Proposal Master Thesis
The Impact of Corruption on the Economic Growth in European Union Countries
submitted by
Rebeca Alambillaga Briz
Wittebollestraat 20-29
5046CE Tilburg The Netherlands
r.alambillaga@outlook.com
University of Tilburg
Master International Management
Finance Department
Faculty of Economics and Business Administration
Supervisor:
MSc L. Sch*fer (Tilburg University)
Dr. V.J.J. Wiegerinck (Tilburg University)
Tilburg, November 26, 2012
Table of Contents
1 Chapter 1: Introduction*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦.. 1
1.1 Background and Problem Statement *€¦*€¦*€¦*€¦*€¦*€¦..*€¦ 1
1.2 Research Questions *€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦ 2
1.3 Relevance *€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦… 4
2 Chapter 2: Theoretical Framework*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦.. 4
2.1 Literature Review*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦… 4
2.2 Contribution*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦…. 10
3 Chapter 3: Research Methodology*€¦*€¦*€¦…*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦ 10
3.1 Framework of the Model *€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦……….. 10
3.1.1 Independent Variable*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦….. 12
3.1.2 Depending Variable*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦ 12
3.1.3 Control Variables*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦…. 13
3.2 Design *€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦ 13
3.3 Data Collection*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦. 14
4 Bibliography*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦ 15
5 Appendix*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦*€¦.. 19 1
Chapter One
Introduction
1.1 Background and Problem Statement
Since 1960, researchers (Leff 1964; Huntington 1968) started to study the corruption
phenomenon. This field of research gained an increasing amount of interest due to the
large consequences that corruption has on political systems, institutions and nations.
Beside its influence on transparency of political decision making (Lindstedt 2010), when
looking from an economic perspective, it is relevant to analyze the impact of corruption on
the economic growth of a nation.
Both in qualitative and quantitative terms, it is a challenging question how to define
corruption. Bayley (1966) defined it as abuse of authority for private gain, among the
worlds oldest practices and a fundamental cause of intrastate conflict, providing a focal
point for many social groups grievances against governments. The World Bank defines
corruption as the single greatest obstacle to economic and social development. It
undermines development by distorting the rule of law and weakening the institutional
foundation on which economic growth depends. Also in large private enterprises,
corruption can be found in for example procurement, or even in hiring new employees. It
also exists in private activities regulated by the government (Tanzi 1998). Furthermore,
corruption can also be defined as the diversion of public resources to nonpublic purposes
(Werlin 1973). In this study, the definition of Bayley is used to describe corruption (the
abuse of public power for private benefit). Public power usually refers to institutional
means of exploiting authority and bureaucratic influence.
Corruption is perceived as especially worrisome in less developed countries, while
corruption in developed countries is believed to be under control. However, a World Bank
Institute study estimates the costs due to corruption in both rich and developing countries
to be $1000 billion a year (World Bank, 2004). Therefore, corruption in developed
countries turns out to be of significant importance.
In the last decade there has been a growing interest in understanding the relationship
between corruption and economic growth. Several researchers investigated this topic, for
instance, cross-countries studies were made, which estimated the impact of corruption on
GDP growth. Podobnik (2008) measured this impact by taking in his sample all countries
in the world. There are also several studies with a focus on developing countries, and
specific regions as Asia, or Africa. However, there is a lack in the amount of studies in
literature about the effects of corruption in developed countries. When looking at Europe,
there are only a few studies paying attention to this area (Podobnik 2008). The principal
motivation of the present work is to study 2
whether corruption affects the economic growth in European Union countries over the
period 2001- 2011. In 2001 the European Union countries were (Germany, France, Italy,
the Netherlands, Belgium, Luxembourg, Denmark, Ireland, United Kingdom, Greece,
Spain, Portugal, Austria, Finland and Sweden) it will be compared to the rest of the
European countries that progressive joined the European Union in years after (Czech
Republic, Cyprus, Estonia, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia and
Slovakia, Bulgaria and Romania) It is necessary to clarify what is meant with European
countries; this means the countries that belong to the European Union. At this moment,
there are a total of twenty-seven countries belonging to this category. Countries like
Croatia, Republic of Macedonia, Serbia, Albania or Kosovo, which are also in Europe,
have substantial different economic standards, and including those countries also in the
analysis will give rise to a certain distortion in the results. Moreover, the reason why this
study will focus only on countries of the European Union is because it wants to investigate
the influence of the institutions belonging to the European Union.
