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Why are corrupt countries less successful in consolidating their budgets?

Author

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  • Arin, K. Peren
  • Chmelarova, Viera
  • Feess, Eberhard
  • Wohlschlegel, Ansgar

Abstract

Following the financial crisis, many countries introduced fiscal stimulus packages making budget consolidations in the future rather challenging. Using a data set for 28 OECD countries spanning the period 1978–2007, we contribute to the literature on success probabilities of consolidation attempts by exploring the impact of corruption, and in particular the interplay of corruption and the choice of the policy instrument. We find that corruption significantly reduces the success rate. When controlling for the change in government expenditures, however, the impact of corruption is insignificant or at least becomes less pronounced. We therefore relate the choice of the fiscal instrument to corruption and find that corrupt countries rely significantly less on expenditure cuts during periods of consolidation attempts. We conclude that international organizations should be careful in observing what corrupt countries do when trying to consolidate their budgets.

Suggested Citation

  • Arin, K. Peren & Chmelarova, Viera & Feess, Eberhard & Wohlschlegel, Ansgar, 2011. "Why are corrupt countries less successful in consolidating their budgets?," Journal of Public Economics, Elsevier, vol. 95(7), pages 521-530.
    • Handle: RePEc:eee:pubeco:v:95:y:2011:i:7:p:521-530
    DOI: 10.1016/j.jpubeco.2011.01.007
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    Cited by:

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    3. Georgia Kaplanoglou & Vassilis T. Rapanos & Ioanna C. Bardakas, 2015. "Does Fairness Matter for the Success of Fiscal Consolidation?," Kyklos, Wiley Blackwell, vol. 68(2), pages 197-219, May.
    4. Jin, Ming & Yin, Mingmei & Chen, Zhongfei, 2021. "Do investors prefer borrowers from high level of trust cities? Evidence from China’s P2P market," Research in International Business and Finance, Elsevier, vol. 58(C).
    5. Joël CARIOLLE, 2014. "Corruption in Turbulent Times: a Response to Shocks?," Working Papers P106, FERDI.
    6. Philip Arestis & Ayşe Kaya & Hüseyin Şen, 2018. "Does fiscal consolidation promote economic growth and employment? Evidence from the PIIGGS countries," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 15(3), pages 289-312, November.
    7. Bosco, Bruno, 2016. "Old and new factors affecting corruption in Europe: Evidence from panel data," Economic Analysis and Policy, Elsevier, vol. 51(C), pages 66-85.
    8. Grilli, Luca & Murtinu, Samuele, 2018. "Selective subsidies, entrepreneurial founders' human capital, and access to R&D alliances," Research Policy, Elsevier, vol. 47(10), pages 1945-1963.
    9. Van-Ha Le & Jakob de Haan & Erik Dietzenbacher & Jakob de Haan, 2013. "Do Higher Government Wages Reduce Corruption? Evidence Based on a Novel Dataset," CESifo Working Paper Series 4254, CESifo.
    10. Arin & Torben Kuhlenkasper & Nandialath, 2015. "Critical thresholds for budget consolidations: a semi-parametric approach," Applied Economics Letters, Taylor & Francis Journals, vol. 22(16), pages 1293-1297, November.
    11. Eberhard Feess & Helge Mueller & Sabrina G. Ruhnau, 2014. "The Impact of Religion and the Degree of Religiosity on Work Ethic: A Multilevel Analysis," Kyklos, Wiley Blackwell, vol. 67(4), pages 506-534, November.
    12. Shahbaz, Muhammad & Balsalobre, Daniel & Shahzad, Syed Jawad Hussain, 2018. "The Influencing Factors of CO2 Emissions and the Role of Biomass Energy Consumption: Statistical Experience from G-7 Countries," MPRA Paper 87456, University Library of Munich, Germany, revised 14 Jun 2018.
    13. Samuele Murtinu & Giulio Piccirilli & Agnese Sacchi, 2016. "Fiscal Policy, Government Polarization, and the Economic Literacy of Voters," Working papers 50, Società Italiana di Economia Pubblica.
    14. Joël CARIOLLE, 2014. "Corruption in Turbulent Times: a Response to Shocks?," Working Papers P106, FERDI.
    15. Warning, Susanne & Dürrenberger, Nicole, 2015. "Corruption and education: Does public financing of higher education matter?," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112836, Verein für Socialpolitik / German Economic Association.
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    17. Toshihiro Ihori, 2015. "Flexibility of Deficit Ceiling and Income Fluctuation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 11(2), pages 231-246, March.

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    More about this item

    Keywords

    Corruption; Fiscal consolidation; Binary choice models;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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