Corruption and economic development in energy-rich economies

Comparative Economic Studies, June, 2009 by Yelena Kalyuzhnova, Ali M. Kutan, Taner Yigit

Hypothesis 1. Corruption is higher in energy-rich countries where state bureaucracy is high or ease of doing business is low.

Hypothesis 2. Democratic regimes foster corruption in countries with significant energy dependency.

Corruption may also be affected by education level or human capital stock in a given country. Gylfason (2001) shows that public spending on education in resource-rich countries is inversely related to the share of natural capital in national wealth across countries because natural capital tends to crowd out human capital. Hence, we develop our third hypothesis as follows:

Hypothesis 3. Energy-abundant countries with low level of education are likely to be more corrupt.

Another key argument discussed in the literature is the link between economic growth, resource richness and corruption. The few studies analysing the poor economic performance of resource-rich economies (Auty, 2001; Gylfason, 2001) overlooked the important possibility of bi-causality, where poor economic performance causes corruption and corruption causes economic decline. Using a dynamic general equilibrium model of economic growth, Blackburn et al. (2005) derive a theoretical link between corruption, economic development and a number of other variables. They show that the relationship between corruption and economic growth is both negative and bi-causal in general. From these arguments we derive our fourth hypothesis:

Hypothesis 4. There is a negative and bi-causal relationship between corruption and growth in energy-rich economies.

It is possible that corruption may not affect the growth rate of GDP, but just its level. Hence, we derive the following final hypothesis:

Hypothesis 5. There is negative and bi-causal relationship between corruption and economic development, measured by the level of GDP per capita, in energy-rich economies.

Empirical models

We estimate two sets of two equations, the first set for the growth rate of real GDP per capita and corruption, and the other one for the level of real GDP per capita and corruption. In the economic growth equation, our focus variable is corruption and energy-specific variables. We also use several control variables to account for the other potential determinants of economic growth. Regarding the latter, standard growth theory (ie Solow, 1956; Barro and Sala-i-Martin, 1991) and new growth theory suggest that capital accumulation and human capital are important factors determining long-term growth (Aghion and Howitt, 1992; Romer, 1990). We therefore expect a positive coefficient for these variables. As proxies for capital accumulation, we use government expenditures, gross fixed capital formation, foreign direct investment (FDI) and infrastructure (percentage of total roads paved). In addition, following some recent studies we have included democracy and openness variables in estimations and these studies have presented evidence that better democratic systems and a higher level of openness increase growth significantly (Bardhan, 1997; Durham, 1999; Rodrik, 2000; Sachs and Warner, 1999b, Tavares and Wacziarg, 2001). Democracy is used to measure institutional quality and openness is utilised as a measure of country's openness to foreign trade. Hence, we expect positive coefficients for these two variables as well.