Corruption and Growth in Ethnically Fragmented World

Abstract

There is increasing recognition that corruption has an adverse influence on growth as it distorts both market economy and democracy. However, the existing literature has failed to address countries' characteristics as far as the process of sample selection is concerned. This paper empirically reexamines the relationship between corruption and growth after dividing the data into two subsamples based on the Index of Ethnic Fractionalization (IEF). Using cross-national evidence, corruption is shown to be an obstacle to growth generally, a conclusion that is in line with the existing literature. Furthermore, a negative association between corruption and growth is found to exist in the subsample of countries with a lower IEF, in ethnically more homogeneous countries. However, there is little evidence that corruption impacts upon growth in the subsample of countries with a relatively higher IEF, in more heterogeneous or diverse countries. This implies that the adverse impact of corruption on growth increases in a country with a relatively low IEF and a strong homogeneity among its constituents, and remains in force so long as attempts to improve transparency are ineffective.