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Corruption, Democracy, and Economic Growth

Author(s): A. Cooper Drury, Jonathan Krieckhaus, Michael Lusztig


Source: International Political Science Review / Revue internationale de science politique, Vol.
27, No. 2 (Apr., 2006), pp. 121-136
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International Political Science Review (2006), Vol 27, No. 2, 121-136

Is P

IPSRI

Corruption,

Democracy,

and Economic Growth

ANDMICHAELLuSZTIG
A. COOPERDRURY,JONATHANKRIECKHAUS,

ABSTRACT.Scholars have long suspected that political processes such as


are important factors in determining
and corruption
democracy
economic growth. Studies show, however, that democracy has only
indirect effects on growth, while corruption
is generally accepted by
scholars as having a direct and negative impact on economic perfor
mance. We argue that one of democracy's indirect benefits is its ability to
the detrimental
effect of corruption on economic growth.
mitigate
Although
corruption certainly occurs in democracies,
the electoral
in corrupt acts that
mechanism
inhibits politicians
from engaging
and thereby jeopardize their
damage overall economic performance
political survival. Using time-series cross-section data for more than 100
countries from 1982-97, we show that corruption has no significant
effect on economic growth in democracies, while non-democracies
suffer
significant economic harm from corruption.
Keywords: * Corruption

* Economic
* Democracy
economy * States

growth

* Political

It is no great insight to proclaim


that liberal democracies
tend to be wealthier
than
non-democracies.
Since the end of World War II, a great deal of scholarly effort
has gone into exploring
the relationship
between
economic
growth and liberal
with many pursuing
an obvious
for their association,
democracy,
explanation
facilitates wealth by stimulating
namely that democracy
economic
growth.' While
is more
intuitively
appealing,
reality suggests
the relationship
complicated.
of studies find no direct, statistically significant
Indeed, a number
relationship
and economic
between democracy
appears to have
growth, although
democracy
indirect influences on growth, due to its positive effect on such things as
important
life expectancy,
and political
educational
expenditure,
stability (Baum and Lake,
et al., 2002). This does not put an end to the
2003; Helliwell,
1994; Kurzman
of the
matter, of course. It simply suggests that greater understanding
is needed
the most robust system of government
apparently
symbiotic role played between

DOI: 10.1177/0192512106061423
SAGE Publications

(London,

( 2006 International Political Science Association

Thousand

Oaks,

CA and New Delhi)

122

International Political Science Review 27(2)

ever developed
(Fukuyama,
1992) and the economic
growth and efficiency
that
appears to sustain it.
the understanding
We attempt
to enhance
of the indirect effects that democ
racy has on economic
our focus is on just one of these indirect
growth. Although
effects,
it is one
is substantively
that, as is clear from the discussion
below,
important
and exists worldwide
to varying degrees. We concentrate
on political
in all regimes, albeit at differing
is present
corruption, which
levels. We are hardly
the first to delve into the role that corruption
plays with respect
to economic
growth. As the literature review below suggests, some argue that corruption
has
beneficial
effects for an economy. We disagree,
and while
this disagreement
is
somewhat
intuitive, some of our findings are unexpected
and shed new light on
and economic
the connection
between democracy
performance.
In this article, we use time-series cross-section
data from 100 countries over a 16
year period and find, rather intuitively, that corruption
has a significant,
negative
in non-democracies.
impact on economic
performance
Our unique contribution,
is to explore
further
these relationships
however,
by examining
democracy's
indirect effects on economic
is that
growth. Our expectation
(discussed
below)
will mitigate
since the electoral
democracy
the negative
effects of corruption,
allows citizens to evict politicians
mechanism
that engage in particularly damaging
in other words, may exhibit no direct statistical
forms of corruption.
Democracy,
the
relationship
with economic
growth, but it clearly serves to militate
against
negative economic
effects of corruption.

The Effects of Corruption

and Democracy

of corruption's
We now turn to a discussion
effect
ameliorates
this effect.
explain how democracy

on Economic Growth
on economic

growth

and

then

The Ill Effects of Corruption


"as the abuse of public office for private gain," whether
We define corruption
or in terms of status. The gain may accrue to an individual or a group,
pecuniary
or to those closely associated with such an individual or group. Corrupt
activity
includes bribery, nepotism,
of public resources
theft, and other misappropriation
(see Bardhan,
1999: 3-4; Nye, 1967: 419; Shleifer
1997: 1321; Lambsdorff,
and
not exclusive, view of corruption
Vishny, 1993: 599). The predominant,
although
to economic
as both a tax on productivity
is that it is damaging
and a
performance
market distortion.
Mauro
that corruption
(1995) finds empirically
reduces private sector invest
ment
even in countries
cumbersome
economic
featuring
regulations,
where
to spur investment.
be expected
Shleifer
and Vishny
corruption
might
(1993)
is more
suggest that one reason for this is that corruption
than simply a tax on
economic
there is no central mechanism
for collection.
activity, primarily because
consumers
of graft may be innumerable.
Post-communist
Instead,
rapacious
Russia illustrates the point nicely:
To invest in a Russian company, a foreigner must bribe every agency involved in
foreign investment, including the foreign investment office, the relevant
industrial ministry, the finance ministry, the executive branch of the local
government, the legislative branch, the central bank, the state property bureau,

Corruption, Democracy, and Economic Growth


DRURY/KRIECKHAUS/LUSZTIG:
and so on. The
(Shleifer

obvious

and Vishny,

1993:

is that foreigners

result
615;

see

also Bardhan,

do not

1997:

123

invest in Russia.

