The effects of corruption on growth, human development and natural resources sector: empirical evidence from a Bayesian panel VAR for Latin American and Nordic countries

Abstract

PurposeThe purpose of this paper is to analyze the effects of corruption on economic growth, human development and natural resources in Latin American and Nordic countries.Design/methodology/approachUsing the hierarchical prior of Gelman et al. (2003), a Bayesian panel Vector AutoRegression (VAR) model is estimated. In addition, two alternative approaches are considered, namely, a panel error correction VAR model and an asymmetric panel VAR model.FindingsThe results reveal some relevant contrasts: (1) in Latin America there is support for the sand the wheels hypothesis in Bolivia and Chile, support for the grease the wheels hypothesis in Colombia and no significant impact of corruption on growth in Brazil and Peru, while in Nordic countries the response of growth to shocks in corruption is negative in all cases; (2) corruption negatively affects human development in all countries from both regions; (3) corruption tends to spur natural resources sector in Latin American countries, while it is detrimental for natural resources sector in Nordic countries.Research limitations/implicationsThe panel VAR approach uses recursive scheme identification. The authors have analyzed robustness using alternative ordering of the variables. The authors also have followed two alternatives suggested by the Referee: a panel error correction VAR model and a panel asymmetric VAR model. However, another more sophisticated identification scheme could be used. Also other variables could be introduced in the VAR model.Practical implicationsRegardless of the issue of the “grease” vs the “sand the wheels” debate, corruption should be reduced because it is anyway harmful for human development. The differences in the results for Latin American and Nordic countries show that the effects of corruption have to be assessed considering the different institutional and economic conditions of the countries analyzed.Social implicationsGovernments should seek to reduce corruption because, despite corruption can have mixed effects on economic growth in some contexts, it is anyway harmful for human development. Besides, the finding that in some Latin American countries more activity in the extractive industries is generated by means of corruption confirm the association between corruption and extractivism found by Gudynas (2017) and can explain why there are issues of environmental damage and social conflict linked to natural resources in those countries.Originality/valueThe present study contributes to the literature by presenting evidence on the effects of corruption on growth, human development and natural resources sector in Latin American and Nordic countries. It is the first study on economics of corruption which directly compares Latin American and Nordic countries. This is relevant because there are important differences between both regions since Latin American countries tend to suffer from widespread corruption, while the Nordic ones have a high level of transparency. It is also the first in using a Bayesian panel VAR approach in order to evaluate the effects of corruption.

Corruption's effect on BRICS countries' economic growth: a panel data analysis

“…Though less prominent, selected inconclusive contributions have also been reported. Urbina and Rodríguez (2022) provide support for the “sand the wheels” hypothesis and “grease the wheels” hypothesis and no growth impact of corruption across Latina American countries. They further show that corruption stimulates natural resources in Latin American countries but dampens the natural resource sector in Nordic countries.…”

“…This was, however, not the case with the robust estimators, possibly revealing rather restrictive economic freedom in some BRICS countries. Under such conditions and according to Urbina and Rodr ıguez (2022), it is plausible to contend that corruption may dampen the natural resource sector of BRICS economies with a restrictive rule of law, resulting in a negative growth impact. This inference emerges from the consistent cross-section and IV-GMM bias-corrected estimators in contrast to the benchmark pooled OLS, which ignores critical econometric issues such as heterogeneity, endogeneity, crosssection dependence and small sample bias.…”

Does corruption grease or sand the wheels of firm productivity? Evidence of a non-linear relationship from a firm-level analysis in Vietnam

“…The question of a possible non-linear impact of corruption on firm performance has not evolved much in the existing literature. As exceptions, Coppier et al (2013) and Urbina and Rodr ıguez (2022) demonstrate that corruption might act as both the grease to and sand in the wheel of productivity and economic growth depending on corruption severity. The common finding is that corruption is the grease to the system in areas with weak institutions and severe corruption.…”

“…The common finding is that corruption is the grease to the system in areas with weak institutions and severe corruption. Government efforts on monitoring corruption are likely to cause greater bureaucratic delays and/or increases in financial burdens on firms for growth because public agents ask for higher bribes in compensation for legal risks (Urbina and Rodr ıguez, 2022;Coppier et al, 2013). Lowering corruption alone, therefore, has a detrimental effect on firms' productivity.…”

Natural resources, institutions and the quality-adjusted human capital

“…One of these factors is corruption and institutional quality. In this sense, a group of economists emphasizes the role of institutions in determining the effects of natural resources on human capital (Cabrales and Hauk, 2010; Daniele, 2011; Blanco and Grier, 2012; Cockx and Francken, 2016; Kim and Lin, 2017b; Urbina and Rodriguez, 2021). This group tends to shed doubt on the validity of the resource curse hypothesis on human capital and they assume that this adverse effect might be conditional based on the level of institutional quality.…”