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We would like to thank Benedikt Braumann, Peter Isard, Menachem Katz, and Robert Klitgaard for helpful comments and discussions.
US concerns center on the perceived disadvantage faced by US firms in the wake of The Foreign Corrupt Practices Act enacted by Congress in 1997. This act not only makes bribe payments ineligible for a tax deduction, but formally forbids US-based companies from engaging in the bribing of foreign officials. Only very recently have other OECD countries started to adopt similar legislation to govern the behavior of their own firms.
Replacing corruption with an index on bureaucratic efficiency yields a probability value of 8 percent.
More specifically, Van Rieckenghem and Weder (1997) find that, in a cross-country regression, the differential between wages in the civil service and in manufacturing is a significant determinant of the corruption index assembled by the IRIS Center of the University of Maryland. The same independent variable, however, turns out to be insignificant in a panel setup.
More recent examples of recessions induced by resource booms include the United Kingdom in the late 1970s, following the discovery and exploitation of the North Sea oil fields, and other oil exporting economies in the late 1970s and early 1980s, following the reversion of the price of oil to its longer-term trend (after the large increases of 1974/75 and 1978/79). In contrast, some countries, for example Malaysia and Botswana, have managed to harness the power of natural resources and maintain both economic stability and above-average growth rates.
The second effect tends to be less relevant in the case of oil since the production process is not very labor-intensive and the domestic financing effects are generally limited.
As a robustness check, Sachs and Warner (1995a) re-estimate the main equations in Barro (1991), King and Levine (1993), Mankiw, Romer and Weil (1992) and DeLong and Summers (1991) while adding natural resource intensity and the openness variable. In all cases, the negative effect of natural resource intensity on long-run growth remains statistically significant.
Strictly speaking, bribes, as compared to taxes, are associated with higher uncertainty and require costly efforts to avoid detection (see section II). Adding uncertainty to the model, however, would only strengthen the main results.
Aside from analyzing corruption, this model can be easily modified to apply to the more general case where a fraction of the population has the revocable power to impose a burden on the entire population.
It proves convenient to start with the government employees’ utility maximization problem, as the private sector agents’ problem turns out to be a special case thereof.
If we imposed a penalty as a function of the wage rate, e.g., through a loss in retirement benefits, our model would show that, ceteris paribus, higher wages deter corruption.
Intuitively, as the number of government employees increases, bureaucrats have more colleagues with whom the proceeds from bribes must be shared, effectively reducing the expected gain from corruption. If simultaneously, the risk of detection remains unaffected (
That is, u(c) = (c1−θ - l)/(l - θ), and therefore the elasticity of marginal utility equals the constant -θ and the elasticity of substitution is σ = 1/θ with θ> 0.
Given their extra sources of income, government employees still enjoy a level of consumption higher than private sector employees.
The transversality condition is lim t→∞ (vK) = 0.
It may also be noted that the increase in output resulting from an anti-corruption policy based on increased penalties depends negatively on the concentration of bureaucratic power, 1-s.
The effect of bureaucratic concentration (and, more specifically, the degree of internalization of the costs of corruption) may otherwise be proxied by the share of government employment in total employment, or by the share of government current expenditures in GDP.
It may also be that leadership, which Tanzi (1998) suggests is associated with less corruption, is more likely to flourish in more ethnically homogeneous societies.
The difference between home consumption and export may impact significantly on the empirical results. Whereas it is customary to proxy production with export figures, since the latter are often incomplete and unreliable, the differences between commodity groups may imply that the production of food and agricultural raw material is generally underestimated in a manner not unrelated to the stage of economic development. Assuming that a higher proportion of food production in lower income countries is for domestic consumption, relying on export statistics instead of production data would tend to overestimate the potentially negative impact of food on growth. Unfortunately, we are unable to avoid this potential bias as we have not been able to locate food production statistics.
One possible explanation for the negative impact of food production on growth is its relatively low productivity combined with high labor intensity and a confinement of production to rural areas. As a result, labor migration to urban areas, where it could engage in more productive activities, is impeded in the presence of mobility costs and consequently steady state output (and output growth during the transition period) reduced.