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Thursday, 14 August 2008

Corruption and Investment, 2nd Edition

A new paper finds that corruption has a positive effect on public investment while it has a negative effect on private investment. Excerpt:

".....Consistent with the evidence in the empirical literature, the analysis in this paper has established a statistically significant effect of investment on growth in a sample of 33 African countries. The evidence confirms that investment constitutes a key driver for growth. In addition, the analysis provides evidence of a negative effect of corruption on domestic investment, suggesting that one of the channels through which corruption affects growth is through investment. One interesting result is that corruption affects private investment and public investment differently. While corruption has a negative impact on private investment, the results indicate a positive relationship between public investment and corruption. The negative effect of corruption on private investment is due to the uncertainty as well as production and transactions costs arising from corruption. Thus, in this sample of African countries, the results do not support the view that corruption serves as a “grease for the wheel” of private economic activity, but rather as a tax that private investors cannot fully internalize.

The observed positive relation between public investment and corruption is indicative of rentseeking and golden-rule effects. However, it is puzzling that at the same time, public investment is positively related to income. One possible interpretation is that countries with high income also have large public sectors, or that the public sector expands as income increases. However, even if this were the case, to the extent that the negative efficiency effects of corruption on public investment are substantial, then public investment would generate minimal gains in terms of long-term growth. Thus, to achieve and sustain high growth rates it is necessary to increase not only the quantity of public investment but also its quality, which in turn will require aggressive measures to reduce corruption...."


  1. Hold on.

    That relationship is about the quantities, isn't it ? And the two effects are interlocked, really. And more public investment ordered doesn't mean more public investment realized. Especially when corruption is high.

  2. Quite right. More importantly increase in public investment does not mean it was efficiently delivered, as the paper notes. The quality of the investment, including cost overruns, fitness of purpose and so forth, are not assessed.


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