Are Corruption and Taxation Really Harmful to Growth? Firm Level Evidence

Exploiting a unique data set containing information on the estimated bribe payments of Ugandan firms, we study the relationship between bribery payments, taxes and firm growth over the period 1995-97. Using industry-location averages to circumvent the potential problem of endogeneity, and to deal with issues of measurement error, we find that both the rate of taxation and bribery are negatively correlated with firm growth. For the full data set, a one-percentage point increase in the bribery rate is associated with a reduction in firm growth of three percentage points, an effect that is about three times greater than that of taxation. Moreover, after outliers are excluded, we find a much greater negative impact of bribery on growth, while the effect of taxation is considerably reduced. This provides some validation for firm-level theories of corruption which posit that corruption retards the development process to an even greater extent than taxation. * Columbia Business School. 614 Uris Hall, Columbia University, New York, NY, 10027. Email: [email protected]. Telephone: (212) 854-9157. Fax: (212) 316-9355 # Institute for International Economic Studies, Stockholm University, 106 91 Stockholm, Sweden, and DECRG, The World Bank. Email: [email protected]. Telephone: (+46) 8 163060. Fax: (+46) 8 161443. We are grateful for comments by Aart Kraay and Torsten Persson. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors.