Corruption and growth: The role of governance, public spending, and economic development

a r t i c l e i n f o This paper analyses how the quality of governance, the size of public spending, and economic development affect the relationship between bureaucratic corruption and economic growth. The analysis shows that the interaction between corruption and governance shapes the efficiency of public spending, which in turn, determines the growth effects of corruption. Specifically, corruption improves economic efficiency only when the actual government size is above the optimal level. It implies that a growth-maximising level of corruption is possible. This paper also finds that the incidence of corruption declines with economic development. This is because with economic development the wage rate rises and makes private rent seeking costs higher, thereby, discouraging corruption. The main policy implication is that targeting tax evaders instead of bureaucrats is more effective in terms of both reducing corruption and improving the growth potential of an economy. When the public and private sectors interact, bureaucrats may abuse their public position for private gains by accepting bribes or even actively extorting them. This behaviour is defined as an act of bureaucratic corruption. Examining the effects of bureaucratic corruption on economic growth and more importantly, how this relationship is influenced by the quality of governance, the size of public spending, and economic development is the primary focus of this paper. Notably, the extant literature finds that corruption either may facilitate growth by helping firms circumvent the burden of the public sector or may retard it by increasing this burden and reducing the efficiency of public spending that contributes to productivity. 1 The literature highlights that whether the positive or negative effect dominates depends on the quality of governance, the size of the public sector, and the level of economic development; as these factors play a significant role in corruption outcomes. However, there are some inconsistencies and gaps in the literature in explaining the dependence of the corruption-growth nexus on these factors, which merit a further investigation. First, the literature is not clear about how the quality and structure of underlying institutions influence the relationship between corruption and economic performance. One line of reasoning in this literature is based on the idea that corruption is driven by the institutional setting. 2 According to this rationale, the institutional structure determines the degree of organisation of corruption, which then impacts on the income uncertainty faced by the private agents and thus on the …