1324-6)

Rose-Ackerman
(1996) also argues that corruption
generates more distortion
than
taxation. Just as an incentive
to bribe exists, one to receive bribes also
does mere
to the market
for
exists. Put differently,
there is an underappreciated
supply-side
One manifestation
is that policymakers
rent-seeking.
may promote
initiatives
not to satisfy social need, but
(public works projects are an excellent
example)
for bribes.
because such projects increase opportunities
Moreover,
as the literature on rent-seeking
and directly unproductive
activity
for political
influence and favors generates
suggests, the construction
of a market
costs in that it dissipates
resources
high opportunity
that could otherwise be used
on productive
activity (Bhagwati, 1982; Brooks and Heijdra,
1988; Krueger,
1974;
Lien, 1990; Tullock, 1967). Thus, corruption
draws off funds that would otherwise
be available for economic
growth.
that while
The other view of corruption
suggests
corruption
itself may be
to moralists,
and unethical
its effects need not be economically
deplorable
Leff (1968) argues that where government
sets for itself the task of
detrimental.
of the right or left are excellent
economic modernization
exam
(dictatorships
economic
ples) graft may promote
growth. That is, graft provides an alternative
for private sector interests otherwise
to influence
not well represented
channel
(Nye, 1967: 420). Huntington
(1968: 69) states it even more boldly: "the only
bureaucracy
is
thing worse than a society with a rigid, overcentralized,
dishonest
one with a rigid, overcentralized,
honest bureaucracy."
beneficial
also can be economically
because
it tends to favor the
Corruption
most efficient firms. Many forms of corruption
take the form of the sale of limited
these are policies,
commodities
(whether
import licenses, or firm-specific
favors,
to be low and demand high). As such, a crude market
for
supply may be assumed
firms most able to
favors emerges, with the richest (and perhaps most efficient)
in this
firms must become more efficient
to compete
outbid their rivals. Weaker
sector
or exit the productive
black market,
(Leff, 1968). The success of these
base of taxation
a broader
firms, moreover,
provides
and public
spending,
are reinvested by the state (Nye, 1967: 420).
assuming at least some of the monies
Even those that do argue that corruption
has economic
benefits do not suggest
that corruption
is efficient
per se. Among
others, Leff
(1968) characterizes
as a tax on economic
corruption
activity; few see taxes as spurs to economic
ismore
growth. Rather, their point is that, under some circumstances,
corruption
efficient than the alternative.
on the economic
In sum, the literature
effects of corruption
yields
two
traditional and accepted position
is that corruption
has
positions. The first, more
it renders otherwise
bad and bad government
few virtues:
good government
resources
that could be used productively,
and generates
suffi
worse, it dissipates
investment. The second view is
ciently high transaction costs to limit significantly
in states that are
serves to create an economic
that corruption
equilibrium
the weakest firms from the marketplace
and
excessively bureaucratic,
rationalizing
for that provided
economic
substituting
private-sector
decision-making
by the
is problematic
it does not consider
state. This second
because
the
position
is
to get into the corruption
game, the result of which
incentive for all officials
taxation on productivity.
excessive
Further, most of those arguing the benefits of
corruption
regularly point out that it is not the ideal, but perhaps better than a

International Political Science Review 27(2)

124

rigid, inefficient
bureaucracy.
Therefore,
we hold
that corruption
will have a
negative
impact on GDP growth, holding other factors constant.
of democracy
We now turn to the discussion
and economic
performance,
where we argue that democracy
has the indirect benefit of mitigating
corruption's
harmful impact on an economy.

The IndirectBenefit ofDemocracy


As a type of government,
is touted as having many benefits,
democracy
both
are not entirely clear, however.
and economic.
The economic
political
benefits
Several writers
have argued
that democracy
has positive
effects on economic
growth for a variety of reasons. First, democracy
allows for the eviction of bad
leaders. North
(1990), for instance, argues that authoritarian
elites will prey upon
societies unless constrained
de Mesquita
by democratic
institutions. Bueno
et al.
(2001) similarly argue that authoritarian
leaders have few checks on their power
and thus engage in cronyism and corruption.
Olson
(1993), along with Przeworski
and Limongi
(1993), provide analogous,
albeit more complicated,
arguments.
In addition
to this general
idea that democracy
allows citizens periodically
to
who hurt the economy,
a second
and complementary
evict politicians
set of
focus on the microeconomic
arguments
effects of a democratic
climate.
political
these effects:
Sirowy and Inkeles (1990: 133-4) nicely summarize
Overall, the extension and protection of civil liberties and basic freedoms are
thought to generate the security of expectation necessary to motivate citizens
to work, save, and invest ... In addition, popular political participation not
only has the consequence of breaking down the privilege and vested interests
of a few but also feeds a participative mentality
that carries over into the
economic arena and greatly increases the flow of information so essential to
effective and efficient governments. In sum, political pluralism acts to release
energies

economic

and

foster

conditions

conducive

to change,

entrepreneurial

risk,

and

development.

