The Effect of Corruption on Exports and Imports in Latin America and the Caribbean

ABSTRACT

International trade, in particular exports and imports, are regarded as important factors that can increase the economic development of the Latin American and Caribbean (LAC) countries. However, little is known whether the ability of these countries to strengthen their global positions in trade can be affected by the pervasiveness of local corruption. The objective of this study is to analyze the impact of corruption on exports and imports in LAC countries. Our empirical results from the gravity model indicate that local corruption strongly reduces exports in the region. Thus, we conclude that LAC would be able to achieve more export growth if corruption in the region was effectively reduced.

RESUMEN

Se considera que el comercio internacional, primordialmente el ramo de las exportaciones e importaciones, son factores importantes que pueden fomentar el desarrollo económico de los países de Latinoamérica y del Caribe (LAC). No obstante, existe una incógnita cuanto al grado en que la habilidad de estos países en fortalecer sus posiciones comerciales globales, pueda verse afectada por la omnipresente influencia de la corrupción local. Este estudio tiene por objeto analizar el impacto que la corrupción ejerce sobre las exportaciones e importaciones en los países de Latinoamérica y el Caribe. El resultado empírico obtenido emana de un modelo de gravedad, que indica que la corrupción local reduce drásticamente las exportaciones en la región. Consecuentemente, llegamos a la conclusión de que dichos países podrían aumentar aún más sus exportaciones, si se llegase realmente a restringir la corrupción en la región.

RESUMO

O comércio internacional, principalmente as importações e exportações, são vistas como fatores importantes capazes de intensificar o desenvolvimento econômico dos países da América Latina e do Caribe (ALC). No entanto, pouco se sabe se a capacidade desses países no que tange o fortalecimento de suas posições globais no comércio pode ser afetada pela difusão da corrupção local. O objetivo do presente estudo é analisar o impacto da corrupção nas importações e exportações dos países da ALC. Os nossos resultados empíricos derivados do modelo de gravidade indicam que a corrupção local reduz muito as exportações da região. Por isso, concluímos que a ALC conseguiria obter um maior crescimento das exportações se a corrupção na região fosse restringida com eficácia.

KEYWORDS:

• corruption
• gravity model
• international trade
• Latin America and the Caribbean (LAC)

ACKNOWLEDGMENT

We are very grateful to two anonymous reviewers for valuable comments and suggestions. All remaining errors and omissions are our own responsibility.

Notes

^a Transparency International (TI).

^b World Development Indicator.

Notes: ***, **, * represent the 1, 5, and 10% significance levels respectively.

Robust standard errors are in parentheses.

Year dummy variables are included in each regression.

Instrumental variables for corruption in Model (2) are the absolute latitude of a country and the government expenditure by GPD.

Notes: ***, **, * represent the 1, 5, and 10% significance levels respectively.

Robust standard errors are in parentheses.

Year dummy variables are included in each regression.

Instrumental variables for corruption in Model (5) are the absolute latitude of a country and the government expenditure by GPD.

Even though the corruption perception index (CPI) from Transparency International has been widely used in many studies, the index still receives some major criticism (see Lancaster and Montinola, 2001; Kuncoro, 2006, for a complete discussion). Because CPI is a composite index that captures various aspects of corruption in a country, some of these aspects may not directly related to international trade. Therefore, the results from our study should be interpreted with caution.

In this model, the variable indicating whether a country pair belongs to the same Preferential Trade Agreements (PTA_ijt) was automatically dropped from the estimation as its values are constant over the periods in our data.