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Financial Liberalisation, Bureaucratic Corruption and Economic Development

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Author Info
Keith Blackburn () (Department of Economics, University of Manchester)
Gonzalo F. Forgues-Puccio () (School of Economics and Finance, University of St Andrews)

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Abstract

We study the effect of international financial integration on economic development when the quality of governance may be compromised by corruption. Our analysis is based on a dynamic general equilibrium model of a small economy in which growth is driven by capital accumulation and public policy is administered by government-appointed bureaucrats. Corruption may arise due to the opportunity for bureaucrats to embezzle public funds, an opportunity that is made more attractive by financial liberalisation which, at the same time, raises efficiency in capital production. Our main results may be summarised as follows: (1) corruption is always bad for economic development, but its effect is worse if the economy is open than if it is closed; (2) the incidence of corruption may, itself, be affected by both the development and openness of the economy; (3) financial liberalisation is good for development when governance is good, but may be bad for development when governance is bad; and (4) corruption and poverty may co-exist as permanent, rather than just transitory, fixtures of an economy.

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Publisher Info
Paper provided by Institute for Advanced Development Studies in its series Development Research Working Paper Series with number 06/2008.

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Length: 30 pages
Date of creation: Jun 2008
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Handle: RePEc:adv:wpaper:200806

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Related research
Keywords: Corruption; development; financial liberalisation;

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Find related papers by JEL classification:
D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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