How Does Corruption in Central and Eastern Europe Hurt Economic Growth? Granger Test of Causality

Abstract:     
How does corruption in Central and Eastern Europe hurt economic growth? The paper explains theoretical framework that is applied to the problem of corruption and reveals its application difficulties. Corruption may be understood as the problem of agency, which is the problem of coordination between principal and agent that is solved through the enforceable system of property rights, or as the problem of rent-seeking addressing the problem of rules motivating entrepreneurs to corrupt behaviour. Within comparison of both agency theory and rent-seeking we argue that corruption in general is the problem of legal setting and its enforcement and, if badly established, it does not promote economic development. To verify the theoretical argument we present empirical test showing whether corruption hurts or not economic growth in Central and Eastern Europe. For this purpose we use Granger causality test to demonstrate that corruption precedes economic growth in Central and Eastern Europe which means that legal setting and its enforcement rather allow for rent-seeking than promote economic growth. As a consequence we emphasize the necessity to focus on institutional framework to fight corruption and support economic growth.

Keywords: Agency theory, corruption, economic growth, rent seeking, Granger causality

JEL Classification: D72, D73, O17

working papers series