The Impact of Corruption and Shadow Economy on the Economic and Sustainable Development. Do They “Sand the Wheels” or “Grease the Wheels”?

Răzvan Hoinaru,Sorin Nicolae Borlea,Daniel Buda,Monica Violeta Achim,Viorela Ligia Văidean

doi:10.3390/su12020481

Abstract

Having in mind the main debate “grease the wheels” vs. “sand the wheels”, the main objective of this study is to find the way in which corruption and shadow economy influence economic and sustainable development. A large cross-country database of 185 countries is used for the 2005–2015 time period. We find that corruption and shadow economy are poverty-driven diseases and they highly characterize low-income countries. Thus, the higher levels of corruption and shadow economy are correlated with low levels of economic and sustainable development. Then, the main contribution of this work consists of finding general and empirical evidence for the destructive role held by the corruption and shadow economy phenomena upon the economic and sustainable development of states. However, we also find some evidence that corruption can be also seen as a way to circumvent the law in order to achieve higher economic benefits and thereby to increase economic development. In addition, we find that economic and sustainable development in high-income countries is more strongly and negatively affected by the phenomena of corruption and shadow economy than in the case of low-income countries. Our research may have political implications for the government institutions that need to adopt the best-required policies, in order to boost economic and sustainable development. For low-income countries, we find some evidence for positive effects of corruption and shadow economy upon economic and sustainable development and the immediate practical implications are not to encourage but to effectively and strongly fight against these destructive phenomena and to find the proper channels to increase the institutional quality and to adopt the appropriate regulatory policies.

Highlights

Both corruption and shadow economy seem to have the circumvention of regulations and that of tax payments in common, further leading towards lower tax revenues, an increase in public expenditures and the hampering of productivity and growth
Our main results consist of explicating economic development (LogGDP) and sustainable development (HDI and Environmental performance index (EPI)) as a function of corruption rankings (COR) and shadow economy (SE) as exogenous variables, taken independently: COR in Models (1) and SE in Models (2)
Each model is at first estimated through the Pooled OLS technique for panel data, and the estimations are performed on the fixed-effects model (FEM) and the random-effects model (REM) for panel data

Summary

Introduction

Both corruption and shadow economy seem to have the circumvention of regulations and that of tax payments in common, further leading towards lower tax revenues, an increase in public expenditures and the hampering of productivity and growth. There are the proponents of a positive effect held by corruption and shadow economy upon economic and sustainable development This positive effect is known as “grease the wheels”. Supporting this view, there are findings documenting that corruption may help firms circumvent government regulation and the firm grows [6,7,8]. This is the case of several countries such as China, Vietnam and Cambodia which face economic growth in spite of their lack of good governance [8,9,10]. There is evidence that the shadow economy, especially in corrupt countries, represents an important buffer for solving many economic problems [11]

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Conclusion