Corruption, Democracy, and Public Debt: a Case of the Arab Countries

Abstract

Previous studies on the effect of corruption on public debt have produced mixed results. Therefore, in an attempt to explain these ambiguous results, we tried this study examine the impact of corruption on the public debt while taking into account the role of democracy. For this reason, we used the general method of moments (GMM) to empirically test this impact in 16 countries of the Arab world over the 2000/2016 period. In fact, the obtained results through the use of the GMM model showed that the higher levels of corruption can lead to high levels of public debt. Moreover, given the role of democracy, an increase in corruption can lead to an increase in public debt if the level of democracy is too low, while if it is high, public debt stops to rise. In fact, the obtained results indicate that a high public spending and a larger shadow economy amplify the effect of corruption on the public debt. Moreover, our estimation confirms the existence of a non-linear relationship between democracy and public debt. On the other hand, there is a threshold beyond which the Arab countries can manage to control their debt. Therefore, to check for the robustness of the results, we made estimations of the impact of the democratization process on public debt through the use of different indexes for both corruption and democracy beside a different proxy for the shadow economy. In fact, these variables continue to have a statistically significant effect on public debt. As a consequence, the results showed that higher levels of corruption, a larger shadow economy, and a lower value of democracy are conducive to the accumulation of public debt. Some policy implications and recommendations for the Arab countries are also discussed.