Corruption and economic development in energy-rich economies

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

Looking at the corruption equation first, we can see that a higher level of GDP per capita improves corruption rankings. Ease of doing business is both statistically and economically significant and positive: a 1 rank reduction in the business index, indicating improvement in business conditions, moves the corruption rank down by close to 3 (1/0.371) steps, to a lower level of corruption. This finding indicates that policy makers need to reduce regulations, so as to reduce opportunities for officials to extract bribes from businesses. Some energy-abundance interaction terms also contribute to explaining the variance in per capita GDP. For example, when the Education variable interacts with Primx, we observe a decline, and hence improvement in, corruption rankings, a finding similar to the growth rate results.

Regarding energy abundance variables, the second interactive term (Democracy x Primx) has a positive sign, suggesting a worsening in corruption ranks in energy-rich countries with low levels of democracy; recall that an increase in the democracy index shows a less democratic country. The principal component variable, PC1, capturing the impact of oil and gas production and reserves, is negative. This shows that an increase in energy production and reserves moves the ranking down, meaning less corruption, due to a higher expected level of economic development in the future due from today's higher energy production and stocks.

Similar to the results in Table 3, the Primx x oil reserves and oil reserves variables have the opposite effects on corruption. An increase in Primx x oil reserves uariable brings about a worsening in corruption rankings, while higher levels of energy production and reserves lower the corruption level. The estimated model is able to explain about 72 % of cross-country variation in corruption ranks.

We next discuss the results for the level of GDP per capita. First, we find that an improvement in democracy (a decline in the index) increases GDP per capita. Second, Government, general government final consumption expenditure as percentage of GDP, is significant and positive, suggesting that government spending adds to the standard of living. On the other hand, an increase in corruption, reflecting an increase in the index, reduces the GDP per capita. The only significant interactive term in the model is Democracy-Primx and it has a negative sign, suggesting that GDP per capita is lower in energy-rich countries with low levels of democracy. Finally, the principal component term is positive, showing that an increase in energy production and reserves alone would increase GDP per capita.

The Primx x oil reserves variable is significant and positive, suggesting that energy abundance increases economic development. Note that this finding is opposite to that in Table 3 on growth: while energy abundance appears to lower economic growth, it may improve economic development, measured by the level of GDP per capita. This finding suggests that energy abundance may not be a curse for economic development. The estimated model is able to explain about 64% of cross-country variation in GDP per capita.