|
Article Excerpt
Abstract
This research contributes to our understanding of the interaction between corruption and economic performance by examining the relationship between corruption and business regulations measured in terms of number of procedures, time, and costs that entrepreneurs incur to satisfy government mandates. After controlling for exogenous variables potentially related to corruption and using two-stage least squares methods to mitigate problems associated with endogeneity, we find a robust positive relationship between corruption and complex rules. The findings suggest policy measures aimed at streamlining business regulations to reduce corruption and enhance growth.
JEL Codes: G18, G33, K2, K4, M13
Keywords: Corruption, Complex rules, Cost of doing business
I. Introduction
Corruption, generally defined as the misuse of governmental power for private gain or benefit, is present in every culture, and it is as old as existence norms and legal procedures (Easterly, 2001; Akcay, 2006). The following example clarifies the definition of corruption. If a bureaucrat with discretionary power applies a governmental regulation, this person enjoys a monopoly over the supply of a public good. The public official can deny or approve the application, require additional transactions, order unnecessary inspections, or simply delay the decision on the matter, with the main intention of obtaining personal benefit, generally in the form of commissions or bribes. In effect, the corrupt government employee becomes the owner of a public good that generates rents (Klitgaard, 1988; Shleifer and Vishny, 1993).
Using data from the Doing Business report of the World Bank, this research examines the relationship between corruption and the number of procedures, time involved, and costs paid to start and close a business, register property, and enforce contracts. After controlling for legal origin, ethno-linguistic fractionalization, latitude, and endogeneity, (using two-stage-least squares, 2SLS) we uncover a robust directional channel that goes from more complex business regulations to greater levels of corruption. Moreover, some of the specific components of the procedures, time and costs survived all of the controls, providing valuable information for policymakers to streamline regulations to mitigate corruption and enhance growth.
Our findings are consistent with Tanzi (1998), who contends that direct and indirect factors originate corruption. Examples of direct factors include the existence of regulations, licenses or authorizations, taxes, decisions on government expenditure, and supply of goods and services with prices below market clearing levels, among other discretional decisions. In fact, discretionary power plays a very important role in light of the monopolistic position of the employee described above. On the other hand, indirect factors include quality of bureaucracy, salaries of public employees, penal systems, institutional controls, transparency of rules, laws and processes, and even the example of political leaders.
Our results also support Rose-Ackerman (1996), who posits two reasons for committing bribery: to obtain benefits and to elude costs. The first relates to the government purchase and sale of goods and services, infrastructure supply, and privatizations of companies--activities in which potential benefits justify bribery. For example, consider a process of privatization in which many companies wish to participate. Some of these companies do not fulfill requirements to enter, but bribing public employees grants them the opportunity, not only of participating in the bid, but of winning it, even if the final price is inflated or the products' quality is diminished.
The second reason for bribery, to elude costs, is closely related to what we have called complex business rules, paying bribes to circumvent the process. This source of corruption is bigger when a decision depends largely on a public official's discretion or when the norms that rule private economic activities have no clear definitions (Rose-Ackerman, 1996). An example is the process of liquidating a business, which is usually so long and complex that it is often better to bribe a judge, a real estate appraiser, or others with discretionary power who are involved in the process to accelerate the decision over the disposition of the company's assets. (1)
Our research is related to those studies that treat regulation and its impact on corruption in the framework of the theories of public interest of Pigou (1938) and of public choice of Tullock (1967) and Shleifer and Vishny (1998). La Porta, Lopez-de-Silanes, Shleifer and Vishny (1999) and Djankov, La Porta, Lopez-de-Silanes and Shleifer (2002) find support for public choice theories and conclude that abundant regulations are associated with less competition and more corruption.
Djankov, La Porta, Lopez-de-Silanes and Shleifer (2002) also study the relationship between corruption and the number of procedures, time, and cost necessary to start a business for a sample of 78 countries using ordinary least squares (OLS). Our research expands the scope of this work by examining the regulations that govern closing a business, obtaining licenses, registering property, and enforcing a contract. In addition, we control for variables commonly accepted as exogenous and potentially correlated with corruption, such as legal origin, latitude, and ethno-linguistic fractionalization. We also mitigate potential problems of endogeneity using 2SLS. Finally, we use data through 2006 from the World Bank's Doing Business report.
This paper is organized as follows: The next section describes the data and methodology. Results are presented in Section III, and the last section concludes the paper.
II. Data and Methodology
This research uses the Corruption Perceptions Index (CPI) published annually by Transparency International (TI) as a measure of corruption. This index "ranks countries in terms of the degree to which corruption is perceived to exist among public officials and politicians" (Transparency International, 2006). This indicator allows us to quantify the level of corruption that prevails in each country and also has academic validity (Meon and Sekkat, 2005). It is based on surveys of experts about the levels of corruption that they perceive in the public sector of 163 countries. Factors assessed in the construction of this indicator include corruption in the forms of excessive patronage, job reservations, favor-for-favors, and nepotism.
CPI values range from zero to ten, with a value close to zero representing the perception of a high level of corruption; five is moderate and ten low level. A revealing fact is that for the year 2006, corruption levels averaged 4.091, suggesting that countries on average exhibit a moderate to high level of corruption.
As a robustness check, we also employ The Corruption Control Index (CCI) that the World Bank publishes annually for 202 countries. Originally developed by Kaufmann, Kraay, and Zoido-Lobaton (1999), values are on -2.5 to...
|
