Corruption and Total Factor Productivity in the Long-Run: Evidence from Post-WW2 Turkey

Abstract

Total Factor Productivity (TFP) not only plays a crucial role on economic development but also on its sustainability. Sustainability is frequently measured by Inclusive Wealth (IW) which is defined as the aggregate value of capital in all forms, human, physical, and natural. According to Arrow et al. (2004, 2012), TFP is a crucial determinant of IW. In this study, we investigate the relationship between corruption and TFP in Turkey over a time period covering more than half a century. Our study contributes to the literature in several ways in terms of data and empirical method. First, we use a new and novel index of corruption for Turkey between the years 1950 and 2014 constructed by Dincer and Teoman (2019). Second, because we now have time-series data on corruption covering a period long enough, we estimate the long-run cointegrating relationship between corruption and TFP in Turkey using the autoregressive distributed lag (ARDL) estimator (Pesaran & Shin 1999; Pesaran, Shin, & Smith 2001) which is robust to endogeneity. We find that corruption decreases TFP in the long-run and its adverse effects on TFP increases with government size.

Keywords: Corruption, TFP, Turkey, ARDL

JEL Classification: D24, D73, 040, 050, Q01