Third, Lipset
(1959, 1960) argues that a symbiotic
relationship
between wealth
and democracy
he suggests
exists. Specifically,
that democracy
is most
likely to
is generated
occur in an industrialized
society in which wealth
by a large number
of (middle-class)
In turn, the middle
industrial producers.
class retains a strong
stake in a system that provides
freedom
of choice
sufficient
(political and eco
to permit the creation of more wealth.
nomic)
The more pessimistic
view of democracy
is rooted in an older literature. This
who argued that in newly
view was popularized
pessimistic
by Samuel Huntington,
citizen demands will rapidly escalate and gener
democratic
developing
countries,
ate high levels of government
and Nelson
spending. Huntington
(1976: 23) argue
is that "political participation
must be held down, at least
that one response
in order to promote
economic
Similar arguments
can
temporarily,
development."
be found in the literature on East Asia, which generally suggests that authoritarian
avoid
and politically
better
regimes
rent-seeking
motivated
policy mistakes
are argued to reduce the surplus available
(Haggard, 1990). In sum, democracies
for investment, with a consequent
negative effect on economic
growth.
A second critique of democracy
stems from the neoclassical
political-economy
for instance, argues that special interest groups tend unduly
literature. Olson,
to

DRURY/KRIECKHAUS/LUSZTIG:
Corruption, Democracy, and Economic Growth
influence
economy.

state policy, reaping


Olson
(1982) argues

125

particularistic
privileges
that damage
the overall
that as a democracy
ages, it becomes more plural

istic and consequently less efficient. This "political" inefficiency leads to decreased
economic
performance.
Simply put, in older democracies
there is more
time for
to overcome
interest groups
the difficulties
associated
with collective
action
(Olson, 1982). As a result, there are ever-more demands
on the resources of the
state. Moreover,
state reflects, at least to some degree,
because
the democratic
the
of its constituents,
political
in
make-up
there are more
voices
represented
government,
leading to political
sclerosis. The result is decreased
governmental
efficiency
and, therefore, decreased
economic
performance
(see also Bell, 1976;
in the developmental
Brittan,
and Karl, 1991). Scholars
1975; Schmitter
state
in depth,
tradition develop
this argument
arguing
that authoritarian
regimes,
in East Asia, are better able to resist special interest groups' distributive
especially
demands and rent-seeking
pressures
(Amsden, 1989; Evans, 1995; Wade, 1990).
Finally, Przeworski
and Limongi
(1993) resurrect
the 19th-century
argument
that democracy
undermines
the security of property rights by providing
the dispo
ssessed with a powerful
tool for expropriating
political
the wealth
of property
holders,
a result that could lead to considerable
economic
uncertainty
and thus

lower economic growth.


While both positive and negative
the more
recent
findings have been argued,
literature suggests that neither perspective
empirical
is accurate, or perhaps both
are accurate and they balance each other out. Using different methodologies
and
a fairly sophisticated
set of techniques
for dealing with endogeneity,
both Helliwell
et al. (2000) conclude
(1994) and Przeworski
that there is simply no statistically
significant
relationship
between democracy
and growth.
This does not mean,
however,
that democracy
has no significant
impact on
growth at all. Instead, democracy
has no direct effect on growth, but scholars are
increasingly
realizing
that democracy
does
important
have
indirect effects.
for instance,
ismore
Democracy,
likely to lead to greater spending
on education
and health, both of which
facilitate economic
growth
(Baum and Lake, 2003;
facilitates political
Helliwell,
1994). Moreover,
democracy
is also
stability, which
known to be good for economic
growth.
We further pursue
this insight that democracy might have important
indirect
to corruption.
Our argument
is grounded
effects, especially
in one
pertaining
variant
of the compatibility
interesting
perspective,
namely
the claim
that
since citizens
are better able to remove corrupt
facilitates
democracy
growth
et al., 2001; North,
politicians
(Bueno de Mesquita
1990). We argue, by extension,
that democracy may not merely
reduce the level of corruption,
but also change

of corruption.
the composition
Our argument
rests upon two plausible assumptions.
First, politicians weigh the
costs and benefits
of specific acts of corruption
when
they are faced with the
in an illicit act. Corrupt behavior yields obvious benefits,
choice of engaging
inclu
and the ability to gain political support from those
ding both personal enrichment
groups
benefiting
from corruption.
These
potential
exist for most
benefits
in most political systems.
politicians
also entails costs, however. Our second assumption
is that these
Corruption
costs vary substantially across types of corruption
and types of political system. The
cost to politicians
is primarily determined
hurts
by how a given act of corruption
to this
societal actors, and how capable those actors are of responding
particular
damage
through the political
system. The ability of the society to react is largely

126
determined

International Political Science Review 27(2)


by regime

type. In authoritarian

systems,

as Bueno

de Mesquita

et al.

