Corruption, governance, investment and growth in emerging markets1

Abstract

The article investigates the potential impact of corruption on economic growth by examining the effect that corruption may have on several significant determinants of economic growth, namely, investment in human, private and public capital, and on governance. Our theoretical approach allows for corruption to influence economic growth directly and indirectly through different investment and governance channels. All previous empirical work on this issue has been based on national income and product accounts (NIPA) data, which do not normally break down gross domestic investment into its private and public sector, and if they do, they misclassify investment by public enterprises as private investment, potentially biasing empirical findings. In this article we use a data set from the International Finance Corporation that bypasses these problems. We find that the impact of corruption on the level of public investment appears to be more ambiguous than it has been found in the previous literature. We, however, find that the impact of corruption on the accumulation of private capital is significantly more damaging than what has been previously found. We also find that the impact of corruption on governance is unambiguously negative, which further deters economic growth. 1The views expressed in this paper are those of the authors and do not represent the official policy of the Naval Postgraduate School, the Overseas Private Investment Corporation, or the United States Government. The usual disclaimers apply.