Indeed, although the levels of corruption in European countries are relatively low in
comparison with developing countries (see International Transparency Index), there are
also notable differences among the members of the European Union group. Many literature
studies show that institutions have an impact on the level of corruption (Knack and Keefer
1995; Boerner and Hainz 2004). Therefore, belonging to a strong framework like the
European Union may affect the level of corruption in the corresponding countries. The
European Union has numerous organisms, like the European Commission, the European
Parliament, the European Council, the Court of Justice of the European Union, The
European Central Bank and the European Court of Auditors in order to apply and control
the common policies for all their members. For instance, the most important policies that
have a significant effect on the countries itself are concerning: agriculture, competence
policy and economic standards, security defense, environmental, public health and food
safety policies, internal market and consumer protection policies. Hence, being a member
of the European Union could be a factor of influence on the level of corruption among the
corresponding countries.
1.2 Research Questions
Many studies focus on the question whether corruption affects the level of GDP growth.
Lambsdorff (1999) claimed that lack of corruption is a factor of importance on the GDP.
According this statement, GDP growth should not be explained by absolute levels of
corruption but by a change in these levels. It can be seen in the second chapter which
studies proofed that there is a strong correlation between GDP and corruption.
Consequently, this paper presents the first research question that will be answered
What is the impact of corruption on GPD growth in Europe? 3
Secondly, there has been extensive literature debate on whether corruption “greases the
wheels” or whether it sands the wheels” of the economy (Meon and Sekkat 2005). Many
researchers estimate the negative impact that corruption has on the GDP growth (see
Mauro 1995; Mo 2001 and Podobnik 2008). Due to profound evidence that corruption may
have a harmful effect, the second research question will be
Does corruption have a negative effect on the European GDP growth?
On the contrary, the main benefits of corruption would appear to be due to the greases the
wheels of bureaucracy. This line of the argumentation is supported by several studies. Leff
(1964) and Huntington (1968) were the first authors to argue that corruption could be
beneficial for the economy. More research (Acemoglu and Verdier 1998; Klitgaard 1988)
came later to affirm this positive effect which corruption may have on the economy, and
thus increasing GDP. Due to the existence of literature which is stressing the benefit of
corruption, it is necessary to answer the following question
Does corruption have a positive effect on the European GDP growth?
North (1990) defined institutions as the formal (common law, regulations) and informal
(norms of behavior, self-imposed codes of conduct and conventions) constrains or human
interaction Such rules affect both individuals and organizations, defined as political
organizations (city councils, regulatory agencies, political parties), economic
organizations ((family) firms, trade unions, cooperatives), educational bodies (schools,
universities, vocational training centers), and social organizations (North 1990) . When
institutions are poorly represented, expressed in its authority or the number of formal
institutions, economic activities are restricted and citizens are more likely to participate in
corrupted activities. In this study, the role of the European Institutions is analyzed.
Comparing the countries which entered the European Union from the start, with the latest
incorporation, it could be seen whether European institutions have an influence on
corruption. Therefore, the final research question will be
Does the existence of a regulatory institution influence the level of corruption and
therefore the GDP growth of a country? 4
1.3 Relevance
Though many studies look at the roots of corruption, it is difficult to determine why
corruption is so prevalent in certain situations. The roots of corruption are planted far in
history, so human nature certainly plays a large role in the existence of corruption.
However, it is unclear why corruption is so much worse in one situation than it is in
another. (Lambsdorff, 2007).
Understanding the impact of corruption is important because it helps us decide why and
how we need to fight corruption. Especially, the intention of the current study to focus on
the European Union could be useful in order to determine the impact that institutions have
over the years on the level of corruption. None of the existing studies examined the
corruption effect on the GDP growth when comparing countries with the earliest and latest
entrance to the European Union. This research will add to existing knowledge by
expanding the previous research about corruption and comparing the different European
countries.
Chapter two
Theoretical Framework
2.1 Literature review
The literature reached no agreement about the effect of corruption on economic growth.
Some researchers suggest that corruption even might be desirable. The literature could be
