Does Political Corruption Affect Economic Growth in Transitional Democracies?

The call for democracy in the name of economic growth and prosperity has never been louder than it is today. Recent movements such as the “Arab Spring” are attempts to establish a democratic system of government in countries where authoritarians, bribery, and abject poverty are widespread. According Nye (2009), a professor of economics at Washington University in St. Louis, economic growth has a direct effect on the overall standard of living of the people in any country. Economic growth is often associated with a higher level of democracy (Kurzman, 2002). Organizations such as the United Nations support democratic movements across the world as democratic systems of governments are proclaimed to be transparent, promote civil rights and economic prosperity. For these reasons, countries embrace democratic systems of government, believing that democracy will help to eradicate corruption, which in turn supports economic growth. Nevertheless, the countries which embrace democracy are known as transitional democracies at the early stage of their development.

Carothers (2000) defines transitional democracies as any nation moving away from authoritarian rule to a democracy. Wooten, (2007) also defines transitional democracies as those nations which have made a shift away from dictatorship towards democracy. Though both of the definitions are same, for the purpose of this paper, the former definition will be used throughout this paper. Transitional democracies take a long period of time to become a fully formed to enjoy the benefits of democracy (Barry et al., 2009). During this transitional period, countries experience tremendous economic challenges along with political corruption (Adhikari 2012). Similarly, organization such as the World Bank, the International Momentary Fund (IMF) and the United Nations (UN Convention on Corruption, 2003) view corruption as a major distraction for economic growth and a tax on society. Corruption has several forms and among them political corruption is the most detrimental to the nation and economic growth (Ebben et al., 2009). Nye, (1989) defines political corruption as a behavior which departs from the official responsibilities of a government post because of personal regard for monetary gains. However, this paper will go along with the definition forwarded by (Heidenheimer et. al., 1993).

They define political corruption as “any transaction between private and public sector actors through which collective goods are illegitimately converted into private-regarding payoffs”. Political corruption includes nepotism (assigning government posts to the people who have a connection with politicians instead of as a result of their competence and merit), bribery (giving financial benefit or benefit in kind to change the behavior of a person in a public office (Nye, 1989)) and embezzlement (misappropriation of government resources for personal uses (Nye, 1989)). Political corruption is one of the major challenges faced by the transitional democracies. Therefore, scholars argue that it is a major obstacle for economic growth. That is, economic growth has a negative correlation with corruption, but a positive correlation with democracy (Assiotis et al., 2010). For example, stronger economic growth is seen in countries which have good governance and a higher degree of transparency (Nowak 2000). Higher economic growth means a higher standard of living. The economic growth, or the rate at which an economy grows, is universally measured using the concept of Gross Domestic Production (GDP) (Callen, 2012). According to the World Bank1, GDP is a percentage change in dollar value of goods and services a country produces from one year to another.

If the value of goods and services produced by a country does not increase at a desirable rate, the country is said to have slow economic growth. Now the question is whether political corruption inhibits economic growth in transitional democracies. The answer could be partly found in the studies done on these issues. There are several studies on the role played by the democratic system of government to mitigate the effects of corruption on economic growth. Among them Drury et al. (2006) investigated the effect of corruption on economic growth both in advanced and developing countries. He reported that corruption is inversely related to economic growth. Therefore, it has a negative effect on economic growth and that democracy mitigates or reduces that effect. In a subsequent study, Assiotis et al. (2010) demonstrated that economic growth has a positive correlation with the control of corruption and degree of democracy. Further, he argued that corruption is more controlled in democracies, hence promoting economic growth. Assiotis’s focus is largely on two extremes of the political system, namely authoritarian regimes versus democracies.

Similarly, Podobnik et al. (2008) found a significant correlation between the Corruption Perception Index* (CPI) and the Gross Domestic Production (GDP) and that reduction in corruption levels leads to considerable economic growth, meaning that country as a whole is better off than it was before. These studies advance the idea that corruption in general has an adverse effect on economic growth and that this adverse effect is reduced in democracies. A stronger democracy means less negative effect of corruption on economic growth and vice versa. These studies argue that in non-democracies the fear of facing public retribution is minimal and a lack of check and balances in the political system leads to more corruption. However, in democracies politicians avoid corruption due to the freedom of the press and the possibility of journalistic expose’. In fact, politicians fear to face public retribution in democracies. In other words, these studies compare the effects of corruption in general on economic growth in democracies and in non-democracies.

However, the subject of political corruption in transitional democracies and its effects on economic growth in transitional democracies has not been addressed in these studies. Therefore, this paper uses statistical models to demonstrate how economic growth is affected by political corruption in countries which are moving away from authoritarian rule towards democracy. The objective of this study is to explore statistically whether the level of political corruption promotes or hinders economic growth as measured by GDP. In this paper, a test is carried out to assess the significance of the effects of political corruption on economic growth in selected transitional democracies (i.e. Maldives, Mongolia, Afghanistan and other- see below). *Corruption perception Index is a political corruption indicator used by the organization, the Transparency International, to measure the level of political corruption in countries. Countries are normally ranked according to the observed level of political corruption based on the assessment and opinion of expert.

Methodology and Outcome
The data on the first independent variable, political corruption, is captured by the most popular index on political corruption, the Corruption Perception Index of Transparency International*. Data on Economic growth is obtained from the Annual GDP Growth Rate** published by the World Bank. Fifteen countries were randomly selected from a list of countries which have moved from dictatorship or authoritarian rule to an electoral democratic system between 1990 and 2000. The data on both political corruption and GDP were obtained from 2000 to 2012. Hypotheses were formulated where the Null hypothesis represents the claim that political corruption has no effect on economic growth in transitional democracies. The Alternative hypothesis represents the claim that political corruption has an effect on economic growth in transitional democracies (the null hypothesis H0 = b1, and alternative hypothesis Ha ≠ b1).

The Data were regressed to determine the significance of effects of political corruption on economic growth. A test at the 95% confidence level (p=0.001) rejects the null hypothesis, showing that economic growth in transitional democracies is directly correlated to political corruption. Therefore, based on the statistical model, a conclusion is reached that political corruption is inversely related to economic growth in transitional democracies. Hence, higher political corruption means slow or no economic growth. This finding came to same conclusion as the other studies carried out on the effects of corruption and democracies on economic growth in developed and developing countries. It is hoped that these finding will contribute to the overall understanding of the effect of corruption on economic growth across the various types of political system.

** Annual GDP Growth Rate is a GDP growth indicator publish by The World Bank every year which measures the economic growth across the countries.

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