Corruption, shadow economy and income inequality: evidence from Asia

A number of recent studies for Latin America show that as the size of the informal economy grows, corruption is less harmful to inequality. We investigate if this relationship is equally compelling for developing countries in Asia where corruption, inequality and shadow economies are considerably large. We use Panel Least Square and Fixed Effects Models for Asia to find that both ‘Corruption Perception Index’ and ‘ICRG’ index are sensitive to a number of important macroeconomic variables. We find that in the absence of the shadow economy, corruption increases inequality. However, with larger shadow economies in South Asia, the income inequality tends to fall

Cost of sovereign debt and foreign bias in bond allocations

Finance theory suggests that markets where foreign bond portfolio investors overweight their portfolio relative to the prescribed theoretical benchmark should experience higher international risk sharing. Correspondingly, the cost of debt in such markets should be lower compared to markets facing a lower degree of international risk sharing. We empirically examine this prediction using a panel data set of sovereign bond yield spreads and a measure of suboptimal foreign bond portfolio allocations for 50 emerging and ten developed markets. Consistent with theory, our results show higher levels of foreign bond allocations – relative to the theoretical benchmark – are negatively related to the cost of debt. These results have important policy implications as a country’s cost of debt could potentially be lowered by encouraging foreign portfolio investors to hold their optimal allocation

Aid dependence and the quality of governance : a cross-country empirical analysis

Good governance -- in the form of institutions that establish predictable, impartial, and consistently enforced rules for investors -- is crucial for the sustained and rapid growthof per capita incomes in poor countries. Aid dependence can undermine institutional quality by weakening accountability, encouraging rent seeking and corruption, fomenting conflict over control of aid funds, siphoning off scarce talent from the bureaucracy, and alleviating pressures to reform inefficient policies and institutions. The author's analyses of cross-country data provide evidence that higher aid levels erode the quality of governance, as measured by indexes of bureaucratic quality, corruption, and the rule of law. This negative relationship strengthens when instruments for aid are used to correct for potential reverse causality. It is robust to changes in the sample and to several alternative forms of estimation. Recent studies have concluded that aid's impact on economic growth and infant mortality is conditional on policy and institutional gaps. The author's results indicate that the size of the institutional gap itself increases with aid levels.Gender and Development,Decentralization,Economic Theory&Research,Development Economics&Aid Effectiveness,School Health,Economic Policy, Institutions and Governance,National Governance,School Health,Governance Indicators,Development Economics&Aid Effectiveness

A Comparative Study of Inequality and Corruption

We argue that income inequality increases the level of corruption through material and normative mechanisms. The wealthy have both greater motivation and opportunity to engage in corruption, while the poor are more vulnerable to extortion and less able to monitor and hold the rich and powerful accountable as inequality increases. Inequality also adversely affects peoples social norms about corruption and beliefs about the legitimacy of rules and institutions, and thereby makes it easier to tolerate corruption as acceptable behavior. Our comparative analysis of 129 countries utilizing two-staged least squares methods with a variety of instrumental variables supports our hypotheses, using different measures of corruption (the World Banks Control of Corruption Index and the Transparency Internationals Corruption Perceptions Index). The explanatory power of inequality is at least as important as conventionally accepted causes of corruption such as economic development. We also find a significant interaction effect between inequality and democracy, and evidence that inequality affects norms and perceptions about corruption, using the World Values Survey data. Since corruption also contributes to income inequality, societies often fall into vicious circles of inequality and corruption.This publication is Hauser Center Working Paper No. 22. The Hauser Center Working Paper Series was launched during the summer of 2000. The Series enables the Hauser Center to share with a broad audience important works-in-progress written by Hauser Center scholars and researchers

Do Freedom of Information Laws Decrease Corruption?

