by the number
of workers. Table 1 presents a summary of the frontier estimates. The first row provides descriptive statistics of
the estimated levels of relative efficiency and the second row the statistics relating to TFP growth, which in turn is
decomposed into changes in efficiency and technological change (third and fourth rows, respectively). The
average efficiency level during these years was around 66%, although there were some differences between
developed and developing countries, with relative efficiency levels near 80% for OECD countries and around 55%

for non OECD ones. TFP growth was, on average, around 0.3% per year and it was mainly due to variations on the
levels of
6The 56 countries of the sample are: Argentina, Australia, Austria, Belgium, Bolivia, Canada, Chile, Colombia,
Denmark, Dominican Rep., Ecuador, Finland, France, Germany (West), Greece, Guatemala, Honduras, Hong Kong,
Iceland, India, Ireland, Israel, Italy, Jamaica, Japan, Kenya, Korea, Luxembourg, Madagascar, Malawi, Mauritius,
Mexico, Morocco, Netherlands, New Zealand, Nigeria, Norway, Panama, Paraguay, Peru, Philippines, Portugal,
Sierra Leona, Spain, Sri Lanka, Sweden, Switzerland, Syria, Taiwan, Thailand, Turkey, United Kingdom, United
States, Venezuela, Zambia and Zimbabwe.
7In particular, data was taken from the PWT version 5.6 (see Summers and Heston 1991, for details). Although
more recent versions of the PWT are available (versions 6.2 or 6.3), information on the capital stock variable is not
provided in there. Since data on the capital stock is primarily needed under the frontier approach used in this
study, the period of time is limited by available data in the PWT 5.6.
Table 1 Efficiency and TFP growth: statistical summary
Total OECD Non-OECD (56 countries) (26 countries) (30 countries)
Mean St. dev. Mean St. dev. Mean St. dev.
(Relative) efficiency 0.6622 0.22145 0.7862 0.13095 0.5547 0.22909 TFP change 1.0030 0.01786 1.0103 0.01035
0.9968 0.02061 Efficiency change 1.0033 0.01713 1.0023 0.01032 1.0041 0.02153 Technological change 1.0008
0.01108 1.0084 0.00716 0.9943 0.00965
efficiency. However, here again we find notable differences between OECD and non OECD countries, since TFP
growth in OECD economies reached 1% per year, with technological progress accounting for around 80% of TFP
growth, while TFP remained relatively stable in non OECD countries in spite of their greater gains in relative
efficiency.8
4 Empirical analysis
Once the efficiency levels and TFP growth indices have been estimated, we shall study which factors could lie
behind productivity, focusing on the role of corruption among other variables. In this work we use the corruption
perception indices (CPI) elaborated by Transparency International (TI), which have probably been the most
extensively used in the recent empirical literature on corruption.9 Most available data on corruption begins in the
1980s and focuses on cross-section information, with data being available for an increasing number of countries
in the course of time. To cover a wide sample of countries, we take the average value of the indices available for
each country until 2005. Since corruption is highly persistent (Mauro 2004) the average values for the CPI indices
do not vary significantly from the CPI value in a given year.10
Furthermore, it has to be noted that the CPI ranges from zero to ten, with higher values of the index corresponding
to lower perceived corruption, so one could regard the CPI as an index of absence of corruption.
8We do not further extend in presenting these results since the estimated production frontiers are similar to those
usually reported in the literature (see for instance Kumar and Russell 2002).
9We also used other indices of corruption, such as those used in Mauro (1995), in Knack and Keefer (1995), and
the governance indicators provided by the World Bank, but the estimates are not reported here. Nevertheless, the
results did not change qualitatively when using different indicators of corruption.
10Related to the high persistence of corruption, we find few empirical studies adopting a panel data framework. As
pointed by Lambsdorff (2005) the use of corruption data in time series has been discouraged due to the low
variability of corruption in time, the focus on cross-section information and changes in the composition of sources.
Detailed information on the CPI can be found in http://www.transparency.org.
Web End =http://www.transparency.org.
Other variables that might condition productivity are also taken into account. Thus, we introduce various control
variables that are commonly used in the literature, such as openness to trade, which is proxied by the percentage

of total trade (import plus exports) to GDP; human capital, proxied by average schooling years in the total
population; the degree of capitalization, measured as capital per worker endowments; and two regional variables,
one for sub-Sahara African countries and another one for South Asian countries.11 Data
on human capital comes from Barro and Lee (2000) education dataset and all other control variables are taken
from the Global Development Network Growth Database of the World Bank.
There is an important literature on the relation between institutional quality and social capital and economic
performance (see, for example, Hall and Jones 1999). Moreover, when studying the determinants of corruption, we
find lot of work highlighting the role of institutional variables. In this context, the institutional framework is
interpreted in a broad sense that includes variables related to historical, cultural, economic and socio-political
factors in a country.12 Therefore, this approach not only focuses on the study of formal institutions but extends to
those informal institutions covered by the idea of social capital such as trust, social cohesion and civic
responsibility, which may affect the quality of governance and the levels of corruption (Knack and Keefer 1997).13
Since the focus of this study is not on the determinants of corruption, where the institutional framework has
proved to play an important role, and in order to avoid problems of multicollinearity (Pellegrini and Gerlagh 2006),
social capital or institutional quality variables are not introduced into the analysis.
Finally, potential problems could arise when estimating the impact of corruption on productivity since the causality
relation may run from a bad economic performance to corruption or it may run both ways. In general, most of the
econometric studies that analyse this issue making use of instruments find that causation runs from corruption, or
other institutional variables, to economic performance, and not the other way round (see Mauro 1995; Hall and
Jones 1999; or Rodrik et al. 2004). In order to deal with causality and endogeneity problems we introduce
instrumental variables in the analysis. As
11In addition to the African and Asian dummies, other regional variables were included in the regressions; in this
case the results obtained for the corruption variable proved to be robust but dummies for other regions were not
significant.
12Among the variables that stand out as determinants of corruption we find the development of a democratic
system (Paldam 2002), the efficiency of the legal system or the cultural tradition (La Porta et al. 1999), the
influence of religion (Treisman 2000), or the existence of civil liberties and freedom of press (Adser et al. 2003;
Brunetti and Weder 2003; Lederman et al. 2005).
13Uslaner (2005) provides a detailed discussion on the relationship between social capital and corruption.
Furthermore, empirical work considering a large number of institutional variables in explaining the causes of
corruption can be found in La Porta et al. (1999) and Treisman (2000).
instrumental variables we employ an index of ethnolinguistic fractionalization14 and a geographic variable referred
to the latitude of the countries, which are variables that significantly correlate with corruption but are uncorrelated
with the error term. These variables have also been taken from the Global Development Network Growth Database
of the World Bank.
4.1 Corruption effects on efficiency
We first estimate the effects of corruption on efficiency levels. Because of the frontier approach adopted in this
study, the degree of capitalization of an economy should not affect the estimated levels of relative efficiency since
both capital and labor are considered when estimating the production frontier. On the contrary, openness to trade
and the level of human capital are expected to affect the levels of efficiency. On the one hand, the economic theory
suggests that openness to international trade could enhance competition, giving rise to a more efficient use of the
productive resources. On the other hand, human capital could affect output through its use as a productive input;
if we think on human capital as an additional productive factor, it will affect the efficiency levels with which other
factors of production, such as capital and labor, are used. However, the empirical literature is ambiguous regarding
the effects of these variables on productivity.15
Table 2 shows the results of efficiency being regressed on corruption. The introduction of the control variables

discussed above is a robustness check of the simple relationship between corruption and relative efficiency.
Finally, regressions 5 and 6 introduce instrumental variables to deal with possible endogeneity problems. The
estimates point to a negative impact of corruption on efficiency, with a positive correlation between absence of
corruption and efficiency levels. The inclusion of the control variables does not change the impact of corruption,
which is highly significant in all regressions and survives the instrumental variable approach. However, the control
variables introduced are not significant in explaining the levels of relative efficiency, thus we do not find empirical
support for a significant effect of trade and human capital on efficiency.
14The ethnolinguistic fractionalization index has been used in most empirical work on corruption addressing the
issue of endogeneity. Nevertheless, other indices such as the Social Diversity Index, which is basically a composite
measure of ethnic fragmentation, could be used as instrument; see Okediji (2005) for a discussion on problems
associated with the empirical measurement of ethnic diversity in the economic development literature.
15As an example, Miller and Upadhyay (2000) find a significant effect of openness on productivity, but mixed
results for the human capital variable; in contrast, Senhadji (2000) finds a positive effect of human capital but
ambiguous results for trade. Temple (2001) provides a review of the empirical evidence on the effects of
education. For a discussion of the empirical results regarding trade, see Rodriguez and Rodrik (2001).
Table 2 Corruption and efficiency levels
Efficiency (1) OLS (2) OLS (3) OLS (4) OLS (5) TSLS (6) TSLS
Constant 0.386 0.396 0.399 0.460 0.340 0.414(7.217)*** (7.030)*** (5.345)*** (7.398)*** (5.501)*** (5.508)***
Absence 0.052 0.045 0.046 0.043 0.061 0.051of corruption (5.759)*** (2.913)*** (2.470) ** (4.414)*** (5.638)***
(4.183)*** Capital 0.000001
(per worker) (0.612)
Education 0.004(average level) (0.250)
Total trade 0.0001
(0.143)
Sub Sahara 0.118 0.094
Africa (dummy) (1.642) (1.245)
South Asia 0.250 0.229
(dummy) (1.988)* (1.791)*
0.17590 0.17693 0.17883 0.17007 0.17736 0.17111 R2 (adjusted) 0.369 0.362 0.309 0.410 0.359 0.396
White corrected t-statistic in parentheses; ***, **, *, significant at 0.01, 0.05, 0.10 probability levels, respectively
4.2 Corruption effects on TFP growth
Regarding productivity growth, we next estimate the effects of corruption on the Malmquist productivity indices
calculated in the previous section. This allows us to study whether corruption has a significant effect on TFP
growth rates and, if so, whether this effect is apparent through variations in relative efficiency or shifts of the
production frontier.
In studying productivity growth, we must bear in mind that the base efficiency level of an economy might condition
TFP growth. On the one hand, one would expect the initial level of efficiency to be positively correlated with
technological change since this would be the mechanism through which economies with already high efficiency
levels might increase their productivity. On the other hand, the initially less efficient economies could increase
their productivity by improving their relative efficiency, so that one would expect a negative correlation between
the initial efficiency levels and efficiency gains. The total effect of the initial efficiency level on TFP growth will
hence depend on the relative weights of these two counteracting effects.
Productivity growth could also be affected by an economys process of capital accumulation. The returns to
technology may differ according to the input mix of an economy, so technological improvements might depend on
the process of capital per worker accumulation. This mechanism might be thought as closely related to the
concept of appropriate technology, that is, to the idea that the technical frontier does not shift evenly across its

surface but biased towards certain factors of production (Basu and Weil 1998; Acemoglu and Zilibotti 2001).
Moreover, capital accumulation may be a channel of adopting the existing technology, thus contributing to
efficiency gains or technological catch-up through the transfers of capital-embodied technology (Romer 1986).
Other variables that could condition TFP growth are human capital and openness to trade. Human capital may
have a dual effect on production. On the one hand, it might be regarded as an input of the production process, with
a level effect on the productivity of other productive inputs; in this case, changes in human capital would
contribute to explain changes in TFP. On the other hand, the level of human capital could enhance TFP growth,
contributing to technological progress and/or favoring efficiency gains through the adoption of technical
advances, thus in line with the idea of absorptive capacity developed by Abramovitz (1986).16 Finally, theoretical
justification for trade as a productivity driving factor can be found in Grossman and Helpman (1991), where
openness to trade appears as a channel for adopting new technologies from abroad, thus contributing to technical
catch-up.
Table 3 provides the results of estimating the impact of corruption on productivity growth, including various
control variables (regressions 1 to 6) and making use of instruments (regressions 7 and 8) in order to obtain
consistent estimates. These estimates show that corruption exerts a significant negative impact on TFP growth,
and this result is robust to the introduction of our control and instrumental variables. Across specifications, all
control variables have the expected sign, although they are not always significant. Initial efficiency enters the
regressions with a significant negative sign, thus providing evidence for a process of convergence in terms of
productivity since economies that start out from lower levels of relative efficiency have, on average, greater TFP
growth. Openness to trade and capital accumulation appear to have a positive impact on TFP growth, despite the
fact that the estimated coefficient for trade seems to be small and the effect of capital accumulation, although
greater, is not always significant. Other variables such as human capital or the regional variables do not exhibit in
principle a significant impact on TFP growth.17
The estimates for the impact of corruption on the components of TFP growthvariations in relative efficiency and
shifts in the technological frontierare presented in Tables 4 and 5. Firstly, the results suggest that the negative
effect of corruption on TFP growth manifests through its impact on shifts of the technological frontier, but its
influence is not found to be significant in explaining variations in efficiency. Focusing on changes in efficiency, we
observe that the aforementioned process of productivity convergence is the result of the gains in efficiency
achieved by the initially less efficient economies, without the initial efficiency level being significantly correlated
with the shifts of the production frontier. Other variables that positively contribute to the process of technical
catch-up are capital accumulation and openness to trade. Thus, we find empirical support for these variables
16Romer (1989) offers a complete discussion on the channels through which education may foster productivity
and economic growth.
17We also introduced an interaction term between education and openness, and tested other regional variables
and a dummy to distinguish between OECD and non-OECD economies, but the results for these variables were not
significant in either regression (neither in explaining TFP growth nor regarding each of its components).
TFPchange(1)OLS(2)OLS(3)OLS(4)OLS(5)OLS(6)OLS(7)TSLS(8)TSLS
Constant1.0000.9931.0030.8280.8060.8780.9990.847
(166.7)***(133.1)***(134.5)***(9.612)***(10.25)***(9.710)***(164.5)***(9.199)***
Initialefficiency0.0350.0360.0350.0380.0400.0380.0380.041
(3.322)***(3.798)***(3.182)***(3.690)***(4.345)***(3.401)***(3.304)***(3.621)***
Absenceofcorruption0.0050.0030.0050.0040.0030.0040.0050.005
(5.302)***(2.469)**(4.908)***(4.179)***(1.910)*(4.078)***(4.529)***(3.452)***
Capital(perworker)0.1760.1920.1270.156
accumulation(2.002)*(2.386)**(1.383)(1.647)