(2001) note, the supporting or ruling coalition is relatively small. Consequently,


the costs of corrupt behavior
imposed upon the majority of the population
can be
safely ignored. Given
that authoritarian
leaders will not suffer retribution
from
society, they can engage in extremely
costly forms of corruption. A good example
of such systematic corruption
is Zaire from 1962 to 1994, where Mobuto
allowed
90 percent of the road network
to erode away, deciding
quite rationally that this
severe misallocation
of resources
from infrastructure
to corruption
not
would
threaten his ability to maintain
power (Evans, 1995).
In democratic
systems, citizens can remove politicians
and, therefore, both the
of corruption will be lower. Corrupt activities that impose a
level and composition
large cost on society will annoy voters, which
is costly for politicians. When
these
costs outweigh
the benefits of any given corrupt act, politicians
will be deterred
from corruption.
This will reduce
of corrupt
in a
the total number
activities
is that this reduction
in corruption
democracy. More
interesting,
for our purposes,
will not be even across all forms of corruption.
Instead, politicians will avoid those
that cost society dearly, given that such acts are most likely to
types of corruption
- namely, removal from office. Corruption
have severe political consequences
that
in physical
impedes
important
investments
infrastructure
and education
will not
the political costs outweigh
be pursued because
the benefits. However,
less costly
forms of corruption,
such as nepotism
or bribes for expedited
access to govern
ment officials, may continue
unabated
because
the benefits continue
to outweigh
the minor political costs.
In sum, our expectation
is that at any given level of corruption, the effect of that
on economic
corruption
than under author
growth will be lower in a democracy
itarian rule. A democracy
might
but this
experience
high levels of corruption,
corruption will be restricted to those activities and sectors that have relatively little
economic
impact on national
performance
because
voters will definitely
act to
in significant
remove politicians
that engage
growth-impairing
This
corruption.
ability to punish elected officials provides a powerful
incentive
for politicians
to
confine
their corrupt activities to economically
irrelevant activities.
This is a rather common-sense
for
intuition, but it has interesting
implications
the relationships
between democracy,
and growth. Our expectation
corruption,
is
that corruption
will have a negative effect on growth in authoritarian
regimes, as
per conventional
this negative
theory, but we believe
that in a democracy
effect
will be much weaker, because
citizens will demand
at least keep
that politicians
their corrupt behavior
from influencing
what
is probably
the most
important
means of legitimacy in modern
nations - economic
growth.

Data
We now turn to a discussion
of the data we use to test our argument. The data are
cross-section
of more
for 16 years
arrayed as a time-series
than 100 countries
statistics for the data appear
in Table 1. Our dependent
(1982-97).
Summary
variable, growth of GDP, is measured
by the World Bank's World Development

Indicators (2003).
For our first independent
we rely on the International
variable, corruption,
Risk Guide's
of corruption
in a wide
Country
(ICRG) assessment
range of
countries between
1982 and 1997. The index ranges from six to zero, with lower
scores indicating
that:

Corruption, Democracy, and Economic Growth


DRURY/KRIECKHAus/LuSZT1G:

127

TABLE1. Summary Statistics

Variable

Mean

Standard
deviation

Growth
Level of corruption
Life expectancy
Trade openness
Population growth
Logged GDP per capita
Tropical climate
Government spending

1.734
2.629
4.090
67.922
0.019
8.162
0.500
20.606

6.813
1.464
0.211
51.430
0.013
1.030
0.478
13.342

Minimum

Maximum

-52.096
0
3.441
0
-0.174
5.639
0
1.578

138.897
6
4.391
440.500
0.174
10.692
1
180.346

"high government officials are likely to demand special payments" and "illegal
payments are generally expected throughout lower levels of government" in
the form of "bribes connected with import and export licenses, exchange
controls, tax assessment, policy protection or loans." (Knack and Keefer, 1995:

225)
We recode
the original data so that the least corrupt countries
(for example,
(for
Australia, Finland, Sweden, and so on) score a zero, while the most corrupt
example, Bangladesh,
Haiti, Niger, and so on) score a six. Thus, higher values
mean higher
measures
of corruption
Alternative
also exist,
levels of corruption.
Mauro
as compared
to the ICRG measure.
but have severe limitations
(1995)
of corruption,
but it is only available for one year. A somewhat
provides a measure
better measure
is Transparency
which provides data for 1996-2003.
International,
to examine up
Given data limitations for other variables, itwould only be possible
six years of data. By comparison,
until 2001, which would
leave merely
the ICRG
data exists for a much
longer period, from 1982 until 1997.
Our second independent
is captured by the most common
variable, democracy,
indices used in the literature.
First, we use the Polity IV data (Marshall and
a country's
level of democracy
and autocracy and
Jaggers, 2000), which measures
the latter from the former. The result is
creates an overall measure
by subtracting
this variable because we want
a score that ranges from -10 to 10. We dichotomize
and
to measure
the effect a democratic
regime has on economic
performance
that we expect
to see beneficial
It is in democracies
effects on
corruption.
economic
effects on corruption.
growth and mitigating
of democracy,
Freedom House measure
Second, we use the equally prominent
which consists of a combined
score of a country's political rights and civil liberties,
in an index that runs from 2 to 14, with lower scores indicating more
resulting
this index at 5.5, based on Freedom House's
judg
democracy. We dichotomize
ment
that countries with a score of less than 5.5 are either "free" or "partially free,"
than 5.5 are "not free."
whereas countries with a score of more
of the results, we utilize an
check on the robustness
Third, as an additional
index of democracy
created
and Przeworski
Cheibub,
Limongi,
by Alvarez,
should not be rated along a
(ACLP). Alvarez et al. (1996) argue that democracy
as a dichotomous
scale, as Polity and Freedom House do, but rather be measured
variable in which countries
either are or are not democratic.
They rate countries
is elected,
as democratic
if: (1) the chief executive
is elected,
(2) the legislature