It has been argued that greater transparency is needed to reduce corruption. One way of increasing transparency is through the adoption of Freedom of Information (FOI) laws. This paper uses the introduction of FOI laws as a natural experiment to determine their effect on corruption. Using a sample of democratic countries and two different corruption indices, I find that countries that adopted FOI laws saw an increase in corruption. Results are robust throughout different specifications. Moreover, I find that countries with plurality systems potentially experienced a decrease in corruption following the adoption of FOI legislation. Having a parliamentary system, however, had no impact on the effect of the reform.Corruption; freedom of information; transparency; accountability

Exploring the links between tourism and quality of institutions

This paper introduces a new perspective on the impacts of tourism on host communi-ties by analyzing the links between tourism specialization and quality of institutions. Our research has two principal aims: firstly, to test the significance and sign of this relationship; and secondly, to explore the channels through which tourism could affect institutional qual-ity. To this end, an econometric analysis is conducted using a sample of 92 countries over the period 1995-2014. The results indicate that there is a significant and positive associa-tion between tourism specialization and institutional quality. Moreover, this relation can be explained through three main channels: level of income, income inequality, and economic freedom.Este trabajo aporta una nueva perspectiva sobre los impactos del turismo analizando las relaciones entre la especialización turística de un país y la calidad de sus instituciones. La investigación plantea dos objetivos: (1) testar empíricamente la significatividad y signo de dichas relaciones y (2) explorar los canales a través de los que se producen. Realizamos un análisis econométrico para 92 países y 20 años. Los principales resultados indican la existencia de una asociación significativa y positiva entre turismo y calidad institucional que se produce principalmente a través de tres canales: nivel de renta, distribución de la renta y libertad económica

Entrepreneurship, Reforms, and Development: Empirical Evidence

We examine how entrepreneurship and institutional and policy reforms affect development (proxied by the rate of growth in per–capita income). We do so by performing Arellano-Bond GMM estimations on annual data for a large group of developing and developed countries, and covering the period 1990-2002. We focus in particular on the interplay of trade and institutional reforms and entrepreneurship. The empirical results indicate that the interplay of entrepreneurship and institutions, and the interplay of entrepreneurship and policy reforms, influence the growth effects of entrepreneurship. However, the effects are strikingly different. The impact of institutional reform is positive when the level of entrepreneurship is low and negative when it is high. On the other hand, the effect of policy reform is negative when entrepreneurial activity is weak and positive when it is strong. These results are robust to the inclusion of other control variables.development, growth, entrepreneurship, institutions, policy reform

Corruption, Seigniorage and Growth: Theory and Evidence

This paper presents an analysis of the effect of bureaucratic corruption on economic growth through a public finance transmission channel. At the theoretical level, we develop a simple dynamic general equilibrium model in which financial intermediaries make portfolio decisions on behalf of agents, and bureaucrats collect tax revenues on behalf of the government. Corruption takes the form of the embezzlement of public funds, the effect of which is to increase the government’s reliance on seigniorage finance. This leads to an increase in inflation which, in turn, reduces capital accumulation and growth. At the empirical level, we use data on 82 countries over a 20-year period to test the predictions of our model. Taking proper account of the government’s budget constraint, we find strong evidence to support these predictions under different estimation strategies. Our results are robust to a wide range of sensitivity tests.corruption, seigniorage, inflation, growth

Confidence Building in Emerging Stock Markets

Investor confidence is a major determinant of financial integration for emerging markets and their stock prices. We investigate whether privatization also has a significant effect on emerging stock market development through the resolution of policy risk. We argue that a sustained privatization program represents a major test of political commitment to market oriented reforms and to safer private property rights. The evidence suggests that progress in privatization gradually leads to increased confidence as measured by perceived policy risk. Moreover, increased confidence has a strong effect on local market development and excess returns. We conclude that, while liberalization is a necessary condition for market development, the resolution of policy risk resulting from successful privatization has been an important source for the rapid growth of stock markets in emerging economies.

Transparency and International Investor Behavior

Does country transparency affect international portfolio investment? We examine this and related questions using some new measures of transparency and a unique micro dataset on international portfolio holdings. We distinguish between government and corporate transparency. There is clear evidence that international funds invest systematically less in less transparent countries. On the other hand, herding among funds tends to be more prevalent in less transparent countries. There is also some evidence that during crises, funds flee non-transparent countries by a greater amount.