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DEMOCRACY AND CORRUPTION: SOME NEW EVIDENCE

DEMOCRACY AND CORRUPTION: SOME NEW EVIDENCE. Jacob Musila Athabasca University, Canada jacobm@athabascau.ca corruption. ABSTRACT.

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DEMOCRACY AND CORRUPTION: SOME NEW EVIDENCE

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  1. DEMOCRACY AND CORRUPTION: SOME NEW EVIDENCE Jacob Musila Athabasca University, Canada jacobm@athabascau.ca corruption.

  2. ABSTRACT This study explores the relationship between democracy and corruption. Using data on African countries, I find the relationship between democracy and corruption measures to be statistically significant and nonlinear. The coefficients of the nonlinear regressions suggest that corruption is slightly lower in autocracies than in partial democracies; and once past a threshold, corruption is substantially lower in full or near-full democracies. Besides the democracy variables, I find legal systems, religious traditions, and ethnic fractionalization to be important determinants of cross-country variations in corruption rates.

  3. OVERVIEW OF PRESENTATION • the problem/issue • literature • analytical framework • empirical analysis • results • threshold democracy • conclusion

  4. THE PROBLEM OF STUDY • Gary Becker observed that the former Soviet bloc countries have similar long-run growth rates as those in developed Western economies. • Ehrlich and Lui (JPE, 1999) claimed that autocratic regimes could achieve growth rates equal or higher than decentralized democracies because corruption is much constrained in the autocracies. • Ehrlich and Lui’s observation, together with the empirical analyses that find a positive correlation between democracy and corruption, suggests that the relation between democracy and corruption is nonlinear. Nobody has successfully test this possibility.

  5. EVIDENCE 1

  6. EVIDENCE 2

  7. EVIDENCE 3

  8. EVIDENCE 4

  9. LITERATURE Linear relationship: • Sung, Hung En (Crime, Law & Social Change, 2004) • Treisman, Daniel (Journal of Pub. Economics, 2000) Nonlinear relationship: • Montinola and Jackman (BJPS, 2002, p.166) Corruption = - 14.855 + 2.235 log (GDP/POP88) - 1.816 OPEC member + 0.043 log (Govt. size88) + 0.203 democracy88 + 0.080 (democracy88)2 Estimator = OLS; adjusted R2 = 0.76

  10. ANALYTICAL FRAMEWORK Corruption function: Φ = b(y) – c(x). (1) Φ is non-decreasing in b(y) and non-increasing in c(x). If b(y') ≥ b(y) or c(x')  c(x), then for rational individuals Φ(b(y'), c(x')) ≥ Φ(b(y), c(x)). (2)

  11. EMPIRICAL ANALYSIS A well known determinant of corruption is the risk of getting caught and punished. According to public choice literature, this risk depends on: (a) Effectiveness of the legal system (b) Religious traditions (c) Historical/colonial traditions (d) Ethnic divisions (e) Democracy

  12. EMPIRICAL MODEL Corruption = a0 + a1 former British colony + a2 common law system + a3 politically relevant ethnic groups + a4 Christian affiliation + a5 democracy +a6 democracy-squared + e (3) where the corruption variable takes on corporate ethics index, public sector ethics index, corporate governance index, and corruption perception index; ai’s are coefficients to be estimated; and e is the error term (i.e., white noise).

  13. DATA Variablesourcevalue Corporate ethics (cei) Kaufman (GCR, 2004) 0<cei<100 Public sector ethics (pei) ,, Corporate governance (cgi) ,, Corruption perception (cpi) Transparency International 0<cpi<10 Former British colony (fbc) Treisman (J. Pub E, 2000) 1 if fbc; 0 otherwise Common law system (cls) ,, 1 if cls; 0 otherwise Christian affiliation CIA World Factbook % of Christians in pop Politically rel. ethnic groups Posner (AJPS, 2004) Democracy freedomhouse.org 0 = auth; 100= demo

  14. RESULTS: Table 1, OLS Estimates (most exogenous variables only) Dependent variables Corporate Public sector Corporate Corruption Explanatory variables ethics ethics governance perception Constant 24.249*** 23.031*** 27.668*** 3.460*** (4.076) (3.414) (3.689) (10.077 Former British colony 0.111 3.845 8.893 -0.554 (0.017) (0.507) (1.055) (-1.121) Common law system 12.156 6.303 11.571 1.150* (1.583) (0.724) (1.195) (2.030) Politic rel. ethnic groups -16.078 -23.882** -13.059 -2.932*** (-1.647) (-2.154) (-1.060) (-5.151) Christian religion affil. 0.174 0.134 0.136 0.008 (1.695) (1.155) (1.055) (1.343) Adjusted R-Square 0.483 0.294 0.483 0.569 Number of observations 19 19 19 28

  15. RESULTS: Table 2, OLS Estimates (democracy introduced nonlinearly) Dependent variables Corporate Public sector Corporate Corruption Explanatory variables ethics ethics governance perception Constant 51.204*** 34.983* 47.175** 3.476*** (4.196) (2.164) (2.418) (4.658) Former British colony -8.580* -4.491 0.248 -0.323 (-1.778) (-0.702) (0.032) (-0.705) Common law system 23.530*** 15.323* 21.893** 0.596 (4.038) (1.985) (2.350) (1.058) Politic rel. ethnic groups -5.921 -10.968 -1.277 -1.821*** (-0.819) (-1.145) (-0.110) (-3.596) Christian religion affiliation 0.022 0.009 -0.004 0.008* (0.279) (0.087) (-0.034) (1.893) Democracy -1.363*** -0.894 -1.139 -0.047* (-3.239) (-1.605) (-1.693) (-1.971) Democracy-square 0.014*** 0.011* 0.013* 0.001*** (3.732) (2.105) (2.062) (3.027) Adjusted R-square 0.774 0.579 0.626 0.772 Number of observations 19 19 19 18

  16. COMBINED EFFECTS OF DEMOCRACY VARIABLES The coefficients of the combined democracy variables computed à la Ralph and Srivastava (The American Statistician, 1979) were positive and statistically significant at the 5% level or better. The t-ratios for combined democracy variables in the regressions are as follows: Democracy and Democracy-square Corporate ethics 4.464 Public sector ethics 3.512 Corporate governance 2.909 Corruption perception 4.579

  17. THRESHOLD DEMOCRACY Democracy (%) corresponding index Corporate ethics index 48.7 26 Public sector ethics index 40.6 16 Corporate governance index 43.8 35 Corruption perception index 23.5 2.1

  18. CONCLUSION • This study empirically tests for nonlinearity between democracy and the various corruption measures for African countries. The results show that the correlation between democracy and corruption is statistically significant and the relationship is of first-degree polynomial. • The estimates suggest that authoritarian countries are slightly less prone to corruption than countries at intermediate levels of democracy, and, that beyond the threshold level of democracy, more democratic countries are less prone to corruption. The threshold levels of democracy range between 23.5% and 48.7% for African countries depending on the measure of corruption. • The estimates also suggest that countries with large Christian followers are perceived to be less corrupt, countries with high ethnic divisions are perceived to be more corrupt, and countries with common law legal system have higher corporate and public sector ethics as well as higher corporate governance standards.

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