Why are Corrupt Countries Less Successful in Consolidating Their Budgets?
32 Pages Posted: 8 Sep 2009
Date Written: September 8, 2009
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: Suggested Citation