Education(averagelevel)0.0010.001
(0.594)(0.546)
Education(change)0.0050.003
(1.607)(1.100)
Totaltrade0.00010.0001
(2.093)**(2.502)**
SubSaharaAfrica0.0100.008
(dummy)1.586)(1.307)
SouthAsia(dummy)0.0130.009
(1.154)(0.833)
0.014700.012840.014300.014300.012230.014180.014750.01434
R2 (adjusted)0.3230.4190.3590.3590.4730.3700.2530.314
Whitecorrectedt-statisticinparentheses;***,**,*,significantat0.01,0.05,0.10probabilitylevels,respectively
Table3CorruptionandTFPgrowth
Efficiencychange(1)OLS(2)OLS(3)OLS(4)OLS(5)OLS(6)OLS(7)TSLS(8)TSLS
Constant1.0191.0151.0110.8420.7790.8441.0180.854
(157.9)***(120.3)***(124.2)***(9.060)***(8.906)***(8.620)***(156.3)***(8.610)***
(3.400)***(3.459)***(2.528)**(3.742)***(4.105)***(2.835)***(3.236)***(3.573)***
(1.817)*(1.576)(1.920)*(0.935)(0.949)(1.173)(1.654)(0.922)
Capital(perworker)0.1810.2420.1720.168
accumulation(1.903)*(2.699)***(1.721)*(1.651)
Education(averagelevel)0.0020.002
(1.211)(1.379)
Education(change)0.0030.001
(0.861)(0.279)
Totaltrade0.00010.0001
(2.175)**(2.666)**
SubSaharaAfrica0.0050.008
(dummy)(0.781)(1.110)
SouthAsia(dummy)0.0210.017
(1.753)*(1.366)
0.015810.014520.015630.015430.013620.015340.015830.01545
R2 (adjusted)0.1490.2900.1680.1890.3750.1980.1410.188
Table4Corruptionandefficiencychange
Technologicalchange(1)OLS(2)OLS(3)OLS(4)OLS(5)OLS(6)OLS(7)TSLS(8)TSLS
Constant0.9850.9820.9940.9910.9951.0600.9920.990
(305.7)***(234.7)***(293.1)***(261.4)***(20.733)(25.622)(310.9)***(275.3)***
(0.141)0.301)(1.327)(1.276)(0.172)(0.941)(0.868)(1.110)
(5.998)***(1.200)(5.926)***(1.866)*(5.526)***(2.258)**(4.458)***(1.740)*
Capital(perworker)0.0110.070

accumulation(0.216)(1.669)
Education(averagelevel)0.0020.0010.0010.001
(3.366)***(2.082)**(2.052)**(1.176)
Education(change)0.002
SubSaharaAfrica0.0150.0130.0140.0140.0123
(dummy)5.189)***(3.869)***(4.201)***(4.890)***(3.725)***
SouthAsia(dummy)0.007.0060.004
(1.322)(1.199)(0.832)
0.007890.007200.006510.006350.007970.006230.006560.00642
R2 (adjusted)0.4930.5320.6550.6370.4830.6500.6130.629
(1.090)
(0.651)
Table5Corruptionandtechnologicalchange
Totaltrade0.00002
to enhance efficiency gains, being channels of technical catch-up through the transfer and adoption of technical
advances. On the contrary, human capital does not appear to have a significant effect in favoring efficiency gains.
Regarding the shifts of the technological frontier, we find that the absence of corruption favors technological
progress. The level of human capital also contributes positively to shift the technological frontier whereas capital
accumulation and openness to trade do not exert a significant impact. Furthermore, the regional dummy for Africa
exhibits a negative and significant coefficient in regressions for technological change, which is in accordance with
the poor productivity performance observed in sub-Saharan economies. Notwithstanding the negative impact of
corruption on technological progress, it is noteworthy that the introduction of the human capital variable lowers
the coefficient and significance of our measure of corruption, suggesting that the influence of corruption on
technological change could manifest via a negative impact on human capital.
5 Conclusions
Over the last decade there has been growing interest in understanding the relationship between corruption and
economic performance. Corruption has been found to negatively affect economic activity, but the debate concerns
the way by which this variable influences economic results. Investment and physical capital accumulation first
attracted the attention of researchers analyzing the economic consequences of corruption. In addition, some work
focused on studying the impact of corruption on the allocation of resources or the distribution between public and
private investment, thereby looking at productivity only in an incidental manner. Recently, some studies have
centered on productivity, focusing on the effects of corruption on either the levels or growth rates of productivity.
Nevertheless, these contributions generally adopt partial productivity measures or estimate TFP as a residual from
a growth accounting exercise. In this paper, a frontier approach was adopted in order to study whether corruption
conditions the levels of efficiency of the economies and the growth rate of TFP, trying to identify the channels
through which corruption can influence productivity growth. Therefore, we did not attempt to estimate the total
effects of corruption on economic results, but just to focus on its impact on productivity. Thus, by adopting a
productivity-based perspective, this study focused on how corruption conditions both the levels and rates of
growth of TFP.
With regard to the levels of efficiency, corruption is found to have a negative effect on this variable and this result
is robust to the introduction of various control variables and to the use of instruments. On the other hand,
corruption is also found to negatively affect TFP growth, with economies that show lower levels of corruption
recording, on average, faster growth rates. This negative effect of corruption on productivity growth is manifest
through its impact on shifts of the technological frontier, while its influence was not found to be significant in
explaining efficiency changes. Despite the negative impact of

corruption on technological progress, it is worthy to note that the introduction of the human capital variable lowers
the coefficient and significance of the corruption variable, suggesting that the negative effect of corruption on
technological progress appears via its influence on human capital.
These results suggest that if strategies aimed at reducing corruption succeed, the efficiency at which economies
operate could be increased and higher rates of growth could be achieved. Moreover, the negative impact of
corruption through human capital may also limit the possibilities of economic growth in the long run since this
factor represents an important channel for exploiting previous technologies from other economies and for
developing new ones. Therefore, given that corruption seems to negatively impact on technological progress, the
effects of achieving lower levels of corruption will spread on the long term.
Appendix
Let St be the technology of production at period t (t = 1,...T):
St = [braceleftbig][parenleftbig]Xt, Yt[parenrightbig] : Xt can produce Yt[bracerightbig] (1) where Xt and Yt are the
vectors of inputs and outputs, respectively.
Following Shephard (1970), the distance function at period t is defined as:18
Dto [parenleftbig]Xt, Yt[parenrightbig] = min [braceleftbig] : [parenleftbig]Xt, Yt[slashbig][parenrightbig]
St[bracerightbig] (2) which allows a perfect characterization of the technology, since (Xt, Yt) St
if, and only if, Dto(Xt, Yt) 1.
In order to define the Malmquist productivity index, we need to relate the input and output vectors at period t to the
technology of the next period, St+1:
Dt+1o [parenleftbig]Xt, Yt[parenrightbig] = min [braceleftbig] : [parenleftbig]Xt, Yt[slashbig][parenrightbig]
St+1[bracerightbig] (3) Similarly, we could define Dto(Xt+1, Yt+1), where the input and output vectors at period t + 1
would be related to the period t technology.
On the basis of the above concepts, Fre et al. (1994) define the following Malmquist productivity index:
Mt+1o [parenleftbig]Xt+1, Yt+1, Xt, Yt[parenrightbig] =
[bracketleftBigg] Dto [parenleftbig]Xt+1, Yt+1[parenrightbig]
Dto (Xt, Yt)
Dt+1o [parenleftbig]Xt+1, Yt+1[parenrightbig]
Dt+1o (Xt, Yt)
1/2
(4)
18The subscript o refers to output based distance functions. See Fre (1988) for a discussion of input and output
distance functions.
As it can be observed, this index is the geometric mean of two Malmquist indices, the first related to the
technology of period t, and the second to the technology of period t + 1.19
This is in fact an index of productivity change between period t and t + 1 and
can be decomposed into efficiency change (EC)change in relative efficiency between periods t and t + 1and
technological change (TC)the geometric
mean of the shift in the frontier between these two periods:
Mt+1o = EC TC
where EC =
Dt+1o(Xt+1, Yt+1)
Dto(Xt, Yt) and
TC=
[bracketleftbigg] Dto(Xt+1, Yt+1)
Dt+1o(Xt+1, Yt+1)

Dto(Xt, Yt)
Dt+1o(Xt, Yt)
1/2
(5)
In order to estimate the component distance functions of the Malmquist index, we use the data envelopment
analysis (DEA)20 non-parametric technique of linear programming. By assuming constant returns to scale21 and
exploiting the fact that the distance functions can be estimated as reciprocals of Farrell efficiency measures,22
the specific problem to calculate Dto(Xt, Yt) can be expressed as:
Dto(Xt, Yt)[bracketrightbig]1 = max
yi,t + Yt 0
s.t. xi,t Xt 0
0 (6)
The other three distance functions are calculated similarly, substituting the appropriate period index (i.e. t or t + 1).
19A similar productivity index, based on Malmquist (1953), was proposed by Caves et al. (1982). However, these
authors assumed Dto(Xt, Yt) and Dt+1o(Xt+1, Yt+1) to be equal to unity, so that technical inefficiencies were not
considered.
20Method developed by Charnes et al. (1978), based on Farrell (1957) technical efficiency measures.
21Grifell-Tatj and Lovell (1995) show that the Malmquist index may not be an accurate measure of TFP change
when non-constant returns are assumed. Furthermore, the constant returns to scale assumption is sufficient
condition to guarantee that the optimization problem has a solution.
22Specifically,
Dto(Xt, Yt) = min{ : (Xt, Yt/) St}
= [max{ : (Xt, Yt) St}]1 = 1/Fto(Xt, Yt)
where Fto(Xt, Yt) is the Farrell output based measure of technical efficiency.
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DETAILS
Subject: Studies; Economic theory; Corruption; Efficiency; Productivity; Economic growth;

Human capital; Economic models
Classification: 9130: Experimental/theoretical; 1130: Economic theory
Publication title: Portuguese Economic Journal; Heidelberg
Volume: 10
Issue: 2
Pages: 109-128
Publication date: Aug 2011
Publisher: Springer Science &Business Media

Place of publication: Heidelberg
Country of publication: Netherlands, Heidelberg
Publication subject: Business And Economics--Economic Situation And C onditions
ISSN: 1617982X
Document type: Feature
DOI: http://dx.doi.org/10.1007/s10258-010-0059-3
Copyright: Springer-Verlag 2011
LINKS
The impact of corruption on provincial

development performance in Vietnam
Dang, Quang Vinh 1 1 Central Institute for Economic Management (CIEM), Ministry of Planning and
Investment, Vitenam, Hanoi, Vietnam . Crime, Law and Social Change ; Dordrecht Vol. 65, Iss. 4-5, (Jun
2016): 325-350.
ABSTRACT (ENGLISH)
Issue Title: Corruption Research in Vietnam
Corruption has long been considered a national illness in Vietnam but progress in fighting corruption has been
modest. In recent years, the Communist Party of Vietnam and the Government of Vietnam have strengthened their
efforts to prevent and fight corruption. Despite strong anti-corruption measures being implemented at the national
level, provincial authorities have shied away from tackling corruption. One of the reasons for this could be that it is
not clear to provincial authorities if and how corruption is affecting local development economically and socially.
This article demonstrates that corruption has a negative impact on private sector investment, employment and per

capita income at the provincial level in Vietnam. However, corruption is found to have no significant impact on how
income is distributed across provinces. The findings demonstrate that more effective anti-corruption measures are
necessary to promote the private sector and improve household income. The study provides provincial leaders
with empirical evidence and incentives for fighting corruption.
FULL TEXT

Crime Law Soc Change (2016) 65:325350
DOI 10.1007/s10611-016-9608-8
Quang Vinh Dang1
Published online: 18 February 2016# Springer Science+Business Media Dordrecht 2016
Abstract Corruption has long been considered a national illness in Vietnam but progress in fighting corruption has
been modest. In recent years, the Communist Party of Vietnam and the Government of Vietnam have strengthened
their efforts to prevent and fight corruption. Despite strong anti-corruption measures being implemented at the
national level, provincial authorities have shied away from tackling corruption. One of the reasons for this could be
that it is not clear to provincial authorities if and how corruption is affecting local development economically and
socially. This article demonstrates that corruption has a negative impact on private sector investment,
employment and per capita income at the provincial level in Vietnam. However, corruption is found to have no
significant impact on how income is distributed across provinces. The findings demonstrate that more effective
anti-corruption measures are necessary to promote the private sector and improve household income. The study
provides provincial leaders with empirical evidence and incentives for fighting corruption.
Introduction
Corruption is generally viewed in the larger academic literature as a hindrance to economic growth and
development. Corruption discourages investment by increasing costs and reducing certainty in the business
environment. It negatively impacts efficiency by diverting valuable resources from the public coffers into private
pockets, and from efficient projects to inefficient ones.
This article is an edited version of a paper by the same title, which was presented at the 2014 Vietnam Economist
Annual Meeting (VEAM), Ho Chi Minh City, 2425 June 2014 and the Costs of Corruption in Vietnam Research
Symposium, Hanoi, 2526 June 2014.
* Quang Vinh Dangquangvinh.dang@gmail.com; dangquangvinh@mpi.gov.vn
1 Central Institute for Economic Management (CIEM), Ministry of Planning and Investment,
Vitenam, Hanoi, Vietnam
http://crossmark.crossref.org/dialog/?doi=10.1007/s10611-016-9608-8&domain=pdf
Web End = http://crossmark.crossref.org/dialog/?doi=10.1007/s10611-016-9608-8&domain=pdf