128

International Political Science Review 27(2)

and (3) there ismore


than one party (Alvarez et al., 1996; Przeworski et al., 2000).
For a critical review of these three different measures
of democracy,
see Munck

and Verkuilen (2002).


in the model.
We also include
six control variables
there are
Theoretically,
strong reasons to believe that each influences
economic
growth. Empirically,
these
in most previous
variables have generally
been found to correlate with growth
cross-sectional
analyses
(Barro, 1997; Bleaney
and Nishiyama,
2002). The cross
is much
sectional
time-series
literature on growth
et al.
sparser, but Kurzman
(2002) find that these variables perform
reasonably well in pooled samples.
of initial GDP
is suggested
First, the inclusion
by basic neoclassical
theory.
returns to capital, rich countries
Given diminishing
should grow less rapidly than
poor countries. Barro (1991) used the log of initial GDP as a proxy for the capital
stock; this proxy has become a staple of statistical analyses of growth.
is logged life expectancy.
Economists
Our second control variable
argue that
the overall health of workers
since workers
are
allows for greater productivity,
to disease
for longer hours, and without
more able to work diligently,
succumbing
in
or debilitation.
It is likely that these factors are particularly
important
since much
labor is physically strenuous and citizens' overall
developing
countries,
The typical
health ismore
likely to be salient than with respect to white-collarjobs.
of health is the log of average life expectancy
quantitative measure
(Barro, 1997).
Third, government
may retard growth since government
consumption
expen
ditures entail higher
levels of taxation and thereby reduce private sector actors'
to work or produce. More generally, government
shifts
willingness
consumption
resources
to the public
from the private sector
sector, and most
economists
than the public
believe
that the private sector more efficiently
allocates resources

sector.
Fourth, population
growth may inhibit economic
growth. When
the rate of
of new workers entering
the work
population
growth is high, the large number
force serves to dilute total capital per worker. For any given level of investment,
the capital
stock per worker
will fall, resulting
in lower levels of economic

productivity.
is expected
to influence
to
Fifth, trade openness
growth positively. According
state-induced
from free
Ricardo's
theory of comparative
advantage,
deviation
trade will merely employ the world's resources
and reduce world out
inefficiently
studies find that greater trade openness
put. Most empirical
does in fact facilitate
a common
growth, and this variable is accordingly
control variable.
of a country that
the proportion
Sixth, we include a dummy variable identifying
is tropical, as defined by the proportion
of the country that lies between
the tropic
of Cancer
This variable has been popularized
and the tropic of Capricorn.
by
Sachs and Warner
produc
(1997), who note that in a variety of ways agricultural
tivity and health is lower in tropical climates.
We did not include education
as a control variable because a number of African
countries
to retain as
fell out of the analysis due to missing
data, and we wished
large a sample as possible. We did, however, run all of the analyses with education
in the analysis, and found little change in the results.
as a control
Finally, while earlier growth studies frequently
included
investment
it is increasingly
that this represents
a suboptimal
control
variable,
recognized
since rapid rates of
(Bleaney and Nishiyama,
2002). First, causality is ambiguous,
lead to higher
investment
constitutes
an
growth
levels of investment.
Second,
rather than a true independent
as such, it is not
intervening variable
variable;

DRURY/KRIECKHAUS/LUSZTIG:
Corruption, Democracy, and Economic Growth

129

to control for its effects (King et al., 1994: 78). One means by which
appropriate
corruption
influence
for instance,
is to reduce
the quantity of
might
growth,
private
or public
investment.
to control
for investment
Therefore,
would
essentially control for the very effect we are trying to uncover.

Analysis
for which
data were
Selecting
all of the countries
the data set is
available,
than 100 countries over a 16-year period. The
of responses from more
comprised
data are arrayed as a time-series cross-section.
There are many more
cases than
are very likely to have nonspherical
time periods, and data with this characteristic
errors. We use panel-corrected
standard errors to correct for this bias that might
otherwise
inflate our significance measures
(Beck and Katz, 1995: 636, 638-640).
Diagnostic
tests revealed
that GDP growth
is autoregressive
1999;
(Banerjee,
Drukker,
2003; Hadri,
2000; Im et al., 1997; Levin and Lin, 1993; Woodridge,
for this temporal
2002). We correct
with a panel-specific
dependence
AR(1)
model
(Achen, 2000) 2
To test for the differences
between non-democracies
and democracies,
we first
interact
the democracy
and corruption
variables. This strategy permits
us to
the impact of corruption
on growth
in democracies
compare
versus non
- one that includes only
We then separate the data into two models
democracies.
non-democracies
and
the other
that contains
democracies.
This
approach
to view the differential
effects corruption
provides a more
intuitive means
has on
and non-democratic
democratic
we have three measures
of
regimes. Because
we report the analyses for each of these measures
in Tables 2-4,
democracy,

