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Corruption and Openness

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  • Neeman, Zvika
  • Paserman, Marco Daniele
  • Simhon, Avi

Abstract

We consider a neoclassical growth model with endogenous corruption. Corruption and wealth, which are co-determined in equilibrium, are shown to be negatively correlated. Richer countries tend to be less corrupt, and corrupt economies tend to be poorer. This observation gives rise to the following puzzle: if poorer countries do indeed experience higher levels of corruption, and if indeed as suggested by a number of empirical studies corruption hampers growth, then how did rich countries, who were poor once, become rich? Our answer is simple. In the past, economies were mostly ‘closed’ in the sense that it was difficult to transfer illicit money outside of the economy. In contrast, today’s economies are mostly open. In the relatively closed economies of the 19th century, the gains from corruption remained inside the country and became part of the economy’s productive capital. In contrast, in today’s open economies, corrupt agents smuggle stolen money abroad depleting their country’s stock of capital. We confirm this intuitive explanation by testing the hypothesis that the effect of corruption on wealth depends on the economy’s degree of openness using cross-country data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4057.

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Date of creation: Sep 2003
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Handle: RePEc:cpr:ceprdp:4057

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Keywords: corruption; growth; openness;

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References

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The cost of corruption
    by Economic Logician in Economic Logic on 2008-12-09 15:02:00
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Cited by:
  1. Sambit Bhattacharyya & Steve Dowrick & Jane Golley, 2007. "Institutions and Trade: Competitors or Complements in Economic Development?," DEGIT Conference Papers c012_005, DEGIT, Dynamics, Economic Growth, and International Trade.
  2. Aida Isabel Tavares, 2004. "The socio-cultural and political-economic causes of corruption: a cross-country analysis," Working Papers de Economia (Economics Working Papers) 19, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
  3. Keith Blackburn & Gonzalo F. Forgues-Puccio, 2007. "Why is Corruption Less Harmful in Some Countries Than in Others?," Centre for Growth and Business Cycle Research Discussion Paper Series 88, Economics, The Univeristy of Manchester.
  4. Keith Blackburn & Gonzalo F. Forgues-Puccio, 2005. "Financial Liberalisation, Bureaucratic Corruption and Economic Devlopment," The School of Economics Discussion Paper Series 0531, Economics, The University of Manchester.
  5. Biru Paksha Paul, 2010. "Does corruption foster growth in Bangladesh?," International Journal of Development Issues, Emerald Group Publishing, vol. 9(3), pages 246-262, July.
  6. Wang, Yuanyuan & You, Jing, 2012. "Corruption and firm growth: Evidence from China," China Economic Review, Elsevier, vol. 23(2), pages 415-433.
  7. Andrew van Hulten & Michael Webber, 2010. "Do developing countries need 'good' institutions and policies and deep financial markets to benefit from capital account liberalization?," Journal of Economic Geography, Oxford University Press, vol. 10(2), pages 283-319, March.
  8. Dreher, Axel & Kotsogiannis, Christos & McCorriston, Steve, 2007. "Corruption around the world: Evidence from a structural model," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 443-466, September.
  9. Francisco De Assis Oliveira Campos & Luiz Ivan De Melo Castelar, 2014. "Avaliação Da Corrupção Municipal A Partir De Microdados," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 075, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  10. Felipe Larraín & José Tavares, 2004. "Does Foreign Direct Investment Decrease Corruption?," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 41(123), pages 217-230.
  11. Subhayu Bandyopadhyay & Suryadipta Roy, 2011. "Political economy determinants of non-agricultural trade policy," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 89-104.
  12. Philip Shaw & Marina‐Selini Katsaiti & Marius Jurgilas, 2011. "Corruption And Growth Under Weak Identification," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 264-275, 01.
  13. Fabrizio Carmignani, 2005. "Efficiency Of Institutions, Political Stability And Income Dynamics," Public Economics 0503007, EconWPA.
  14. George Economides & Sarantis Kalyvitis & Apostolis Philippopoulos, 2008. "Does foreign aid distort incentives and hurt growth? Theory and evidence from 75 aid-recipient countries," Public Choice, Springer, vol. 134(3), pages 463-488, March.

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