Web End = The impact of corruption on provincial development performance in Vietnam
326 D. Quang Vinh
In Vietnam, as pointed out in the 2012 Governments report to the National Assembly (Nguoi lao dong 2012)
corruption has long been named a national problem that threatens the existence of the regime. However, the
situation has not improved in recent years. The Vietnam Competitiveness Report 2010 1 ([1]: 14) states that
Bcorruption levels show few signs of falling^. By international standards, the situation of corruption in Vietnam
seems to have gotten worse in the past few years. In 2012, Vietnam dropped 11 places to the 123rd place in the
Transparency Internationals Corruption Perception Index (from 112th in 2011).
In recognition of the grave consequences of corruption, the Communist Party of Vietnam (CPV) and the
Government of Vietnam have in recent years stepped up efforts to prevent and fight corruption. This includes the
revision of the Law on Anti-corruption promulgated by the National Assembly in November 2012, and the
reallocation of the Central Steering Committee for Anti-Corruption from the Prime Ministers Office to the Partys
Secretary General. However, no major changes have yet been seen, possibly due to the fact that it takes time to
implement far-ranging policies such as anti-corruption measures. It can also be observed that local leaders in
Vietnam are not very active in fighting corruption. They seem to perceive that corruption happens somewhere else
and that anti-corruption initiatives have nothing to do with their mandate and responsibility.
This calls for a rigorous study that specifically demonstrates to local leaders how corruption can dampen local
development in Vietnam, which in turn can jeopardize or slow down their political careers. At the national level,
empirical studies of this kind can also provide relevant leaders and government agencies with valuable information
on the tangible costs of corruption in relation to socio-economic performance so that that they can remind their
provincial counterparts of the pernicious effects of corruption and demand that provincial leaders implement the
necessary changes.
Corruption is popular as a research subject. However, there are only a few evidence-based studies on corruption in
Vietnam. Perhaps this is due to the lack of data and attention from both government agencies and the academia.
Some noticeable studies on corruption in Vietnam include Nguyen and van Dijk [2], Gueorguiev and Malesky [3],
and the World Bank [4], as well as Rand and Tarp [5] and DEPOCEN [6]. This study hopes to contribute to the
limited knowledge of corruption in Vietnam, especially regarding its impact on local socio-economic development.
Corruption comes in many shapes and forms, and different types of corruption have different impacts on
development performance. Depending on the angles from which corruption is looked at, there are different ways to

categorize corruption. Focusing on political and administrative functions, corruption can be categorized as (i)
bureaucratic or petty corruption which involves bureaucrats delivering public services, and (ii) political corruption
or grand corruption committed by political elites at national policy levels (see [7]). In this article, we focus on petty
corruption. Of particular interest are firms perceptions about corruption that take place at an administrative level,
for example during firm registration, when applying for public services (e.g. requesting construction permits) or
when businesses are inspected by local authorities.
1 This report was commissioned by the Government of Vietnam and written under the guidance of Professor
Michael Porter, Harvard Business School.
Corruption on provincial development performance in Vietnam 327
Conventional corruption studies focus on the impact of corruption on GDP or GDP per capita. However, in the
provincial context, and in view of the so-called legal target,2 GDP is not chosen as an indicator of economic
development, given that Vietnams national and provincial GDP estimates are notoriously incorrect and
inconsistent. Instead, this study focuses on three important issues for sustainable development in Vietnam,
namely, the development of the domestic private sector, income per capita and income inequality.
The two main variables in the analysis are the impact of corruption on i) domestic private sector investment and ii)
employment. Private sector investment has long been recognized as a significant driver of long-term growth, and
employment generated by private businesses is crucial in providing income to the population and maintaining
social order. As for social development, the analysis focuses on household per capita income and the Gini
coefficient. These indicators are important for local leaders because local economies are very much dependent on
private sector development, particularly after a wave of state-owned enterprises (SOE) privatization that took place
in the late 1990s and early 2000s. Household income and income inequality are also performance indicators that
are often stipulated in the five-year and annual socioeconomic development plans approved by the provincial
Peoples Council. If corruption can be shown to have a negative impact on these indicators, then these findings can
be used to pressure local leaders to implement more effective anti-corruption measures in their provinces.
The central research question of this study is how and to what extent corruption is affecting socio-economic
development in provinces of Vietnam, especially with regard to private investment, job creation, household income
and income inequality. In seeking to produce evidence about the supposedly negative impact of corruption on
socio-economic development in provinces of Vietnam, the ultimate goal of this study is to bring to the attention of
government agencies and the general public the costs of corruption in real terms so that leaders feel compelled to
take more immediate actions to fight corruption.
The next section reviews the literature regarding the impact of corruption on economic performance and income
inequality. It is followed by a discussion on the research approach and data employed in this study. The next
section presents and interprets the findings of the study. The final section concludes with some policy
discussions.
Literature review
Impact of corruption on economic performance
Corruption is generally seen as an obstacle to investment and growth because it increases the costs of doing
business and reduces expected profits. In addition, corruption, which is secret in nature, makes the business

environment less certain. It is then
2 In Vietnam, every year the National Assembly passes a resolution on socio-economic development in which the
government is mandated to achieve some specific socio-economic targets which include, in particular, GDP growth
rate; hence the term Blegal target^. The same exercise is carried out at the provincial level.
328 D. Quang Vinh
more difficult for investors to make decisions, which in turn prevents investments from occurring. Corruption can
also exert a negative impact on economic growth by shifting valuable resources from efficient users to inefficient
ones, which can generate detrimental consequences for the economy. Researchers often refer to the negative
impacts of corruption on development and economic growth as the sanding the wheel effect.
On the contrary, some researchers have proposed that corruption may help development because it creates
incentive for low-paid bureaucrats to work harder in providing public services to firms. This is often referred to as
the greasing the wheel effect. Lui [8] analyses a model in which corruption works similarly to an auction where the
most efficient firms pay the highest price and get served, thus making the economy more efficient. However, these
theoretical arguments face serious criticisms. For example, corrupt bureaucrats may create delays to extract
bribes when they know firms are ready to pay more. Luis analytical work suffers from many shortcomings such as
the assumption of information symmetry (i.e., everybody knows about the auction of the services) and lack of
dynamic interaction between economic and political factors(i.e., inefficient but politically powerful firms may win
the deal). There also is some evidence in support of the greasing the wheel approach in the work of Dreher and
Gassebner [9]. They find that corruption facilitates firm entry in highly regulated economies where it takes more
than 50 days to start a business. However, this finding alone cannot lead to a conclusion about the overall impact
of corruption on economic growth because entry of some firms may limit entry of others and entry by itself does
not necessarily ensure increased investment and long-term economic growth.
In the current literature, there is ample empirical evidence about the negative impact of corruption on growth.
Mauro [10] shows that corruption reduces investment and lowers growth rates for a sample of 67 countries.
Campos et al. [11], while attempting to explain the East Asian growth-corruption irregularity, also confirms that in
any case, more corruption means less investment.
Corruption can have a negative impact on growth in an indirect way through its impact on the efficiency of
investments.3 Swaleheen [12] shows that corruption has a negative effect on efficiency which is measured by the
ratio of the increase in investment to the increase (or decrease) in GDP. Likewise, Lambsdorff [13] provides
evidence that corruption affects efficiency in the use of the entire stock of capital in a country. Specifically, that
article concludes: B[h]ad investments in Tanzania been undertaken at the low level of corruption that prevails in
the United Kingdom, the total output would have been 20 % higher.^
At the sub-national level, Del Monte and Papagni [14] study the relationship between corruption and growth across
Italian regions and find that corruption has a negative effect on growth, both through its effect on private
investment and on the efficiency of public expenditures.
At the firm level, Fisman and Svensson [15] show that corruption is negatively correlated with firm growth for a
sample of Ugandan firms. Using data of about 10,000 firms collected by the World Bank in 19992000, Asiedu and
Freeman [16] show that

3 This indirect method, as opposed to the direct method, refers to ways in which corruption can affect growth
through a transmission mechanism or channel (such as investments). That is, growth is affected by a number of
variables or parameters, each of which is equally affected by corruption. To better ascertain the relationship
between growth and corruption, many authors suggest looking at the indirect channels, as well as the direct ones.
corruption has a negative and significant effect on investment growth of firms in transition countries and is the
most important determinant of investment in these countries. In Vietnam, Nguyen and van Dijk [2] analyze a
sample of Vietnamese firms and find that corruption hampers the growth of private sector firms but not the state
sector ones. This study uses data collected by the World Banks 2005 Productivity and Investment Climate Survey,
which covers 24 provinces of Vietnam, and the Provincial Competitiveness Index (PCI) survey of 2005.
Studies have also shown the negative effects of corruption on foreign direct investment (FDI). Javorcik and Wei
[17] analyze firm data from 22 transition economies in Central and Eastern Europe and show that corruption
reduces the probability that a foreign firm looking for an investment destination would choose a certain country to
invest in. With a sample of both OECD and non-OECD countries, Egger and Winner [18] also show a negative impact
of corruption on FDI flows.
For a specific firm, corruption can either be an advantage or a disadvantage. On the one hand, corruption can be an
unbearable cost for a firm to expand to a new location or a new line of business. On the other, corruption can
provide another firm means of accessing valuable resources or great business opportunities. In other words,
corruption creates winners and losers. However, the aforementioned studies defending the sand the wheel
approach suggest that the net effect of corruption on a national or provincial economy is expected to be negative.
Corruption and income inequality
In theory, when political or grand corruption happens, it creates the possibility for the rich to get richer by
influencing policies to align with their own interests, thus worsening the inequality problem. Grand corruption can
lead to low government investment in education, which reduces access to education by poor people and limits
their opportunities to find good jobs and get out of poverty [19]. In addition, grand corruption can lead to higher
inequalities by creating incentives for higher investment in capital-intensive projects and lower investment in labor-
intensive projects [20].
There is empirical evidence on the negative impacts of corruption on income distribution. Gupta et al. [21] study
the impact of corruption in a cross section of countries and conclude that high and rising corruption increases
income inequality and poverty. Li et al. [22] examine the impact of corruption on inequality in a large sample of
countries and show that corruption is an important determinant of inequality with corruption alone explaining half
of Latin AmericaOECD Gini differential and all of the AsiaOECD Gini differential. Dong &Torgler [19], in turn, analyze
Chinas provincial level data and find that corruption increases income inequality and reduces government
spending on education. On the contrary, in the context of Latin America with a high level of informality, Dobson and
Ramlogan-Dobson [23] demonstrate that lower corruption is associated with higher income inequality. The
explanation is that lower corruption is associated with formalization, higher costs and lower employment for the
poor.
With respect to petty corruption, it can reduce private investment and job creation, thus preventing the poor from
getting jobs and income from the growth of the private sector [15, 16]. Petty corruption as measured by firm

perception in interacting with bureaucrats also has a negative impact on FDI [17], thus reducing job opportunities
for the poor who only have labor that FDI firms seek.
330 D. Quang Vinh
Research approach and data
Research approach
Most empirical studies on corruption that we are aware of utilize cross-sectional data at either the national or firm
level. This study greatly benefits from the availability of panel data extracted from the Provincial Competitiveness
Index (PCI), with observations of 63 provinces over the 20062012 period. Given this availability of data, panel with
unobserved effects is a favorable model because it can take into account unobserved province-specific
characteristics (that can have an impact on provincial economic performance) such as traditional and natural ones
(geography, climate, business tradition, etc.). If we do not take into account these variables that influence the
dependent variable but cannot be observed, our estimation will be biased because of the missing variable problem.
4 In this type of model, the unobserved effects are assumed to stay constant over time. Therefore, we apply the
following panel data model to empirically examine the relationship between corruption and development
performance:
Yi;t 1Corruptioni;t 2Controlsi;t ui i;t
In the above equation, Yi,t is the dependent variable which can be one of the four development indicators
discussed previously (i.e., investment, employment, household per capita income and Gini coefficient). Corruption
is one of several corruption variables which will be discussed in detail below. Controls is a vector of control
variables which are included to avoid omitted variable problems and obtain unbiased estimates of the effect of
corruption variables. ui is the unobserved province-specific effect as mentioned above and i,t is the idiosyncratic
error term (which is assumed to satisfy the classical OLS assumptions).
The control variables we use in this study are area, population, distance to Hanoi or Ho Chi Minh City, and
infrastructure development as proxied by the number of landline and post-paid mobile subscribers. These control
variables are included in the model because they are found to have significant effects on development indicators.
Naturally, land area and population are proxies for market size of the province which is normally proxied by GDP
per capita but this variable is not reliable in the Vietnamese context.
Distance to economic centers is a classical explanatory variable that is often included in research on investment
and economic growth (see, for example, [17]). The World Bank Economic Development Report 2009 dedicates an
entire chapter to the importance of economic distance and its implications for national economic development.
The level of infrastructure development is always important for investment because surveys show that firms often
cite infrastructure quality as an obstacle to doing business. In this study, the level of infrastructure development is
proxied by the number of landlines and post-paid mobile subscribers per thousand
4 If a variable has the potential to influence the dependent variable but it is not observed, hence not included, in the
estimation equation, the effects of included variables will carry the effect of the unobserved variable and the
estimated coefficients of included variables will be biased.

people. Chakraborty and Nandi [24] indicate that telecommunication infrastructure and growth have a significant
two-way causal relationship, which suggests that infrastructure should have an effect on private investment
because investment and growth are closely related (see also Barro [25] and Islam [26]. Without these variables, we
cannot correctly estimate the marginal effect of corruption on the development indicators of concern because of
the omitted variable problem. In other words, the effect of the included variables may carry the effect of the
omitted variables and we cannot tell which is which.
Description of data and detailed specification
This research makes use of three major data sources. The first is the annual enterprise censuses that have been
conducted since 2000 by the General Statistics Office (GSO). This dataset gives the sum of firms long-term and
fixed assets by ownership type and by province which is used to measure private sector investment at the
provincial level. This dataset also provides the number of employees in domestic private sector firms. The second
is a series of household living standard surveys (VHHLSS) conducted every other year since 2002 by the GSO with
technical assistance from the World Bank. These VHHLSS are carried out in accordance with international
standards and can be considered the most reliable data source in Vietnam. GSO uses these VHHLSS to generate
the provincial average income per capita and the Gini coefficients, which this study employs to assess the impact
of corruption on income and inequality. The third data source is the Provincial Competitiveness Index (PCI) survey
conducted by the Vietnam Chamber of Commerce and Industry (VCCI) with technical and financial assistance from
the US Agency for International Development (USAID). This survey covers almost all aspects of the provincial
business environment and reflects the quality of local economic governance, including corruption. Specifically, the
three survey questions that are used in this study to measure corruption are:
1. Question 9, Section D of the PCI 2012 survey5: Do you agree with this statement: It is common for firms in my
line of business to have to pay some irregular additional unofficial payments? The percentage of firms in a
province that answers Agree or Strongly agree is used as the first corruption variable which indicates the
prevalence of corruption in a province. This variable is denoted as d10_new.
2. Question 10, Section D of the PCI 2012 survey: On average, what percentage of income do firms in your line of
business typically pay per annum in unofficial payments to public officials? The percentage of firms in a province
that answers 10 % or higher is used as the second corruption variable which measures the burden of corruption.
This variable is denoted as d11_new.
3. Question 11, Section D of the PCI 2012 survey: If a firm has made unofficial payments, are transactions
conducted exactly as they wish? There are five answers to this question: (1) Always; (2) In most of the cases; (3)
Sometimes; (4) Rarely;
5 Numbering may be different from one year to another, but the wording of the question has not changed since
2006.
332 D. Quang Vinh
and (5) Never. The percentage of firms in a province that answer Always or In most of the cases is used as the
third corruption variable, indicating the predictability of corruption. This variable is denoted as d12_new.6
These questions are standard ones that have been used in surveysincluding the World Bank Enterprise Surveys,7

and often used for corruption research.8 Regarding the control variables, data is collected from the GSO statistical
yearbooks over the 2006 2012 period.
Table 1 below shows descriptive statistics of the variables used in this study. There was a drop in private sector
investment and employment in 2009 as compared to 2008. The average income per capita increased quickly over
the period 20062012, but this is nominal income with the inflation effect not accounted for. The Gini coefficient
increased over the 20062010 period from 0.374 to 0.386, but fell to 0.38 in 2012. One thing to note here is the
small variation in Gini coefficient which may render the estimation of the impacts of corruption on inequality
meaningless due to insignificant coefficient estimates.
On average, the indicator of the prevalence of corruption (d10_new) shows signs of improvement over the years.
The average percentage of firms agreeing that paying bribery is common practice in their line of business falls
from 69 % in 2006 to 53.5 % in 2012. However, the burden of corruption (d11_new) decreases from over 13.47 % in
2006 to almost 8 % in 2011. Table 1 also shows that predictability of corruption improves over the period with the
average percentage of firms agreeing that transactions are done as expected, increasing from 47 % in 2006 to 62 %
in 2011 before falling to 58.4 % in 2012.
Table 2 shows the average investment, employment, income per capita and GINI by corruption quartile. Corruption
quartiles are created based on a corruption index which is the simple average of the prevalence of corruption
(d10_new) and the burden of corruption (d11_new). These two variables are observed consistently over the period
and are highly correlated. The corruption index ranges from 0 to 10, with 10 representing little to no corruption. As
we can see, the level of investment and employment rises as corruption levels fall, except for the 4th quartile.
However, income per capita consistently increases as we move from the 1st quartile to the 4th quartile. The
average Gini coefficient also falls as the severity of corruption lessens, except for the 4th quartile.
In the Appendix, we provide some figures that show the position of provinces in the corruption-development
sphere. As in the quartile comparison, the corruption index used here is the simple average of prevalence of
corruption and burden of corruption and is rescaled on a 010 range with 10 being the cleanest. What stands out of
these figures is that Ha Noi and Ho Chi Minh City have very high levels of
6 In addition to these perception questions, the PCI survey also makes use of the Unmatched Count Technique
(UCT) or List question to generate a more precise measure of corruption prevalence, but the response rate for
some provinces is not high enough to build a statistically significant measure for cross-province comparison. See
Coutts and Jann [27] and Blai and Imai [28] for details about UCTs.
7 Visit http://www.enterprisesurveys.org/
Web End =http://www.enterprisesurveys.org/ for details about the surveys and a list of studies that use the survey
data.
8 See, for example, Fisman and Svensson [15], Campos et al. [11], and World Bank [29].
Table 1 Descriptive statistics
Dependent variables

