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

Abstract

The paper explains theoretical framework of how corruption hurts economic growth and reveals its application difficulties. Comparing views on corruption in terms of the problem of agency and the problem of 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 growth. To verify the theoretical argument we present empirical Granger causality test to demonstrate that corruption precedes economic growth in Central and Eastern Europe. This 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