Why are Corrupt Countries Less Successful in Consolidating Their Budgets?

32 Pages Posted: 8 Sep 2009

See all articles by K. Peren Arin

K. Peren Arin

Zayed University

Viera Chmelarova

European Central Bank (ECB)

Eberhard Feess

Frankfurt School of Finance & Management gemeinnützige GmbH

Ansgar Wohlschlegel

Portsmouth Business School

Date Written: September 8, 2009

Abstract

Following the financial crisis, many countries introduced fiscal stimulus packages making budget consolidations in the future rather challenging. Using a data set for 28 OECD countries spanning the period 1978-2007, we contribute to the literature on success probabilities of consolidation attempts by exploring the impact of corruption, and in particular the interplay of corruption and policy instrument choice. We find that corruption significantly reduces the success rate. When controlling for the change in government expenditures, however, the impact of corruption disappears or at least becomes less pronounced. In the second step, we therefore relate the choice of the instrument to corruption and find that corrupt countries rely significantly less on expenditure cuts during periods of consolidation attempts. We conclude that international organizations should be careful in observing what corrupt countries do when trying to consolidate their budgets. Before presenting the empirical evidence, we suggest a simple political-economic model that adds to our understanding as to why the differences in the shares in expenditures on GDP between corrupt and non-corrupt countries are increasing during attempt periods.

Keywords: Corruption, Fiscal consolidation, Binary choice models, Panel data

JEL Classification: E62, E63, H30, H63

Suggested Citation

Arin, Kerim Peren and Chmelarova, Viera and Feess, Eberhard and Wohlschlegel, Ansgar, Why are Corrupt Countries Less Successful in Consolidating Their Budgets? (September 8, 2009). Available at SSRN: https://ssrn.com/abstract=1470188 or http://dx.doi.org/10.2139/ssrn.1470188

Kerim Peren Arin

Zayed University ( email )

P.O. Box 4783
Abu Dhabi
United Arab Emirates

Viera Chmelarova

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Eberhard Feess (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

Ansgar Wohlschlegel

Portsmouth Business School ( email )

Portsmouth, PO1 3DE
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
75
Abstract Views
614
rank
312,769
PlumX Metrics