respectively.3
the models
are all
Overall,
and democracies)
(interaction,
non-democracies,
the 0.0001
their performance
is not overly
significant
beyond
level, although
on the
strong, with the R2 statistics ranging between
0.07 and 0.17, depending
a higher R2 would be preferable,
measure
of democracy
used. While
it is worth
et al. (2002) report an even lower R2 when
noting
that Kurzman
examining
are inherently
annual
data. As they note, annual models
that
"noisy," given
business cycles and other short-run factors are accounting
for much of the annual
variation in growth.
The
in all three
results
tables provide
for our
almost uniform
support
in Tables 2-4 report our results for the interaction of
argument. The first columns
and corruption.
For both the Polity and Freedom House measures,
democracy
the
results support our argument
that democracy
mitigates
the negative
impact of
on economic
at Table 2, for example,
the model
corruption
growth. Looking
that for each standard deviation
in the level of corruption,
increase
predicts
1 percent,
economic
all other variables
growth decreases
by nearly
holding
constant. However,
in a democracy
the same increase
leads to a marginal
0.1
percent
increase in the growth rate.4 A nearly identical effect is found in Table 3.
that corruption
These results clearly support the argument
is a drag on economic
performance
only in non-democratic
regimes.
The insignificance
of the corruption,
and interaction
in
democracy,
variables
Table 4 is most
likely the result of the limited scope of the ACLP democracy
measure. Unlike
the Polity and Freedom House data, the ACLP data end in 1990,
the analysis by seven years and cutting out almost half of the
effectively
truncating
data.

International Political Science Review 27 (2)

130

TABLE2. The Effects of Corruption on Economic Growth inNon-Democracies and Democracies,


1982-97 (Polity fVDemocracyData)
Democracy/corruption
interaction
Level of corruption
Democracy
Corruption

/ democracy

interaction

Life expectancy
Trade openness
Population

growth

Logged GDP per capita


Tropical state
Government

spending

Constant

-0.583**
(0.181)
-1.44
(0.946)
0.688**
(0.262)
3.099
(2.131)
0.017**
(0.004)
-23.61
(16.595)
-0.900*
(0.358)
-1.623**
(0.447)
-0.090**
(0.016)
-0.84
(7.543)
1435
0.07

Observations
R2

Non
democracy

Democracy

-0.625**
(0.174)

0.37
(0.252)

4.271
(2.727)
0.018**
(0.007)
-35.863
(33.814)
-1.132**
(0.363)
-1.345
(0.922)
-0.090**
(0.022)
-3.513
(11.341)

1.097
(3.400)
0.0188*
(0.006)
-11.162
(19.173)
0.005
(0.630)
-1.752**
(0.493)
-0.067*
(0.027)
-2.998
(13.126)

602
0.07

833
0.05

TABLE3. The Effects of Corruption on Economic Growth inNon-Democracies and Democracies,


1982-97 (FreedomHouse DemocracyData)
Democracy/corruption
interaction
Level of corruption
Democracy
Corruption

/ democracy

interaction

Life expectancy
Trade openness
Population

growth

Logged GDP per capita


Tropical state
Government

spending

Constant
Observations
R2
errors in parentheses
Notes: Standard
*
** significant
at 5 percent;
significant

-0.462**
(0.151)
-1.053
(0.743)
0.555*
(0.224)
2.962
(2.284)
0.018**
(0.003)
-43.900**
(16.908)
-0.902*
(0.383)
-1.550**
(0.399)
-0.081**
(0.016)
-0.5
(7.813)
1506
0.09
at 1 percent

Non
democracy

Democracy

-0.430**
(0.148)

0.072
(0.242)

4.424
(2.507)
0.017**
(0.006)
-72.419**
(22.422)
-0.956*
(0.419)
-1.134
(0.593)
-0.088**
(0.021)
-5.371
(9.111)

-0.207
(3.243)
0.018**
(0.004)
-3.061
(19.232)
-0.508
(0.615)
-2.232**
(0.627)
-0.031
(0.024)
7.193
(12.064)

761
0.08

745
0.09

Corruption, Democracy, and Economic Growth


DRURY/KRLECKHAUS/LUSZTIG:

131

TABLE4. The Effects of Corruption on Economic Growth inNon-Democracies and Democracies,


1982-90 (ACLPDemocracyData)
Non
democracy

Democracy

-0.163
(0.164)
0.281
(0.831)
-0.357
(0.240)
2.488
(2.046)
0.020**
(0.005)
-17.366

-0.551 *
(0.232)

0.094
(0.332)

3.845
(2.191)
0.023**
(0.006)
3.147

3.966
(5.042)
0.017**
(0.005)
-21.078

(25.538)

(41.129)

(38.494)

-1.171 *
(0.522)
-2.247**
(0.501)
-0.110**
(0.015)
3.337
(7.476)

-1.508**
(0.514)
-2.093**
(0.599)
-0.124**
(0.025)
0.363
(9.242)

-0.977
(0.979)
-3.067**
(0.640)
-0.069*
(0.029)
-5.286
(16.676)