Year Investment (mil. VND) Employment Income (thousand VND per month)
Subscribers Distance
(km)
mean std. dev. mean std. dev. mean std. dev. mean std. dev.
2006 5256.36 3685.65 1322.4 1056.3 139.19 217.13 257.59 221.05
2007 5256.36 3685.65 1336.8 1079.7 179.49 254.94 257.59 221.05
2008 5256.36 3685.65 1351.1 1125.1 223.59 292.68 257.59 221.05
2009 5256.36 3685.65 1365.5 1151.5 248.64 286.59 257.59 221.05
2010 5256.36 3685.65 1379.9 1175.0 248.31 287.16 257.59 221.05
2011 5256.36 3685.65 1394.3 1196.9 223.09 331.44 257.59 221.05
2012 5256.36 3685.65 1409.1 1219.1 161.41 231.71 257.59 221.05
private investment, private employment and income per capital, but they suffer from considerable corruption which
is close to the national average. In 2012, the corruption index scores of Ha Noi and Ho Chi Minh City are 6.35 and
7.13 while the national average is 6.63. Some provinces that are doing well in both control of corruption and
private sector development are Binh Duong, Dong Nai, Da Nang and Long An. The provinces that are lagging
behind in both private investment and control of corruption are Northern mountainous provinces such as Bac Kan,
Cao Bang, Hoa Binh and Ha Giang.
Table 3 shows the correlation matrix of variables used in this study. The Gini coefficient is not significantly
correlated with any explanatory variables, which
Gini Std. dev.
Mean Std. dev. Mean Std. dev. Mean Std. dev. Mean std. dev.
2006 4653.41 15769.96 50144.76 120856.4 572.73 196.72 0.374 0.027
2007 9258.98 35169.67 59095.90 138874.5 N/A N/A N/A N/A
2008 14818.02 54543.93 73524.83 165200.4 870.76 308.00 0.381 0.025
2009 14553.35 54253.25 68882.21 161492.0 N/A N/A N/A N/A
2010 20182.84 72040.95 79704.71 185659.1 1198.26 414.43 0.387 0.027

2011 33622.49 141351.90 94941.40 230180.6 N/A N/A N/A N/A
2012 85392.04 344425.90 109734.70 268533.7 1745.08 601.29 0.380 0.030
Corruption variables (%)
Prevalence (d10_new) Burden (d11_new) Predictability (d12_new)
mean std. dev. mean std. dev. mean std. dev.
2006 68.95 7.16 13.47 5.35 47.00 8.97
2007 67.95 7.36 11.38 5.22 47.16 8.08
2008 65.59 7.84 10.27 4.74 48.71 7.06
2009 58.86 9.67 9.74 4.03 52.80 7.22
2010 56.90 11.16 7.20 4.12 56.12 8.37
2011 52.74 12.77 6.89 3.50 61.95 10.50
2012 53.50 10.54 7.81 5.19 58.40 10.82
Control variables
Area (km2) Population
(thousand)
334 D. Quang Vinh
Table 2 Investment, employment, income and GINI by corruption quartile
Investment (ln) Employment (ln) Income per capita (ln) GINI
1st quartile 8.255 10.31 6.64 0.391
2nd quartile 8.542 10.46 6.88 0.377
3rd quartile 8.716 10.72 6.94 0.373
4th quartile 8.48 10.52 7.01 0.379
suggests that the estimation may not yield meaningful results. It can be seen that the measure of prevalence of
corruption (d10_new) and the measure of burden of corruption (d11_new) are positively and significantly
correlated with each other while they are not significantly correlated with measure of predictability of corruption

(d12_new). It should be noted here that different measures of corruption may have different effects on economic
performance. In general, the prevalence and burden of corruption are theoretically expected to have negative
impacts on investment and growth and this has been empirically proven. On the contrary, as shown by Campos et
al. [11], for the same level of corruption prevalence, predictability of corruption is associated with a higher ratio of
investment to GDP which is needed to sustain long-term growth.
Based on the model (1) and data characteristics, we revised the detailed model specification as follows:
Yi;t 1Corri;t1 2Predi;t1 3Areai 4Popi;t 5Subi;t1
6Disti i Regioni ui i;t

2
In Eq. (2), Corri,t 1 is the first lag of either the measure of prevalence of
corruption or the measure of burden of corruption. Because prevalence and burden of corruption are highly
correlated we do not use them in the same equation to avoid the problem of multicollinearity. Predi,t 1 is the first
lag of the measure of predict
ability of corruption. Regioni is a vector of regional dummy variables which represent seven geographical regions
of Vietnam9 and i is the vector of corresponding coefficients to be estimated. These regional dummies are added
to control for regional differences that cannot be measured but may have effects on the dependent variables. Areai
is the total land area of each province which does not change over time and Popi,t is the population size of each
province. Subi,t 1
is the first lag of the number of landline and post-paid mobile subscribers which is the proxy for infrastructure
development. Disti is the distance from the province to either Ha Noi or Ho Chi Minh City, with the closer economic
center used as a benchmark.
Model (2) is a standard panel data model with unobserved individual-specific effect which is usually estimated by
fixed effect (FE) or random effect (RE) methods. The difference between the two methods is that in case the
explanatory variables and ui are
9 The seven regions are: Red River Delta, Northern Uplands, Northern Central Coast, Southern Central Coast,
Central Highlands, Southeast, and Mekong Delta. The Red River Delta is the reference region in this study.
d10_newd11_newd12_newInvestmentJobIncomeGINIAreaPop.Distance
Note:*meanssignificanceat5%level.d10_new,d11_newandd12_newaremeasuresofprevalence,burdenandpredictabili
tyofcorruption,respectively
Table3Correlationmatrix
d10_new1
d11_new0.42*1

d12_new0.050.091
Investment0.13*0.41*0.32*1
Employment0.0040.39*0.17*0.91*1
Income0.41*0.48*0.29*0.81*0.63*1
GINI0.080.110.010.020.110.0591
Area0.16*0.31*0.010.17*0.21*0.27*0.091
Population0.13*0.21*0.16*0.57*0.43*0.65*0.010.0151
Distance00.22*0.14*0.25*0.26*0.22*0.050.45*0.12*1
Subscriber0.14*0.14*0.12*0.65*0.72*0.35*0.080.090.31*0.27*
336 D. Quang Vinh
correlated, the FE estimator is consistent while the RE estimator is not. However, if the explanatory variables and
ui are uncorrelated, both FE and RE estimators are consistent while the RE estimator is more efficient because it
makes use of the information about the structure of the variance of the composite error term ui +
i,t. The assumption that the explanatory variables and ui are uncorrelated is too strong in many cases and in our
study it seems the assumption is arguable, at least. The reason is because ui is meant to represent geographical
and cultural features that can be correlated with corruption practices, firms perception or tolerance for corruption,
and population size. That means the theoretical ground for RE is weak, leaving FE as a preferred choice. However,
FE has a disadvantage of not estimating coefficients of time-invariant variables because before estimation the
data is transformed such that ui is removed, hence the removal of time-invariant variables. In addition, both FE and
RE requires that all explanatory variables are not correlated with the idiosyncratic error term i,t in order to produce
unbiased estimators. To address this issue, we use the first lags of corruption variables,
Corri,t 1 and Predi,t 1, and the infrastructure variable Subi,t 1 as shown in the Eq. (2).
When endogeneity is suspected and/or confirmed by empirical tests, the usual alternative is to find instrumental
variables not included in the model and to apply the instrumental variable method (IV) to have consistent
estimators. However, it is notoriously difficult to instrument for such a complex variable as corruption because the
instrumental variable has to satisfy two conditions to be a valid instrument: (i) it has to be correlated with the
instrumented variable; and (ii) it cannot be correlated directly with the dependent variable. To our knowledge, in
Vietnam there are no available measured variables that can be valid instruments for corruption.
In this context, we decide to make use of the Hausman-Taylor estimation method (H-T) as it presents several
advantages. H-T offers consistent estimators when some explanatory variables can be correlated with ui while
time-invariant variables are not dropped.10 Essentially, to estimate Eq. (2) by H-T we will make two assumptions:
(i) except for Corri,t 1, Predi,t 1, and Subi,t 1 all other explanatory variables are not correlated with ui; (ii) all

explanatory variables are not correlated with i,t. Basically, assumption (ii) means corruption and infrastructure
level at time t-1 have an impact on the level of investment, job, income and inequality at time t but not the other
way around, and they are not affected by a third factor at the same time.
Empirical results and discussion
In this section, we will present estimation results obtained by FE, RE and H-T methods at the same time. Tables 4,
5, 6 and 7 below show the estimation results of Eq. (2) with four dependent variables as described above. In these
tables, FE, RE and H-T estimations show consistent results.
10 Refer to http://www.stata.com/manuals13/xtxthtaylor.pdf
Web End =http://www.stata.com/manuals13/xtxthtaylor.pdf for an explanation and examples about this method.
Basically, this method uses exogenous variables as instruments to estimate coefficients of time-invariant
endogenous variables.
Table 4 Estimation results for private sector investment
VARIABLES (1) RE_d10 (2) FE_d10 (3) HT_d10 (4) RE_d11 (5) FE_d11 (6) HT_d11
Prevalence (lagged) 0.036*** 0.035*** 0.036***(0.003) (0.003) (0.003)
Burden (lagged) 0.063*** 0.059*** 0.062***(0.006) (0.006) (0.006)
Predictability (lagged) 0.031*** 0.030*** 0.031*** 0.035*** 0.034*** 0.035***(0.003) (0.003) (0.003) (0.003) (0.003)
(0.003)
Area 0.000 0.000 0.000 0.000(0.000) (0.000) (0.000) (0.000)
Population 0.001*** 0.002*** 0.001*** 0.001*** 0.002*** 0.001***(0.000) (0.000) (0.000) (0.000) (0.001) (0.000)
Subscribers (lagged) 0.000 0.000 0.000 0.001 0.000 0.001(0.000) (0.000) (0.000) (0.001) (0.001) (0.000)
Distance 0.000 0.000 0.000 0.001(0.001) (0.001) (0.001) (0.002)
Northern Uplands 0.866*** 0.825* 0.757*** 0.594(0.248) (0.475) (0.250) (0.703)
Northern Central Coast 0.740** 0.738 0.601* 0.611(0.324) (0.650) (0.338) (0.966)
Southern Central Coast 0.005 0.039 0.031 0.105(0.405) (0.738) (0.357) (1.095)
Central Highlands 0.521 0.499 0.404 0.310(0.403) (0.720) (0.387) (1.068)
Southeast 0.307 0.304 0.155 0.133(0.323) (0.439) (0.309) (0.651)

Mekong Delta 1.191*** 1.188*** 0.716*** 0.661(0.268) (0.414) (0.237) (0.608)
Constant 8.833*** 7.139*** 8.853*** 6.956*** 4.714*** 6.670***(0.327) (0.697) (0.469) (0.252) (0.756) (0.575)
Observations 377 377 377 377 377 377 Number of pci_id 63 63 63 63 63 63 R-squared of overall model 0.720 0.600
0.728 0.600chi2 1378 . 538.2 1029 . 417.7P value of model significance 0 0 0 0 0rho 0.606 0.834 0.790 0.550 0.911
0.887 F for Hausman-Taylor model 44.85 34.81
Dependent variable: logged private sector investment
Note: Robust standard errors are in parentheses. ***, ** and * mean p <0.01, p <0.05 and p <0.1 respectively. rho is
the ratio of the variance of the unobserved fixed effects, u_i, to the sum of variance of u_i and error terms _it. The
reference region is the Red River Delta. The Northern Uplands is sometimes divided into Northeast and Northwest
Private sector investment
Table 4 shows regression results for private sector investment. We use the H-T estimation results in columns (3)
and (6) to interpret the impact of corruption. As
338 D. Quang Vinh
Table 5 Estimation results for private sector employment
Variables (1) RE_d10 (2) FE_d10 (3) HT_d10 (4) RE_d11 (5) FE_d11 (6) HT_d11
Burden (lagged) 0.019*** 0.018*** 0.018***
Predictability (lagged) (0.003) (0.003) (0.003)0.009*** 0.009*** 0.009*** 0.010*** 0.010*** 0.010***
Area (0.001) (0.001) (0.001) (0.001) (0.001) (0.001)
0.000 0.000 0.000 0.000
Population (0.000) (0.000) (0.000) (0.000)0.001*** 0.000** 0.001*** 0.001*** 0.001*** 0.000***
Subscribers (lagged) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)0.000 0.000 0.000 0.000 0.000 0.000*(0.000)
(0.000) (0.000) (0.000) (0.000) (0.000)
Distance 0.001* 0.001 0.001 0.001(0.000) (0.001) (0.000) (0.001)
Northern Uplands 0.619*** 0.616** 0.568*** 0.569**(0.216) (0.245) (0.209) (0.232)
Northern Central Coast 0.277 0.272 0.236 0.234(0.231) (0.336) (0.226) (0.318)
Southern Central Coast 0.512 0.516 0.502* 0.510(0.312) (0.381) (0.291) (0.361)

