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Public Expenditures, Bureaucratic Corruption and Economic Development

  • K Blackburn
  • G Forgues-Puccio
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    This paper presents a dynamic general equilibrium analysis of public sector corruption and economic growth. In an economy with government intervention and capital accumulation, state-appointed bureaucrats are charged with the responsibility for procuring public goods which contribute to productive efficiency. Corruption arises because of an opportunity for bureaucrats to appropriate public funds by misinforming the government about the cost and quality of public goods provision. The incentive for each bureaucrat to do this depends on economy-wide outcomes which, in turn, depend on the behaviour of all bureaucrats. We establish the existence of multiple development regimes, together with the possibility of multiple, frequency-dependent equilibria. The predictions of our analysis accord strongly with recent empirical evidence on the causes and consequences of corruption in public office.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 e¤ect 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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    File URL: http://www.socialsciences.manchester.ac.uk/medialibrary/cgbcr/discussionpapers/dpcgbcr54.pdf
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    Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 54.

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    Length: 30 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:man:cgbcrp:54
    Contact details of provider: Postal: Manchester M13 9PL
    Phone: (0)161 275 4868
    Fax: (0)161 275 4812
    Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/our-research/centre-for-growth-and-business-cycle-research/

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    1. Acemoglu, Daron & Verdier, Thierry, 1996. "Property Rights, Corruption and the Allocation of Talent: A General Equilibrium Approach," CEPR Discussion Papers 1494, C.E.P.R. Discussion Papers.
    2. Mauro, Paolo, 1995. "Corruption and Growth," The Quarterly Journal of Economics, MIT Press, vol. 110(3), pages 681-712, August.
    3. Aizenman, Joshua & Pinto, Brian & Radziwill, Artur, 2004. "Sources for Financing Domestic Capital - is Foreign Saving a Viable Option for Developing Countries?," Santa Cruz Department of Economics, Working Paper Series qt7g18546z, Department of Economics, UC Santa Cruz.
    4. Acemoglu, D. & Verdier, T., 1997. "The Choice between Market Failures and Corruption," DELTA Working Papers 97-06, DELTA (Ecole normale supérieure).
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    7. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    8. Shang-Jin Wei, 1997. "How Taxing is Corruption on International Investors?," NBER Working Papers 6030, National Bureau of Economic Research, Inc.
    9. Takatoshi Ito & Anne O. Krueger, 1996. "Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5," NBER Books, National Bureau of Economic Research, Inc, number ito_96-1, June.
    10. Sarte, Pierre-Daniel G., 2000. "Informality and rent-seeking bureaucracies in a model of long-run growth," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 173-197, August.
    11. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
    12. Fisman, Raymond & Gatti, Roberta, 2000. "Decentralization and corruption - evidence across countries," Policy Research Working Paper Series 2290, The World Bank.
    13. Keefer, Philip & Knack, Stephen, 1997. "Why Don't Poor Countries Catch Up? A Cross-National Test of Institutional Explanation," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 590-602, July.
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    15. Takatoshi Ito & Anne O. Krueger, 1996. "Introduction to "Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5"," NBER Chapters, in: Financial Deregulation and Integration in East Asia, NBER-EASE Volume 5, pages 1-5 National Bureau of Economic Research, Inc.
    16. Isaac Ehrlich & Francis T. Lui, 1999. "Bureaucratic Corruption and Endogenous Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 107(S6), pages S270-S293, December.
    17. Hongyi Li & Lixin Colin Xu & Heng-fu Zou, 2000. "Corruption, Income Distribution, and Growth," CEMA Working Papers 472, China Economics and Management Academy, Central University of Finance and Economics.
    18. Ito, Takatoshi & Krueger, Anne O. (ed.), 1996. "Financial Deregulation and Integration in East Asia," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226386713.
    19. Kwabena Gyimah-Brempong, 2002. "Corruption, economic growth, and income inequality in Africa," Economics of Governance, Springer, vol. 3(3), pages 183-209, November.
    20. Rafael Di Tella & Alberto Ades, 1999. "Rents, Competition, and Corruption," American Economic Review, American Economic Association, vol. 89(4), pages 982-993, September.
    21. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
    22. Barry Eichengreen & David Leblang, 2003. "Capital Account Liberalization and Growth: Was Mr. Mahathir Right?," NBER Working Papers 9427, National Bureau of Economic Research, Inc.
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