Democracy/corruption
interaction
Level of corruption
Democracy
Corruption

/ democracy

Life expectancy
Trade openness
Population

growth

Logged GDP per capita


Tropical state
Government
Constant

Observations
R2

spending

interaction

788
0.14

399
0.17

389
0.10

Note: Standard errors in parentheses


* significant at 5 percent; ** significant at 1percent

in Tables 2-4 report our


As an alternative
test, the second and third columns
and democracies
as two separate samples. The tables
results for non-democracies
all show that corruption
has a deleterious
in
effect on economic
performance
As the interaction model
a one standard deviation
non-democracies.
predicts,
increase in corruption
leads to nearly a full point decrease
in the annual growth
rate. Unlike
their non-democratic
brethren,
growth in demo
however, economic
cratic regimes is unaffected
by corruption. As each of the tables report, corruption
for democratic
never attains or even approaches
statistical significance
countries.
the economically
itself seems
to mitigate
of
Democracy
damaging
effects
Unlike
whose
economic
corruption.
non-democracies,
performance
significantly
democracies
suffers from corruption,
corrupt
grow just as fast as
apparently
democracies
with little to no corruption.
has a negative effect in authoritarian
Our results show that corruption
regimes,
our contention
that democracy
but not democratic
supports
regimes, which
are three
There
the negative
effects of any given level of corruption.
mitigates
for the lack of a correlation
and
between
alternative
explanations
corruption
is that the effects are simply
however. The first concern
growth in democracies,
If there was little to no
in corruption
for democracies.
due to a lack of variation
in the independent
then corruption
variation
variable,
clearly could not have an

132

International Political Science Review 27(2)

effect on growth even if democracy


has no ameliorative
effect whatsoever.
In fact,
however, corruption
does vary substantially
in democracies,
and even varies more
than in authoritarian
regimes:
the standard
deviation
of corruption
is 1.4 in
democratic
regimes and only 1.1 in authoritarian
regimes.
A second potential
issue is that while corruption
might
vary in both types of
regime,
the mean
level of corruption
be lower in democracies,
might
causing
to have no impact on the economy.
corruption
it is true that the average
Indeed,
score in democracies
is 2.0, while the average corruption
corruption
score in non
is somewhat higher at 3.3. Although
democracies
we certainly would not deny that
democracy might
improve economic
performance
by reducing
the level of corrup
tion within countries,
column one of both Tables 2 and 3 nonetheless
confirms
that democracy mitigates
the effect of any given level of corruption.5 These models
control for the level of corruption
in each country. Therefore,
the fact that the
term is statistically
interaction
and positive confirms
significant
that even after
for democracy's
controlling
possible effects through lowering corruption,
there is
an additional
nonetheless
positive effect by reducing
the impact of corruption
at
any level.
A third and more
is that despite
subtle possibility
of
the high variance
in democracies,
there simply might not be enough
corruption
in any
corruption
to reduce substantially
democracy
economic
growth, and that there is therefore
no way to falsify our hypothesis.
In fact, however, many democracies
exhibit very
high levels of corruption,
the maximum
including
score of six. Moreover,
fully 29
of the 52 democratic
in our sample did at one point or another
countries
expe
rience a level of corruption
greater than or equal to the mean
level of corruption
in authoritarian
regimes. Thus, there are plenty of data to falsify our hypothesis.
Our main goal in the above analyses was to note that democracy mitigates
the
negative
effects of a given level of corruption,
but it is also worth discussing
the
influence of the control variables. It is important
to note that previous extensions
economic
of cross-sectional
analysis to pooled data have generally
some
rendered
so we do not necessarily
control variables insignificant,
expect all control variables
to be significant.6 For precisely
this reason, however,
it is interesting
to examine
which control variables are robust to cross-sectional
time-series analysis.
Neoclassical
growth
that initial GDP has a negative
theory predicts
effect on
growth,
reflecting
diminishing
returns
to capital
in richer countries,
and our
results confirm this standard prediction
for the sample with non-democracies.
Economists
also argue that government
hurts growth by taking
consumption
resources
away from the (efficient)
them within
the
private sector and placing
(less efficient)
public sector (Barro, 1997). Economists
analogously
argue that
trade openness
should enhance
growth, given efficiency
gains from comparative
and greater opportunities
advantage
for technology
transfer. These
free-market
are confirmed
in most of the analyses.
expectations
The effect of a tropical climate has not been previously
tested in annual time
series cross-sectional
analysis, and our findings confirm
the typical cross-sectional
finding, namely
that the countries
in a more
tropical climate do in fact suffer
less economic
significantly
growth.
Finally, the last two control variables also have the anticipated
effect, but their
effects do not generally
reach statistical significance.
Population
growth impedes
economic
life expectancy
growth, while higher
facilitates
generally
it, but while
the signs are as expected,
the variables generally do not reach conventional
levels
of significance.