Southeast 0.162 0.159 0.119 0.117(0.253) (0.227) (0.247) (0.215)
Mekong Delta 0.691*** 0.681*** 0.562*** 0.550***(0.189) (0.213) (0.177) (0.200)
Constant 10.483*** 10.109*** 10.487*** 9.964*** 9.462*** 9.962***(0.180) (0.311) (0.226) (0.154) (0.277) (0.196)
0.775 0.667chi2 829.1 . 447.7 651.6 . 451.8P value of model significance 0 0 0 0 0 0rho 0.867 0.917 0.856 0.839
0.893 0.835 F for Hausman-Taylor model 37.31 37.65
Dependent variable: logged private sector employment
the Bsanding the wheel^ theory predicts, the coefficient of both prevalence of corruption and burden of corruption
are significant and negative. This result is
Table 6 Estimation results for income per capita
Variables (1) RE_d10 (2) FE_d10 (3) HT_d10 (4) RE_d11 (5) FE_d11 (6) HT_d11
Burden (lagged) 0.024*** 0.021*** 0.023***(0.005) (0.006) (0.005)
Predictability (lagged) 0.015*** 0.014*** 0.015*** 0.017*** 0.018*** 0.019***(0.002) (0.002) (0.002) (0.002) (0.002)
(0.002)
Area 0.000** 0.000 0.000 0.000(0.000) (0.000) (0.000) (0.000)
Population 0.000 0.001* 0.000 0.000 0.001* 0.000(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Subscribers (lagged) 0.000 0.000 0.000 0.000* 0.000 0.000(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Distance 0.000** 0.000 0.000** 0.000(0.000) (0.001) (0.000) (0.001)
Northern Uplands 0.172** 0.127 0.163** 0.090(0.079) (0.284) (0.082) (0.410)

Southern Central Coast 0.296*** 0.263 0.352*** 0.309(0.111) (0.440) (0.093) (0.637)
Central Highlands 0.250** 0.283 0.263** 0.306(0.103) (0.429) (0.104) (0.621)
Southeast 0.234*** 0.240 0.298*** 0.317(0.085) (0.262) (0.086) (0.379)
Mekong Delta 0.020 0.013 0.242*** 0.288(0.084) (0.248) (0.070) (0.355)
Constant 7.134*** 6.140*** 7.122*** 6.358*** 4.981*** 6.116***(0.186) (0.594) (0.294) (0.134) (0.641) (0.343)
0.609 0.210chi2 788.3 . 254.4 626.3 . 183.9P value of model significance 0 0 0 0 0 0rho 0.174 0.901 0.873 0.113
0.943 0.926 F for Hausman-Taylor model 21.20 15.32
Dependent variable: logged income per capita
consistent across three methods. In other words, the prevalence and burden of corruption reduces private
investment at the provincial level. In line with what is
340 D. Quang Vinh
Table 7 Estimation results for Gini coefficient
Variables (1) (2) (3) (4) (5) (6)
RE_d10 FE_d10 HT_d10 RE_d11 FE_d11 HT_d11
Prevalence (lagged) 0.000 0.000 0.000(0.000) (0.000) (0.000)
Burden (lagged) 0.000 0.000 0.000(0.000) (0.000) (0.000)
Predictability (lagged) 0.000 0.000 0.000 0.000 0.000 0.000(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Area 0.000 0.000 0.000 0.000(0.000) (0.000) (0.000) (0.000)
Population 0.000 0.000 0.000 0.000 0.000 0.000(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Subscribers (lagged) 0.000** 0.000 0.000 0.000 0.000 0.000(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Distance 0.000 0.000 0.000 0.000(0.000) (0.000) (0.000) (0.000)
Northern Uplands 0.026** 0.029*** 0.027** 0.030***(0.012) (0.010) (0.012) (0.011)

Southern Central Coast 0.013 0.016 0.016 0.018(0.016) (0.016) (0.016) (0.017)
Southeast 0.021** 0.021** 0.019** 0.020**(0.009) (0.010) (0.009) (0.010)
Mekong Delta 0.032*** 0.029*** 0.027*** 0.026***(0.010) (0.010) (0.010) (0.009)
Constant 0.343*** 0.370*** 0.352*** 0.364*** 0.393*** 0.366***(0.019) (0.031) (0.020) (0.013) (0.025) (0.014)
Observations 188 188 188 188 188 188 Number of pci_id 63 63 63 63 63 63 R-squared of overall model 0.268
0.00917 0.250 0.00975chi2 53.96 . 30.27 32.91 . 26.66P value of model significance 2.78e-07 0.645 0.00254
0.00100 0.819 0.00863 rho 0.436 0.607 0.404 0.444 0.600 0.448F for Hausman-Taylor model 2.523 2.222
found in Campos et al. [11], at the same level of prevalence or burden of corruption, the predictability of corruption
(d12_new) has a positive impact on
private investment at the provincial level as well. More specifically, the coefficient of prevalence of corruption is
0.036 (column 3). This means that if the percentage of firms in a province agreeing with the statement that paying
bribes is common practice in their line of business is reduced by 1 %, the amount of private investments in that
province will be increased by 3.7 %.11 Likewise, if the percentage of firms agreeing with the statement that paying
bribes is common practice in their line of business is reduced by 10 %, private investments will increase by 43.3 %.
Regarding the burden of corruption, column (6) shows that the coefficient of burden is 0.062 which is much larger
than that of prevalence of corruption in terms of magnitude. Accordingly, a decrease of 1 % in the percentage of
firms saying that informal charges costs them 10 % or more of their revenue will lead to an increase of6.2 % in
private investments.
Contrary to the corruption prevalence and corruption burden, the predictabil
ity of corruption (d12_new) has a positive and significant effect on private investment with the coefficient equal to
0.031 or 0.035 when it is entered into the estimation equation with prevalence of corruption or burden of
corruption, respectively. This means, for the same level of burden of corruption, if the percentage of firms agreeing
that they can rely on bureaucrats to deliver services or contracts as agreed after receiving bribes goes up by 1 %,
then private investment will increase by 3.6 % (column (6)). This effect is similar to that of prevalence of corruption
but considerably smaller than that of burden of corruption. A possible explanation for the positive impact of
predictability of corruption is that the local business community has more confidence in the local business
environment when officials keep to their promise.

Private sector employment
Table 5 shows the estimation results for private sector employment. It is not a surprise that the results here are
similar to those in Table 4 in terms of the coefficient sign because investment and job creation are highly
correlated. A one percent decrease in d10_new (prevalence of corruption) can help increase private sector
employment by 1 % (Column 3). The corresponding number for d11_new (burden of corruption) is 1.8 % (Column 6).
As for predictability of corruption (d12_new), a one percent increase will lead to a 1 % increase in private sector
jobs (column (3) &(6)).
Household income
Table 6 shows the estimation results for income per capita. As we can see, the prevalence and burden of
corruption also have large and negative impacts on
11 Because private investment is log-transformed before the estimation, this percentage value is calculated by
converting log value to percentage value by this mathematical transformation: ln_INVt ln_INVt_1 = 0.0.36
ln(INVt /INVt_1)=0.036 INVt -INVt_1 =e0.036 (INVt -INVt_1)/INVt_1 = e0.036 - 1.
342 D. Quang Vinh
income per capita, perhaps due to their impacts on private sector development. If a province can reduce the
prevalence of corruption (d10_new) by 1 %, then it can expect the local per capita income to increase by 1.5 %. As
for the burden of corruption, the impact is two times larger, with the expected growth of income per capita
standing at 2.3 % for a 1 % reduction in the burden of corruption. Improvement in the predictability of corruption is
also helpful in improving per capita income, since the expected increase in income is 1.5 % (column (3)) or 1.9 %
(column (6)) for 1 % increase in predictability of corruption.
Income distribution
Finally, Table 7 shows that corruption does not have significant impacts on distribution of income in Vietnamese
provinces. This is suggested by the scatterplot of corruption on the Gini coefficient in the Fig. 5 in the Appendix.
The reason is, as noted in the data description section, the variation of Gini coefficients at the provincial level is
very small. This is not a surprising result because previous studies (e.g. [30]) also show that there is no significant
relationship between investment and income inequality.
The control variables do not have significant impacts on inequality either, except for some regional dummies.
Table 7 suggests that Northern Uplands, Southeast and the Mekong Delta regions have more inequality than the
reference region of Red River Delta.
Conclusions and policy recommendations
This study set out to investigate the possible impacts of corruption on private sector development, household
income and inequality at the provincial level in Vietnam. The objective was to find evidence of the costs of
corruption at the provincial level in order to better understand the kinds of incentives and pressures that are
required to fight corruption. By analyzing provincial level data from the GSO enterprise censuses and the PCI
surveys, this study has

Table 8 Key findings
produced a number of important empirical results, summarised schematically in Table 8 below:
i. The Impact of corruption on private sector development: Prevalence and burden of corruption have significant
and negative impacts on private sector development, as indicated by the level of private sector investments and
the number of jobs. Therefore, control of corruption brings about sizeable benefits for provincial economic
development. If the percentage of firms that agree that paying bribes is common in their line of business
(corruption prevalence) is reduced by 1 %, then private sector investment is expected to increase by 3.7 %. If the
percentage of firms agreeing that informal charges costs them 10 % or more of their revenue (corruption burden) is
reduced by 1 %, then private investment is expected to increase by 6.4 %. For job creation, the corresponding
effects of corruption prevalence and corruption burden are 1 % and1.8 %.
For the same level of corruption, the more predictable the outcomes of corruption are, the more investments are
made and jobs created. That is to say, the more firms believe they can get transactions done as expected after
paying bribes, the more investments are made and more jobs are created. One percent increase in the
predictability of corruption will lead to a 3.6 % increase in private investment and 1 % increase in private sector
jobs.
It is clear from this empirical analysis that maintaining predictability of corruption is not a good strategy to attract
investment because the prevalence and burden of corruption have stronger negative effects on investment and job
creation. It is imperative that local governments reduce corruption practices while making the local business
environment more predictable and transparent as well.
(ii) Impact of corruption on income per capita: Corruption prevalence, corruption burden and corruption
predictability all have significant impacts on the level of average per capita income. A one percent decrease in the
measure of corruption prevalence (d10_new) will lead to a 1.5 % increase in income per capita. A one percent
decrease in the measure of corruption burden (d11_new) will lead to a 2.3 % increase in income per capita. And a
one percent increase in the measure of corruption predictability will lead to an increase of at least a 1.5 % in
income per capita.
(iii) Corruption and income distribution: This study does not find any significant impact of corruption on the Gini
coefficient. Perhaps the main reason is the low level of variation in the provincial Gini coefficients. Cross-country
studies such as Barro [30] have found few links between inequality and investments. Analyses at district or
commune levels may
344 D. Quang Vinh
yield significant results because of greater variations in district or commune Gini coefficients.
This study also suggests that predictability in delivery of public services in particular and in overall regulatory
environment in general is very important for developing the private sector and raising peoples income. Therefore,
local governments should develop a culture of regulatory consistency and predictability to attract more investment
and achieve higher economic growth.

Our findings provide additional evidence on the impact of corruption at the sub-national levels, and is consistent
with other findings. For example, a World Bank survey found that provinces in which more firms pay bribes are on
average those where firms report that they are growing more slowly (Fig. 1). It is therefore crucial to find
appropriate measures that jointly address corruption and promote private sector investments and employment.
For an effective anti-corruption campaign to take place, the whole
Source: World Bank 2012

Fig. 1 Provinces with more bribery have firms that are doing worse. Source: [4]
government apparatus from central to local level should get involved. Local leaders should be aware of the costs
of corruption because it has a significant and negative impact on the development performance of their province
and therefore on their career prospects as well. If we are to believe a recent World Bank study ([4]: 63), addressing
corruption at the local level could also be the right entry point, since local leaders at the commune, district and
province level tend to be more positive than officials at the central level about the effectiveness of anti-corruption
measures, such as increased openness and transparency, or the implementation of entitlement norms and
standards, administrative reforms, etc.
Appendix
Corrup on and private investment (ln), 2012

Note: Corrup on Index is a simple average of corrup on prevalence and corrup on burden, converted to 0-10 scale.
Fig. 2 Corruption and private investment (ln), 2012. Note: Corruption Index is a simple average of corruption
prevalence and corruption burden, converted to 010 scale
346 D. Quang Vinh
Fig. 3 Corruption and private employment (ln), 2012. Note: Corruption Index is a simple average of corruption
prevalence and corruption burden, converted to 010 scale
Corrup on and private employment (ln), 2012

Fig. 4 Corruption and income per capita (thousand VND per month), 2012. Note: Corruption Index is a simple
average of corruption prevalence and corruption burden, converted to 010 scale
Corrup on and income per capita (thousand VND per month), 2012
348 D. Quang Vinh
Fig. 5 Corruption and Gini coefficient, 2012. Note: Corruption Index is a simple average of corruption prevalence
and corruption burden, converted to 010 scale

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DETAILS
Subject: Corruption; Incentives; Employment; Illness; Research; Investment; Communist

parties; Housing authorities; Private sector; Income; Economic development;
Provinces; Economic impact; Local government; Income distribution; Statistical
analysis

Location: Vietnam
Company / organization: Name: International Bank for Reconstruction &Development--World Bank; NAICS:
928120; Name: United Nations Development Programme; NAICS: 928120
Classification: 1200: Social policy; 2147: social problems and social welfare; sociology of crime;
9141: political economy; political economy; 9105: politics; national-level politics;
4300: Law; 1110: Economic conditions &forecasts; 9550: Public sector; 9130:
Experimental/theoretical; 9179: Asia &the Pacific
Publication title: Crime, Law and Social Change; Dordrecht
Volume: 65
Issue: 4-5
Pages: 325-350
Publication date: Jun 2016
Publisher: Springer Science &Business Media
Place of publication: Dordrecht
Country of publication: Netherlands, Dordrecht
Publication subject: Social Services And Welfare, Criminology And Law Enforcement
ISSN: 09254994
Document type: Journal Article
Document feature: Tables References
DOI: http://dx.doi.org/10.1007/s10611-016-9608-8
Copyright: Springer Science+Business Media Dordrecht 2016

