The Effect of Corruption on Energy Security and the Analysis of Outlying Countries in East Asia

Abstract

With annual data for 2010-13 from fifty-five countries, we explore the possibility that differences in corruption are causal to differentials in energy security. For the purpose of policy formation diagnostic double-checkings are conducted to evaluate all the models in the sense that the more tests that are carried out, the less the chance of accepting a poor model. Among those performed are: the RESET tests for functional form misspecification and the tests for heteroskedasticity. The fixed effect (FE) estimates suggest that corruption has a detrimental effect on energy security. It is also evident from the Spearman rank correlation coefficient that corruption and energy security are negatively dependent on one another, implying that higher corruption correlates with lower energy security. The FE estimates suggest that corruption has a detrimental effect on energy security. Political stability energy price, energy use, energy imports, energy production, total carbon dioxide emissions, and military expenditure variables are controlled for. Each of the control variables presents a statistically significant coefficient with the predicted sign. Results from Granger causality test suggest that corruption is Granger-causal to energy security risk in both all countries as well as East Asian countries (i.e., China, Japan, and Korea). More specifically, the FE estimates also suggest that the harmful effects of corruption on energy security is greater in the three core East Asian countries than in other countries. This suggests that the three core East Asian countries can be regarded as outliers. The ceteris paribus mean elasticity of energy security risk with respect to corruption in East Asia, indicating that a 10 percent increase in corruption enhances energy security risk by 2.46 percent in East Asia. This implies that energy security risk is less sensitive to a change in corruption. Given the importance of energy security for sustainable development in East Asia, therefore, a key element of ensuring energy security is that for more transparent physical and financial energy markets the three East Asian countries enhance energy cooperation, to make energy market data more accurate and available, and to take steps to support the development of cleaner and more efficient energy technologies to enhance the efficiency of markets and shift towards a more sustainable energy future. For example, compliance with the United Nations Convention Against Corruption may be facilitated by reforms aimed at reducing corruption.