Corruption, Democracy, and Economic Growth


DRURY/KRIECKHAUS/LUSZTIG:

133

Conclusion
and
that political
processes
such as democracy
Scholars
have long suspected
argument,
sup
are important
for economic
growth. Our theoretical
corruption
of the
reconceptualization
entails a significant
evidence,
ported
by empirical
these three variables. Most studies of democracy
relationships
between
complex
studies of
test its direct impact on economic
growth and find no result. Most
effect. We
impact on growth and find a negative
test its aggregate
corruption
between
these variables
is more
complex.
that the causal relationship
argue
effect of corruption
is mediated
by the
Specifically, we argue that the negative
or
occurs, and that democracy will mitigate
political process in which corruption
in
the political effects of corruption,
effect. To understand
reduce that negative
the political
to take into account
context within which
the
short, it is necessary
for the electorate
to
the ability in a democracy
occurs. Specifically,
corruption
has
the stunting effect corruption
remove its leaders from office seems to mitigate
exhibit significant
levels of corruption,
on economic
growth. Many democracies
refrain from growth-impairing
corruption
lest they be
but their leaders must
at the next election.
punished
results suggest the need for further research on the interaction
Our empirical
that a democracy's
and growth. We
argue
corruption,
between
democracy,
to have no impact on its economy. Future
causes corruption
electoral mechanism
specification
of
the nature of this causal process. One
research should explore
that process would
the impact of a free press, given that in a demo
emphasize
activities than in
cratic context journalists are freer to publicize growth-impairing
such as
context. Another
causal story may be that institutions
an authoritarian
from
that constrain
individual politicians
political parties put in place mechanisms
in growth-impairing
regimes are likely to
Finally, democratic
corruption.
engaging
yet
for the judiciary, which
provides
greater
political
independence
provide
of corruption.
another check on the quantity and composition
between
politics
Finally, our results provide new insight into the relationship
to showing generally
that political factors play a
and economic
growth. In addition
economic
growth, our findings suggest that democracy
large role in determining
ill economic
to recommend
it - mitigating
corruption's
has yet another benefit
democracy
promoting
effects. Given that some nations are rife with corruption,
not only their general human
them may enhance
rights, but also their
within
for prosperity.
opportunity

Notes
a
as one
to the
that conforms
government
following:
where
all
and
the autonomy
of all
individuals;
rights
state
are
and
is limited,
the law; where
individuals
before
transparent,
authority
equal
elites
of the
of the individual;
in the
and where
government
protection
rights
grounded
ensure
must
are selected
the respon
The
selection
moreover,
mechanism,
by merit.
to civil
of representatives
selection
and must
entail
siveness
of elites
through
society,
with
universal
elections
(near)
voting
rights.
popular
in
variables
of the
below with
also ran the models
2. We
dependent
place
lagged
presented
no
were
to those
results
The
correction.
below;
AR(1)
signifi
presented
comparable
1. We

cant,
3.

Data,
page.

define

structure

that

liberal

substantive
output,

democracy
the

preserves

and

appeared.
changes
command
files

(Stata

8)

are

available

from

the

first

author's

web

134

International Political Science Review 2 7 (2)


To

4.

calculate

the

interaction

effect

coefficients

in a democracy.

The

not

Additional

significant.
third
second
and

be

might

to the

due

given
spurious
modernization,
corrupt.
Kurzman

6.

but

for

that

richer
are

lack

insignificant.
in democracies
but

to be

likely

effect

and
corruption
of corruption

summed

significant
that
show
the

of democracy,
have
undergone

more

the

by

the

of

which

statistically
is lower

societies

hence

indicated

this

2-4,

corruption
beneficial
effects

and

we
add
democracy,
is a near-zero
result

The
1982).
in growth

of Tables

states,

in

corruption

evidence

columns

in democratic
positive
The
that average
fact

5.

of

(Friedrich,
small
increase

coefficients

is
in

impact
corruption

the

appears
variable

is

in non-democracies

than
the

also be
relationship
might
substantial
and
social
political
democratic

simultaneously

less

and

one
for instance,
cross-sections
with pooled
data using
(2002),
compare
our
in
find
and
that
R2
falls
while
control
(as
many
analysis),
they
sharply,
a similar
Barro
become
(1997)
reports
phenomenon.
insignificant.
et al.

intervals

year
variables

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Biographical Notes
A. COOPER DRURY is Assistant
at the University
of
Professor
of Political Science
on foreign
Missouri,
Columbia
and conducts
research
policy
and political
on economic
economy,
and specifically
sanctions. He is the author of Economic
Sanctions and Presidential Decisions: Models of Political Rationality
(2005). His most
in the Journal of Politics, Journal of Peace Research, and
recent articles appear
of Political Science, University
International Studies Perspectives. ADDRESS:Department
of Missouri, Columbia, MO 65211-6030,
USA [email: drury@missouri.edu].

isAssistant Professor of Political Science at theUniversity of


KRIECKHAUS
JONATHAN
and conducts
research on the politics of economic
Missouri, Columbia
growth. He
is the author
of Dictating Development: How Europe Shaped the Global Periphery
in the British Journal of Political
His work has also recently appeared
(forthcoming).
of Missouri,
MO
Science and World Development. ADDRESS: University
Columbia,

65211-6030, USA [email: krieckhausj@missouri.edu].


MICHAEL LuSZTIC isAssociate
Professor of Political Science at Southern Methodist
is author
of two books, Risking Free Trade and The Limits of
He
University.
in journals
Protectionism, as well
as numerous
articles
such as the Review of
International
Political Economy, World Politics, Comparative Politics, and Publius.
of Political Science,
ADDRESS:Department
Southern Methodist
University,
Dallas,

TX 75275, USA [email:mlusztig@mail.smu.edu].


Acknowledgments. We thank Jay Dow, Doh Shin, and Melanie
comments on previous drafts of this article.

Taylor Drury for their helpful