LINKS
Corruption performance voting and the electoral

context
Ecker, Alejandro; Glinitzer, Konstantin; Meyer, Thomas M . European Political Science Review : EPSR ;
Cambridge Vol. 8, Iss. 3, (Aug 2016): 333-354.
ABSTRACT (ENGLISH)
Fighting corruption is a vital aspect of good governance. When assessing government performance voters should
thus withdraw electoral support from government parties that turn a blind eye to or even engage in corrupt
practices. Whereas most accounts of performance-based voting focus on economic outcomes, we analyse
whether and to what extent voters punish incumbents for high levels of corruption. Using data from the
Comparative Study of Electoral Systems, we find that while voters perceiving high levels of corruption punish
incumbents, corruption performance voting depends on individual-level attributes and the electoral context: it is
most likely for non-partisans, for voters who believe that government turnover will bring about change, and in
systems where corruption is a salient issue. Yet, corruption performance voting is not moderated by the clarity of
political responsibility. Studying these conditions helps us to understand why corruption is more persistent in
some contexts than in others.
FULL TEXT

(ProQuest: ... denotes formulae and/or non-US-ASCII text omitted; see image)
Introduction
In representative democracies citizens hold the government accountable for its actions. By punishing poor and
rewarding good performance, voters express their preferences and force political elites to perform in line with their
preferences. Most empirical research on electoral accountability and the impact of retrospective performance
evaluations focuses on the economy (Lewis-Beck and Stegmaier, 2000; Anderson, 2007; Duch and Stevenson,
2008; Singer and Carlin, 2013). However, as voters can assign responsibility to various government outcomes,
there is no reason to believe that electoral accountability should be restricted to economic issues (Singer, 2011a,
b). In this article we focus on corruption - another dimension of the growing performance voting literature.
Corruption comprises activities such as bribery, embezzlement of public funds, misuse of public party funding, and
clientelism. Its severe detrimental effects on the economy and society (Mauro, 1995; Rose-Ackerman, 1999)
should motivate citizens to make vote choices based on their perceived level of corruption. We employ a reward-
and-punishment framework to study its electoral consequences. Corruption is a valence issue (Stokes, 1963, 1992)
where voters evaluate parties based on their ability to achieve a generally desired policy goal. As a result, citizens
should reward government parties for low levels of corruption and punish them for high levels. However, corruption
is also a highly persistent phenomenon (e.g. Alesina and Weder, 2002), which suggests that this simple reward-
and-punishment framework to 'throw the rascals out' is not the modus operandi in all contexts. Drawing on the rich

literature on economic voting, we argue that corruption performance voting varies with individual-level factors and
the institutional context. By providing insights into the specific conditions under which the chain of accountability
breaks down (Vivyan et al., 2012), we may better understand why fighting corruption is a ubiquitous challenge,
even in competitive electoral democracies.
The empirical analysis is based on individual-level data on corruption perceptions and voting behaviour in 20
elections across Western and Central Eastern Europe from Module 2 of the Comparative Study of Electoral
Systems (CSES) survey. Past research on the effects of corruption on incumbents' electoral performance is often
based on macro-level data and addresses variation in corruption across countries (Ferraz and Finan, 2008; Krause
and Mendez, 2009; Choi and Woo, 2010). Micro-level analyses, in turn, are often linked to specific scandals and
certain national contexts (Peters and Welch, 1980; Welch and Hibbing, 1997; Vivyan et al., 2012; Basinger, 2013;
Praino et al., 2013; Winters and Weitz-Shapiro, 2013; Wagner et al., 2014). In this article, we employ the CSES data
to analyse corruption performance voting and its constraints under various micro- and macro-level factors. The
results show some similarities between economic and corruption performance voting, but also point to important
differences. As with economic issues, voters generally punish governments if they perceive high levels of
corruption. Moreover, corruption perceptions influence vote choice if voters believe that bringing in a new
government will make a difference. Non-partisans are more likely to make use of their corruption perception than
party-loyal voters. We also find that corruption voting is stronger in national contexts where corruption is a severe,
very salient policy issue. However, we find no evidence that corruption voting hinges on a political system's 'clarity
of responsibility', that is, the degree to which voters can assign responsibility to particular political actors (Powell
and Whitten, 1993).
These findings suggest that while the state of the economy is a major benchmark that allows voters to evaluate
incumbent parties, it is not the only yardstick they use to reward or punish incumbents. Democracies in Central
Eastern but also Southern Europe often face high levels of corruption and patronage that may overshadow
problems in the economic realm (see, e.g. Anderson and Tverdova, 2003; Kopecký et al., 2012). In these contexts,
including corruption perception enriches the performance voting framework and our knowledge of voting
behaviour. At the same time, clarity of responsibility as an alternative context factor seems to be less relevant for
corruption performance voting than for the economy. As a result, the context-dependent nature of corruption
performance voting allows us to better understand why corruption is highly persistent in some countries.
The economic prerogative in performance voting
We explore whether vote choice is influenced by perceived levels of corruption. Conceptually, this approach relates
to the broad theoretical framework of performance voting models (Key, 1966; Kramer, 1971; Ferejohn, 1986).
Performance voting is based on the simple idea that voters evaluate parties based on their achievements in office.
It assumes that government performance enters a voter's decision-making process retrospectively. In Kramer's
(1971: 134) words: 'if the performance of the incumbent party is "satisfactory" [...], the voter votes to retain the
incumbent governing party in office [...]; if the incumbent's performance is not "satisfactory", the voter votes
against the incumbent to give the opposition party a chance to govern'. Thus, performance voting is based on
voter evaluations of the government parties' past performance irrespective of how they evaluate the opposition
parties' potential performance. The implicit assumption is that voters first and foremost care about 'throwing the
rascals out' if their performance was unsatisfactory.
So far, existing studies on performance voting have mainly focused on the economy (Key, 1966; Kramer, 1971;
Fiorina, 1981; Powell and Whitten, 1993; Whitten and Palmer, 1999; Lewis-Beck and Stegmaier, 2000; van der Brug
et al., 2007; Duch and Stevenson, 2008; Becher and Donnelly, 2013). There are various reasons for its

preponderance in the performance voting literature. First, voters generally agree on desired economic policy goals
(economic growth and low levels of unemployment and inflation). As the economy is therefore a valence issue,
voters can send coherent signals to incumbents if they fail to act in line with the voters' preferences. This
agreement on policy ends effectively enables voters to efficiently structure the behaviour of the government
(Ferejohn, 1986). Second, the focus on economic outcomes is justified by its importance to voters. While issue
priorities vary substantially between voters and electoral contexts (Singer, 2011a, b), economic problems, such as
unemployment, are typically among voters' most pressing concerns. Finally, economic outcomes are easy to
observe for the average voter. Economic voting allows voters to make rational decisions even if they are politically
inattentive (Fiorina, 1981).
A thriving or deteriorating economy is, however, not the only criterion voters can use to evaluate the performance
of government parties (Fiorina, 1981; Stokes, 1992). As Stokes (1992: 147) notes:
'The classic illustration [for a valence issue] is good economic times and bad. But the parties and leaders are at
times linked to peace and war, internal order and crime, and many other conditions that are positively or negatively
valued. Although their bonding to economic conditions goes back to the early nineteenth century, the conditions
that provide the symbolic content of valence politics have progressively expanded with the scope of government in
the twentieth century.'
Thus, if voters care about monitoring officeholders, they might also condition their vote choice on other
dimensions of good governance such as public safety or peace. Here, we focus on one such non-economic issue:
the level of corruption. Corruption is commonly defined as 'the misuse of public office for private gains' (Treisman,
2000: 399) or as 'an act by a public official (or with the acquiescence of a public official) that violates legal or
social norms for private or particularistic gains' (Gerring and Thacker, 2004: 300). In both definitions public
officials are the major actors, while the extent and type of corruption are left open. Corruption thus comprises
activities such as bribery, embezzlement of public funds, misuse of public party funding, and clientelism. Gerring
and Thacker's definition also includes the toleration of corrupt practices. Hence, political elites may be held
accountable not just for themselves abusing power and money, but also for failing to limit corrupt behaviour in
general (Tavits, 2007).
Recent research highlights the role of corruption perceptions on political behaviour, in particular its effect on voter
turnout (Peters and Welch, 1980; Stockemer and Calca, 2013; Stockemer et al., 2013). Some studies show that
high levels of corruption decrease turnout (e.g. McCann and Dominguez, 1998; Stockemer et al., 2013) as high
levels of perceived corruption lead to more negative evaluations of political authorities and the political system in
general (Anderson and Tverdova, 2003). Yet, others find a positive effect of corruption on turnout (Stockemer and
Calca, 2013). Kostadinova (2009), in turn, argues that both effects may occur: there is a direct, mobilizing effect of
corruption on turnout and an indirect, negative one that affects turnout through political efficacy. Here, we will
extend this research on corruption and study its effect on incumbent voting.
We posit that voters evaluate government parties based on the perceived level of corruption for two reasons. First,
corruption is a valence issue (Stokes, 1963, 1992) and thus fits the reward-and-punishment logic of the
performance voting framework: voters should prefer less to more corruption and should evaluate the extent to
which the incumbent government has performed effectively.1Second, corruption is particularly relevant in some
Eastern and Southern European (e.g. Anderson and Tverdova, 2003; Kopecký et al., 2012) and Western European
countries (Singer, 2011b). For example, countries such as Romania or Bulgaria do poorly in Transparency
International's Corruption Perception Index (CPI), and voters in these countries also name corruption as one of the
most important issues (Singer, 2011b). Thus, in these contexts corruption should be a major element in voters'

reasoning when casting their ballots.
In fact, the reward-and-punishment mechanism may even be more persuasive for corruption levels than for the
economy. Economic policies also entail aspects where policy means rather than goals are important for making
decisions. For example, voters may not only value parties that are competent in ensuring economic growth or low
unemployment rates, but also those that advocate policies (e.g. income tax, minimum wages) that are in line with
their personal policy preferences. These positional elements of party competition are less relevant for voters'
perceptions of corruption. In contrast to economic policies, parties differ less in how they propose to fight
corruption. Instead, corruption can almost exclusively be discussed in valence terms, making the reward-and-
punishment logic even more appealing than for economic policies. Moreover, corruption is an issue where it is
crucial that voters monitor the incumbents. This is due to the fact that political elites enjoy private gains when
exploiting their power and positions for their own good. They thus have clear incentives to pursue their own goals,
and these differ from those of voters. Finally, corruption is a particularly suitable issue for performance voting
because corruption, as defined above, is directly attributable to the political elites. Thus, it should be relatively easy
for the average voter to evaluate incumbent performance on corruption and to punish those who fail to deliver the
desired outcome. This leads us to expect that corruption perceptions have a strong effect on vote choice.
The contingent effect of corruption performance voting
However, previous research has shown that performance voting is context-dependent (Powell and Whitten, 1993;
Whitten and Palmer, 1999; Hellwig 2001, 2011; Anderson, 2007; van der Brug et al., 2007; Duch and Stevenson,
2008, 2010). Hence, we expect that the connection between voter perceptions of corruption and vote choice is also
likely to be contingent on individual-level attributes as well as on macro-level context factors. We argue that some
of these contingency-effects will differ from those for the economy as a performance voting issue. While both
issues share many commonalities leading to similar effects and mechanisms, we also observe differences that
should affect the circumstances under which economic and corruption performance voting are most likely.2
A first moderating factor is partisanship: performance voting is more likely for non-partisans than for voters who
lean towards a particular party (van der Brug et al., 2007; Kayser and Wlezien, 2011). This argument goes beyond
the widely known findings that partisanship affects voter perceptions of politics (Campbell et al., 1960; Bartels,
2002; Anduiza et al., 2013) and vote choice (see e.g. Merrill and Grofman, 1999). Rather, it states that partisanship
moderates the impact of (potentially biased) perceptions of politics on vote choice (Vivyan et al., 2012). Voters
with strong partisan attachment should be less responsive to short-term factors including performance
evaluations because of their clear-cut party preferences. Although these voters might be dissatisfied with the
performance of their most preferred party, their strong preferences for that party make party switching less likely
(Kayser and Wlezien, 2011; Eggers et al., 2014). In contrast, non-partisans lack these strong predispositions, and
thus even small differences in their perceived party performance can have significant effects on their vote choice
(van der Brug et al., 2007). Following the literature on economic voting, we test whether non-partisan voters put
greater weight on the government's record in tackling corruption:
Hypothesis 1. The influence of corruption performance voting is higher for non-partisans than for voters who feel
close to a party.
Retrospective voting should also depend on voters' belief that throwing the rascals out will not bring new rascals
in. Punishing government parties by voting for opposition parties presumes that voters believe in the effect of
government turnover. This belief is captured in several theoretical concepts. It relates to voter perceptions of
government responsiveness (Kölln et al., 2014) and is reflected in what Downs (1957) has labelled the 'expected

party differential', which is defined as 'the difference between the utility income [a citizen] actually received [...]and
the one he would have received if the opposition had been in power' (Downs, 1957: 40). Understood in a broader
sense, this notion of party differentials captures in fact any form of perceived party differences including not only
policy, but also perceived differences in performance-based assessments and evaluations of party leaders (see
Blais et al., 2000; Wessels and Schmitt, 2008). If they do not believe that government turnover will make a
difference, citizens are unlikely to punish incumbents by voting for an opposition party. The more likely option in
this situation is to abstain (Downs, 1957; see also McCann and Dominguez, 1998; Kostadinova, 2009). Thus, we
expect corruption performance voting to be stronger if voters believe that electing opposition parties will make a
difference:
Hypothesis 2. The influence of corruption performance voting is higher if voters expect significant change when
the government composition changes.
Turning to factors in the electoral context, we test whether the effect of corruption performance voting depends on
the severity of corruption. One of the core elements of issue voting models is that voters evaluate parties based on
their most important problems and concerns (Krosnick, 1988, 1990). Thus, economic performance voting is most
likely in hard economic times and among those who are hit hardest by unemployment and recessions (Stevenson,
2002; Singer, 2011a, b).
Following this argument, we test whether voters pay more attention to their corruption perception when evaluating
government performance in electoral contexts where corruption is a prominent problem. In these contexts, the
misuse of public goods is more relevant to voters when evaluating government performance. Thus, it is here where
voters can use their retrospective evaluation of corruption as an information shortcut (Fiorina, 1981). In contrast,
the effect of corruption perception might be weaker in national contexts where corruption is less severe. Here,
voters are more likely to focus on other issues (e.g. the economy) to assess the performance of government
parties. Therefore, corruption performance voting should be more likely in contexts where corruption is a
prominent problem. This leads to:
Hypothesis 3. The influence of corruption performance voting is higher in electoral contexts where corruption is a
prominent issue.
Another factor that might hinder performance voting is the clarity of political responsibility. In order to punish
incumbent parties, voters need to be sure that bad performance was truly a result of the officeholders'
mismanagement - and not a result of exogenous factors or actions taken by other political actors. One of the major
findings in the economic voting literature is that evaluating parties and candidates is much easier in systems
where performance can clearly be attributed to individual actors (Powell and Whitten, 1993; Whitten and Palmer,
1999; Anderson, 2007; Duch and Stevenson, 2008). It is easier for voters to evaluate the responsible parties, for
example, if the government composition is relatively stable and if the incumbent parties have a majority in
parliament. Moreover, the consensus-seeking common in coalition governments makes it difficult for voters to
identify the party or parties that are responsible for policy outputs, and this challenge increases with the increasing
number of coalition partners.
We test whether the same moderating effect exists for corruption performance voting. Following the arguments
from the economic voting literature, corruption performance voting should be more likely in electoral contexts
where government parties have unified control over policy-making. Higher clarity of responsibility should make it
easier for citizens to identify corruption and scandals, and a high level of information about corrupt practices is
linked to corruption performance voting (Winters and Weitz-Shapiro, 2013). There are of course differences

