The good, the bad, and the ugly: New evidence on alternative views of corruption

ABSTRACT

Different views of corruption are discussed in the literature, ranging from theories highlighting a positive role of corruption (to ‘grease the wheels’ of an economy) to negative (acting as ‘sand in the wheels’) or even destructive effects of corruption on economic outcomes. The empirical evidence in this context is mixed, with alternative theories being supported by different studies, typically relying on different data sources, time periods, and measures of corruption. In this paper, we assess several alternative views of corruption simultaneously in a single empirical framework. Specifically, we test six prominent hypotheses regarding the role of corruption for government revenues using a comprehensive country-level panel dataset covering 194 countries in the period 1996–2019. Our results help to shed light on the factors that are empirically important in explaining the link between corruption and government revenues, including the role of governance, autocracy, fragile states, and natural resources.

KEYWORDS:

• Corruption
• government revenue
• grease the wheels
• institutions
• natural resources

JEL CLASSIFICATION:

• D73
• E62
• H26
• H71
• O23
• Q34

Acknowledgement

We thank Aart Kraay, Arye Hillman, and several anonymous referees for valuable comments and suggestions. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of the World Bank Group.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ We briefly summarize the different findings in this literature in Section II.

² Since countries’ geographical region does not change over time, the SSA dummy variable is captured by the country fixed effects and thus not included as a regressor itself (in this case only the interaction term of corruption and SSA is included).

³ Two major sources of such data are expert ratings (e.g. the data from the Business International Corporation used in Mauro 1995) and surveys of residents collecting information on perceived levels of corruption (e.g. the data from the World Economic Forum’s Global Competitiveness Report).

⁴ The Worldwide Governance Indicators (WGI) are a research dataset summarizing the views on the quality of governance provided by a large number of enterprises, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey institutes, think tanks, non-governmental organizations, international organizations, and private sector firms. The WGI do not reflect the official views of the World Bank, its Executive Directors, or the countries they represent. The WGI are not used by the World Bank Group to allocate resources.

⁵ Excluding these three years does not critically affect our findings as the main regression results regarding the empirical validity of the tested hypotheses remain qualitatively the same.