between the economy and corruption as performance voting issues. First, responsibility over economic policies
mostly deals with legislative competences, while fighting corruption is largely a matter of executive power. When
unable to pass their preferred economic legislation, minority governments or those facing a strong second
chamber may diffuse responsibility and blame their political opponents for blocking their most desired policy
proposals. In contrast, parties rarely disagree about how to fight corruption. Rather, it is primarily a matter of
effective control over the public administration, enforcing existing laws and regulations, and thus lies at the very
heart of the executive branch's responsibility. Second, attributing blame for corruption, especially grand corruption,
is much easier than for economic outcomes. Expenses and corruption scandals are often linked to particular
parties and politicians, and voters can identify relevant players irrespective of the institutional and political clarity
of responsibility. Thus, the signal-extraction problem that plagues voters on economic policies may be less severe
for corruption performance voting. Although we expect a moderating effect of political responsibility on corruption
voting, its effect might be weaker than previous research found for economic voting.
Hypothesis 4. The influence of corruption performance voting is higher in electoral contexts where the clarity of
political responsibility is high.
Data and measurement
There are only a few cross-national studies on corruption performance voting using individual-level data. Most
studies focus on particular events (e.g. an expenses scandal) to study the effects of bribery on voters' opinions
and vote choice (Peters and Welch, 1980; Vivyan et al., 2012; Wagner et al., 2014). Moreover, many analyses use
survey experiments (Anduiza et al., 2013; Winters and Weitz-Shapiro, 2013; Eggers et al., 2014; Wagner et al., 2014)
to provide insights on the causal mechanisms in decision-making processes. Yet, analyses based on a single
national context do not allow us to study cross-national differences even though such differences are likely to
exist (van der Brug et al., 2007; Duch and Stevenson, 2008). Comparative analyses are rare and largely limited to a
macro-level perspective (Krause and Mendez, 2009; Choi and Woo, 2010). These analyses run the risk of
committing ecological fallacies and are not well-suited to testing the causal mechanism linking citizens'
perceptions of corruption and reward-punishment behaviour.
We study individual voting behaviour in 20 parliamentary elections in Western and Central Eastern Europe using
the CSES Module 2 survey data (CSES, 2007).3These data enable us to study the effect of corruption perception
using identical question wording in various political and economic contexts.
Dependent variable
Our dependent variable is vote choice, distinguishing respondents who voted for an incumbent government party
(1) and those casting a vote for an opposition party (0).4The data on the government status of each political party
running in the respective election is retrieved from the ERD data archive (Andersson et al., 2014).
Independent variable
The key independent variable captures each individual's perceived level of corruption and is based on the following
survey item:
How widespread do you think corruption such as bribe taking is amongst politicians in [COUNTRY]: very
widespread (4), quite widespread (3), not very widespread (2), it hardly happens at all (1)?5

This item takes up the two definitional criteria of corruption perception mentioned before: it highlights the role of
public officials as the central agents of corruption, while leaving the extent and type of corruption largely open. Yet,
it does not capture which particular political actors are linked to the perceived level of corruption. In that respect,
the question mirrors that of the economic vote where respondents are asked to assess the state of the economy
without an explicit reference to the government's impact on the state of the economy (see, e.g., Lewis-Beck, 1988:
35-37). As for the economy, we assume that voters implicitly hold government parties responsible for policy
outcomes because it is these parties that are in charge of making and enforcing laws that prevent undesirable
outcomes. We cannot, however, use this question to infer respondents' views on the effectiveness of government
actions (for a general overview of performance and government responsibility, see Glasgow et al., 2002).
Moderating variables
Since our interest lies primarily in the contingent effect of corruption perception, our empirical models feature
interaction terms with four moderating variables. First, we test whether partisanship moderates the effect of
corruption performance voting: Non-partisans should be more likely to vote based on their performance
evaluations than voters who feel close to a political party. We identify voters' partisanship using the CSES question
item 'which party do you feel closest to?' and use indicator variables to distinguish between those who feel close
to government parties, opposition parties, and non-partisans. As above, the data on government participation of
political parties are retrieved from the ERD data archive.6The second individual-level characteristic refers to the
voters' belief that government turnover will bring about change. We capture this belief with an item (measured on a
five-point scale) indicating whether respondents think that 'it makes a difference who is in power' (5) or not (1).
For macro level effects, we measure the severity of corruption using the CPI provided by Transparency
International. The CPI is a composite index and combines surveys and assessments of corruption by several
institutions and organizations into a single measure. It is generally considered the most valid and reliable cross-
national estimate of corruption and is thus widely used in comparative studies (see, e.g., Treisman, 2000; Persson
et al., 2003; Krause and Mendez, 2009; Choi and Woo, 2010).7For each election we capture the severity of
corruption via the country's average CPI score over the entire parliamentary term. In this context, we inverse the
original eleven-point scale so that the maximum score (10) corresponds to high levels of corruption, while a
minimum score (0) indicates low corruption levels.
Our last moderating variable is clarity of responsibility. There is no established measure of clarity of responsibility
in the existing literature (see, e.g. Whitten and Palmer, 1999; Tavits, 2007; De Vries et al., 2011). Hobolt et al. (2013)
argue that attributes of the incumbent government (which they label 'government clarity') are more relevant than
institutional factors (such as bicameralism and the committee structure in parliament). Thus, we follow their
approach by compiling a composite index of government clarity ranging from 0 (low clarity) to 1 (high clarity). This
index is based upon each government's (i) single-party status, (ii) the extent of cohabitation within semi-
presidential systems, (iii) a measure of its ideological cohesion, and (iv) the main governing party's share of
cabinet posts.
Control variables
The incumbent government's economic performance is captured via the level of unemployment in the year before
the election. Ideally, including measures of the perceived state of the economy at the individual level would allow
us to test the effect of corruption performance voting side-by-side with economic performance voting.
Unfortunately, such individual-level measures are not included in the CSES Module 2 survey data.8We resort to
using the level of unemployment as a macroeconomic indicator that is likely to have the most direct effect on each

respondent's individual evaluation of the government's economic performance.9These macro-economic data are
retrieved from the World Development Indicators database (The World Bank, 2013). At the individual level, we
include a series of standard socio-demographic controls, namely age (in years), sex, education (distinguishing four
levels of education), and voters' ideological preferences measured on an eleven-point left-right scale.
Empirical analysis
Given the hierarchical structure of our data with individuals nested within elections and the binary nature of the
dependent variable, the subsequent empirical analysis rests upon a series of multilevel logistic regression models
of incumbent voting with random intercepts accounting for unobserved heterogeneity between elections.10The
results of these hierarchical logistic regression models are shown in Table 1. Model 1 shows the overall effect of
corruption performance on vote choice. Model 2 includes moderating effects for both individual-level factors
(Hypotheses 1 and 2). We test the electoral context effects of the systemic level of corruption (Hypothesis 3;
Model 3) and of clarity of responsibility (Hypothesis 4; Model 4) separately. All estimated marginal effects and
associated marginal-effect plots are based on a full model (Model 5) including all covariates.
Table 1
Random intercept models of incumbent voting
Model 1 Model 2 Model 3 Model 4 Model 5
-0.282*** 0.105 0.191* 0.187 0.260*

Corruption perception
(0.021) (0.068) (0.077) (0.097) (0.103)
Close to
Reference -3.053***
H1 Non-partisan opposition
category (0.244)
party
Close to
-3.058*** -3.077*** 2.855***
-3.073*** (0.247) government
(0.244) (0.247) (0.195)
party
Corruption
perception×
2.842*** 2.851*** 0.118
2.862*** (0.194) close to
(0.196) (0.194) (0.083)
opposition
party
Corruption
perception×
0.120 0.127 0.081
0.126 (0.084) close to
(0.083) (0.084) (0.071)
government
party

Perceived
0.086 0.082 effect of
0.078 (0.070) H2
(0.071) (0.070) government
turnover
Corruption
perception×
0.261*** 0.259*** 0.260*** perceived
0.261*** (0.051)
(0.051) (0.051) (0.051) effect of
government
turnover
-0.085*** -0.085*** -0.085*** Corruption

-0.085*** (0.017) H3
(0.017) (0.017) (0.017) severity
Corruption
0.116 0.133 perception×

(0.085) (0.083) corruption
severity
-0.034* -0.033*
H4
(0.015) (0.015)
-0.311 -0.393
Government clarity
(0.596) (0.593)
-0.135 -0.120
Corruption perception×government clarity
(0.116) (0.116)
0.002 -0.001 -0.001 -0.001

Control variables Age
(0.001) (0.001) (0.001) (0.001)
0.091** 0.092* 0.088* 0.092*

-0.001 (0.001) Female
(0.030) (0.039) (0.039) (0.039)
Educational 0.310*** 0.221 0.214

0.089* (0.039) None
attainment (0.088) (0.119) (0.119)
0.215 Primary 0.087* 0.063 0.061

0.222 (0.119)
(0.119) level (0.039) (0.051) (0.051)
0.062 Secondary Reference Tertiary -0.037

0.063 (0.051)
(0.051) level category level (0.041)
-0.037 -0.043 -0.037 0.011

-0.043 (0.041) Ideology
(0.054) (0.054) (0.054) (0.007)

-0.005 -0.006 -0.006 Unemploym -0.095**
-0.005 (0.009)
(0.009) (0.009) (0.009) ent (0.036)
-0.081 -0.078* -0.089* 0.798**

-0.077* (0.035) Constant
(0.042) (0.033) (0.040) (0.294)
-0.643 -0.161 -0.357 Random Variance

-0.404 (0.346)
(0.362) (0.518) (0.519) intercept (elections)
0.318*** 0.310*** 0.292*** 0.281*** N

0.350** (0.113)
(0.104) (0.102) (0.096) (0.093) (individuals)
N
19,782 19,782 19,782 19,782 19,782
(elections)
Log
20 20 20 20 20
likelihood
-12,527.5 -8,127.8 -8,125.1 -8,126.2 -8,123.6 AIC
Likelihood
ratio test
25,075.1 16,287.5 16,286.3 16,288.5 16,287.3 vs. logistic
regression
(P-value)
Standard errors in parentheses.*P<0.05, **P<0.01, ***P<0.001.
We start by analysing whether voters resort to corruption as a simple means of retrospective voting. As expected,
corruption perception has a significant negative effect on incumbent voting. Thus, individuals perceiving higher
levels of corruption are less likely to vote for a party in government. Increasing the level of corruption perception by
one unit (on a four-point scale) lowers the probability of incumbent voting by ~5.4 percentage points, with all other
independent variables held at their mean or mode, respectively.11To put this effect in perspective, we compare this
estimate with that of a one unit change of voters' economic perceptions. Studying 163 different estimates of
economic perception voting, Duch and Stevenson (2008: 64) find that a one-unit change in economic perceptions
(on a three-point scale) decreases the probability of incumbent voting on average by 5.0 percentage points.
Despite the difficulties of comparing effect sizes across the different models,12we may tentatively conclude that
the substantive impact of corruption perceptions on vote choice is similar to that of economic perceptions.
This baseline effect of corruption perception on incumbent voting may serve as a starting point to evaluate the
conditional factors in Hypotheses 1-4. Starting with the individual-level factors that may affect performance voting,
our results indicate that the effect of corruption perception on incumbent voting is characterized by a strong
partisan bias. Figure 1 juxtaposes the particularly influential effect of corruption perception for non-partisan voters
with that of voters feeling close to an opposition party, and those who feel close to the incumbent government.13
Corroborating our first hypothesis, the perceived level of corruption has only little influence on partisans. In fact,
individuals closely tied to the incumbent are likely to support them regardless of their corruption perception, as

their likelihood of incumbent voting merely decreases from 94.3 to 91.4% as corruption perception changes from
'hardly happens at all' (1) to 'very widespread' (4). In a similar vein, individuals close to the opposition are unlikely
to support incumbent government parties regardless of their level of perceived corruption (the corresponding
change in the predicted probability of incumbent voting is from 4.4 to 3.3%). Overall, it is non-partisans for whom
the perceived level of corruption matters most for their vote choice. In contrast, those who feel close to a party
have already relatively clear preferences and thus changing corruption perceptions hardly alter their vote choice.
Figure 1
Corruption perception effect depending on party affiliation (H1). Note: This figure shows the estimated marginal
effect of a one-unit change in corruption perceptions on the probability of incumbent voting for non-partisans,
voters feeling close to an opposition party, and voters feeling close to a government party. All point estimates
(dots) and corresponding 95% confidence intervals (vertical lines) are based on Model 5.
[Figure Omitted; See PDF]
A second moderating factor is whether respondents believe that government turnover will yield changes. In line
with Hypothesis 2, Models 2 and 5 show a negative interaction between corruption perception and the perceived
differences of who is in power, and this effect is statistically significant at conventional levels. Thus, the extent to
which voting behaviour is influenced by corruption perceptions increases as respondents believe that opposition
parties will govern differently than the incumbent government. Figure 2 shows the marginal effect of corruption
perception dependent on the perceived effect of government turnover, holding all other variables at their mean or
mode, respectively. Here, we observe that corruption perceptions have almost no impact on the likelihood of
incumbent voting (increase by ~0.2 percentage points, insignificant) for individuals who have little faith in
government turnover. In fact, a minimum sense that 'it makes a difference who is in power' is necessary so that
corruption perceptions influence one's voting behaviour.14For these voters, an increase in the level of perceived
corruption negatively affects the probability to vote for incumbents by ~3.7 percentage points, and this effect
becomes stronger as the perceived effect of government turnover increases. For individuals who strongly believe
in the changing effect of government turnover (five scale points), increasing the level of corruption perception by
one unit decreases the likelihood of incumbent voting by 7.8 percentage points.
Figure 2
Corruption perception effect depending on effect of government turnover (H2). Note: This figure shows the
estimated marginal effect of a one-unit change in corruption perceptions on incumbent voting, conditional on the
perceived effect of government turnover. All point estimates (dots) and corresponding 95% confidence intervals
(vertical lines) are based on Model 5.
Turning to the macro-level context factors (Models 3 and 5), we hypothesized that corruption performance voting
is more relevant in countries with high levels of corruption (Hypothesis 3). Figure 3 shows the corresponding
marginal effect of corruption voting for varying levels of corruption, again holding all other variables in the model
at their mean or mode, respectively. Indeed, we observe a strong punishment effect by the electorate in national
contexts where corruption is highly salient (e.g. Romania in 2004). If corruption perceptions increase by one unit in
such contexts, we would predict that the probability of voting for the incumbent declines by 9.2 percentage points.
This effect is approximately three times larger than the corresponding effect in elections where corruption is

hardly an issue (e.g. Finland in 2003). Here, increasing the level of corruption perception by one unit decreases the
likelihood of incumbent voting by ~3.2 percentage points.
Figure 3
Corruption perception effect depending on corruption severity (H3). Note: This figure shows the estimated
marginal effect of a one-unit change in corruption perceptions on incumbent voting, conditional on corruption
severity. All estimates (solid line) and the corresponding 95% confidence interval (dashed lines) are based on
Model 5. The empirically observed maximum on the Corruption Perception Index (CPI) 0-10 scale is 7.2.
Concerning Hypothesis 4, the results of Models 4 and 5 do not support the claim that corruption performance
voting varies with the clarity of government responsibility. While the corresponding coefficient for Corruption
perception×government clarity is negative, it fails to reach conventional levels of significance, indicating that
varying levels of government clarity do not affect the effect of corruption voting.15Thus, these results indicate that
individuals are able to clearly attribute and punish corrupt behaviour, regardless of factors blurring this link (see
Figure 4).
Figure 4
Corruption perception effect depending on government clarity (H4). Note: This figure shows the estimated
marginal effect of a one-unit change in corruption perceptions on incumbent voting, conditional on the level of
government clarity. All estimates (solid line) and the corresponding 95% confidence interval (dashed lines) are
based on Model 5.
Finally, Models 1-5 also contain the level of unemployment as a control variable. In line with the expectations of
the economic performance voting literature, the coefficient of unemployment is negative: an increase in
unemployment by one standard deviation above the mean decreases the probability to vote for incumbent parties
by 7.9 percentage points. This suggests that performance voting may encompass economic as well as non-
economic performance evaluations and that their combined effect is larger than either that of economic and of
corruption performance voting alone.
Conclusion
Are elected officials held accountable for high levels of corruption? The evidence presented here suggests that
voters indeed sanction governing parties if they perceive high levels of corruption. Yet, this effect depends on both
individual voter characteristics and the electoral context. These findings might help us to understand why
corruption is a persistent phenomenon in some contexts but not in others. Regarding individual characteristics, we
showed that corruption voting depends on partisanship. It is non-partisans who make vote choices based on
perceived levels of corruption. Partisans who lean towards government or opposition parties have a strong
predisposition towards these parties. For such voters, performance evaluations are far less important for their vote
choice. This is in line with previous research showing varying effects of economic voting for partisans and non-
partisans (e.g. Kayser and Wlezien, 2011), suggesting that partisanship moderates the effect of voters' attitudes
on vote choice.

Our results also suggest that electoral control diminishes as citizens lose faith in replacing incumbents with
opposition parties. Only citizens who believe that government turnover will lead to substantial changes punish
incumbents by voting for an opposition party. In contrast, those who perceive no differences between government
and opposition do not vote for opposition parties if the perceived level of corruption is high. This highlights the
importance of the voters' perceived differences between parties, for example in terms of policy positions (see
Hellwig, 2012) and party competence.
The CSES data from 20 elections in different national contexts also allow us to analyse the electoral context of
corruption performance voting. Corruption voting increases in a setting with high corruption, indicating that
performance voting depends on the saliency of the issue voters use to evaluate government parties. The
normative implications of this finding are twofold: First, it implies that voters facing high and persistent levels of
corruption indeed try to bring down these high levels by closely monitoring the incumbent parties. Second, it
means that corrupt political elites might escape electoral punishment as long as corruption is not among the most
salient issues.
In contrast to the economic dimension of performance voting, we find no evidence that clarity of responsibility
affects the magnitude of corruption performance voting. This negative finding, which is robust to various
approaches to measuring clarity of responsibility, illustrates that performance voting is a multi-faceted
phenomenon: while being a strong moderating variable for the influence of voters' economic perceptions on
incumbent support (Powell and Whitten, 1993; Whitten and Palmer, 1999; Anderson, 2007; Duch and Stevenson,
2008), the same does not hold for corruption perception voting. Perhaps the signal-extraction problem, fostered by
power dispersion, is more severe for economic policies than for corruption.
Economic policies partly entail positional competition, and these conflicts affect legislation on economic policies.
Thus, power dispersion leads to a signal extraction problem and makes economic performance voting less likely.
In contrast, fighting corruption involves less ideological conflict and is less dependent on legislative politics.
Fighting corruption is largely a matter of executive politics, the enforcement of existing rules and laws, and
effective control in the public administration. Moreover, corruption scandals are often highly visible and clearly
linked to names of parties and individual politicians, irrespective of the political and institutional context. While
this remains speculation, extending the theoretical framework of performance voting to explain these differences
is a crucial step towards a better understanding of individual voting behaviour.
This study focused on the influence of corruption perceptions on incumbent support, but there are several further
implications for other aspects of electoral politics. For example, the results presented here may have implications
for the emergence and electoral success of new parties (Lucardie, 2000; Tavits, 2006; Sikk, 2012). Following
Lucardie (2000: 182), 'new parties need a political project that caters to social problems perceived as important by
significant numbers of voters in order to win support'. In contexts where voters perceive high levels of corruption,
corruption can serve as a fruitful ground for new parties that run on an anti-corruption image (see also Sikk, 2012),
with sustainable effects if these parties can defend their distinct profile (Bolleyer and Bytzek, 2013). Furthermore,
corruption perceptions not only affect party choice but also turnout (Stockemer et al., 2013). Yet, there is no
consistent evidence whether turnout increases or decreases together with levels of corruption. The results
presented here suggest that these differences depend on whether voters believe that replacing the government
would make a difference. Those voters who believe in different outcomes under a government led by the current
opposition parties punish incumbents for high corruption, while we find no such effect for those who perceive few
differences between government alternatives. Thus, the effect of corruption perceptions on turnout may well be
conditional on citizens' beliefs about whether government turnover actually makes a difference (see also

Kostadinova, 2009). The results presented in this study highlight the importance of such conditional effects of
corruption perceptions. It is likely that similar effects are relevant for related research questions.
The present study also encourages research on temporal effects on performance voting. We focus on corruption
performance voting in different national contexts, and data constraints do not allow us to include cross-temporal
variation in corruption performance voting as well. Nevertheless, we believe that time-series data linking corruption
perceptions and vote choice could reveal further insights. For example, voters may be most responsive to sharp
increases in perceived corruption and reward incumbents if they perceive decreasing levels of corruption.
Including these factors would improve our understanding of voter behaviour in general, and corruption
performance voting in particular.
Acknowledgements
We gratefully acknowledge financial support from the Austrian Science Fund (FWF) (grants P25490, S10902-G11,
and S10903-G11) and thank Hannah Kieblspeck for excellent research assistance. We are indebted to Michael
Lewis-Beck, Markus Wagner, Eva Zeglovits, and the participants of the seminar series at the Department of
Methods in the Social Sciences and the Department of Government, University of Vienna, for helpful comments
and suggestions on earlier drafts. We also thank the three anonymous reviewers and the editors at EPSR for their
support and helpful suggestions.
To view supplementary material for this article, please visit http://dx.doi.org/10.1017/S1755773915000053
Footnote
1. Clearly, any voter directly benefiting from clientelist linkages may be somewhat ambivalent in her evaluation of
corruption (Kitschelt, 2000). However, not all clientelist practices are necessarily corrupt. Also, individual level
measures of corruption largely reflect voters' daily personal experiences with petty acts of corruption and are
generally detached from material advantages in clientelist elite-voter linkages. See Singer (2011c) on the complex
relationship between clientelism and perceived levels of corruption, especially grand corruption by political elites
used to generate funds to finance clientelist practices.
2. The list of moderating factors in Hypotheses 1-4 is of course not exhaustive. For example, we could also test
whether a voter's political information, and thus the probability to recognize corruption among politicians, affects
vote choice. As there are much better data for political information in national surveys, however, we refrain from
testing this information hypothesis (Winters and Weitz-Shapiro, 2013).
3. See Table A.1 in the Supplementary material for detailed information on the parliamentary elections studied.
4. Our empirical results are robust to two alternative specifications of the dependent variable, namely a model
separating voters for the prime minister's party (1) vs. any other party (0), and a multinomial logit model based on a
tripartite coding of respondents' vote choice (abstention (0), opposition vote (1), or incumbent vote (2)). The latter
model indicates that increasing corruption perception significantly reduces the odds of voting for the incumbent
(vs. voting for an opposition party), supporting the basic idea of retrospective voting models (see Supplementary
material, Model 6 in Table A.2 and Model 10 in Table A.3).
5. We use inversed scores so that higher scores indicate more perceived corruption, while lower scores indicate
less perceived corruption. Note that this measure does not capture differences across countries. In
methodological terms, Hypothesis 3 accounts for these different national contexts by weighting the corruption
perception effect with the severity of corruption in the election context. In other words, we use corruption severity
as an anchor (King et al., 2004) to achieve higher levels of cross-national comparability of survey items.
6. Including partisanship as a moderating variable also accounts for potential biases in our estimates of corruption
performance voting in general (Duch and Stevenson, 2008; Tilley et al., 2008): Voters who feel close to a political

party are likely to evaluate its performance more positively through a 'partisan lens'. Thus, performance voting
effects of partisans are probably biased (Wlezien et al., 1997; Duch et al., 2000; Evans and Andersen, 2006). The
main effects of partisanship account for this perceptual bias. In addition, we also would expect the conditional
effects of corruption perception posited in Hypothesis 2-4 to be significantly higher for non-partisans than for
voters with party affiliation. Additional tests (not reported) support this expectation.
7. The growing interest on the causes and effects of corruption has raised doubts on the validity of subjective
indexes of perceived corruption (Treisman, 2007). Yet, for our sample of European countries the CPI measure of
corruption is highly correlated both with alternative measures of perceived corruption [control of corruption by the
World Bank (2013); r=0.93] and experience-based indicators [Global Corruption Barometer (2005); r=0.82]. It also
correlates highly with the country means of perceived corruption in the CSES we employ in this article (r=0.91). All
empirical results below are robust to using this alternative measure for severity of corruption (see Supplementary
material, Model 7 in Table A.2).
8. For a similar strategy in dealing with the lack of individual-level measures on the economic conditions in the
CSES Module 2 survey data, see Singer (2011b).
9. We also estimate empirical models using alternative macroeconomic indicators to measure economic
performance. For the given sample of 20 European elections, unemployment is the only indicator exerting a
significant effect on individual voting behaviour. The models in Table A.4 in the Supplementary material show that
our empirical results are largely robust to GDP per capita growth, GDP growth and inflation as alternative
macroeconomic indicators.
10. As with random intercept models in general, this modelling strategy bears the risk of biased estimates due to a
potential correlation of the individual-level variables with the unobserved heterogeneity at the election level. The
results of Models 1 (FE) - 5 (FE) in the Supplementary material (Table A.5) underline the robustness of the
empirical results to an alternative fixed-effects model specification.
11. That is, for a male, middle-aged (47.5 years), non-partisan, and centrist (5.61) voter with completed secondary
education who is convinced that it 'makes a difference who is in power' (3.81). Here, the electoral context is
characterized by low levels of corruption (2.77) as well as moderate levels of government clarity (0.62) and
unemployment (6.60).
12. Clearly, there are differences in the scaling approaches of the main explanatory variable (three-point scale vs.
four-point scale), the choice of the empirical model (multinomial logistic vs. multilevel logistic), and the effects
reported (average marginal effects vs. conditional marginal effects). Nonetheless, Duch and Stevenson's (2008)
account of economic performance voting is the most comprehensive and thus arguably the most suited for a
comparative assessment of the two different dimensions of performance voting.
13. Comparing the marginal effects in Figure 1 with the regression coefficients in Models 2-5 exemplifies the
challenges to interpret interaction effects. In contrast to linear models, the marginal effect of interacting variables
in non-linear models hinges on the interaction term but also (among other factors) on the main constituent terms
(for details, see Berry et al., 2010). Figure 1 shows that there are substantial differences between non-partisans
and partisans.
14. Three scale points or higher, which accounts for roughly 85% of the individuals in our sample.
15. This inconclusive finding is robust to an alternative operationalization of clarity of responsibility based on
institutional clarity indicated by (i) weak committee structures, (ii) unitary states, (iii) parliamentary systems; (iv)
and unicameral systems (see Supplementary material Model 8, Table A.2 and Hobolt et al., 2013).
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AuthorAffiliation
1
Department of Government, University of Vienna, Austria
2
Department of Methods in the Social Sciences, University of Vienna, Austria
3
Department of Government, University of Vienna, Austria
DETAILS
Subject: Political science; Elections; Corruption; Voting; Voters; Electoral College;

Governance; Electoral systems; Corruption in government; Voter behavior
Location: Austria
Company / organization: Name: International Bank for Reconstruction &Development--World Bank; NAICS:
928120; Name: University of Vienna; NAICS: 611310
Classification: 9083: government/political systems; comparative governments/political systems;

9105: politics; national-level politics; 9121: political behavior; political behavior
Identifier / keyword: corruption voting behaviour comparative politics
Publication title: European Political Science Review : EPSR; Cambridge
Volume: 8
Issue: 3
Pages: 333-354
Number of pages: 22

Publication date: Aug 2016
Publisher: Camb ridge University Press
Place of publication: Cambridge
Country of publication: United Kingdom, Cambridge
Publication subject: Political Science
ISSN: 17557739
Document type: Journal Article
Document feature: References
DOI: http://dx.doi.org/10.1017/S1755773915000053
Copyright: © European Consortium for Political Research 2015 This is an Open Access article,
distributed under the terms of the Creative Commons Attribution licence
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ProQuest document ID: 1737492874

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Corruption and total factor productivity: level or

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Subject: Studies; Economic theory; Corruption; Efficiency; Productivity; Economic growth;

Classification: 9130: Experimental/theoretical; 1130: Economic theory

Publication title: Portuguese Economic Journal; Heidelberg

Publication year: 2011

Publication date: Aug 2011

Publisher: Springer Science &Business Media

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Country of publication: Netherlands, Heidelberg

Publication subject: Business And Economics--Economic Situation And C onditions

Source type: Scholarly Journals

Language of publication: English

Document type: Feature

ProQuest document ID: 876816656

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Copyright: Springer-Verlag 2011

Last updated: 2014-08-30

Database: ABI/INFORM Global,ProQuest Central

The impact of corruption on provincial