Transnational Corporations Review

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Economic analysis of corruption: evidence from

Pakistan

Afshan Uroos, Malik Shahzad Shabbir, Muhammad Umar Zahid, Ghulam

Yahya & Bilal Ahmed Abbasi

To cite this article: Afshan Uroos, Malik Shahzad Shabbir, Muhammad Umar Zahid, Ghulam
Yahya & Bilal Ahmed Abbasi (2021): Economic analysis of corruption: evidence from Pakistan,
Transnational Corporations Review, DOI: 10.1080/19186444.2021.1917331

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Published online: 28 May 2021.

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TRANSNATIONAL CORPORATIONS REVIEW
https://doi.org/10.1080/19186444.2021.1917331

RESEARCH ARTICLE

Economic analysis of corruption: evidence from Pakistan

Afshan Uroosa, Malik Shahzad Shabbirb, Muhammad Umar Zahida, Ghulam Yahyac and
Bilal Ahmed Abbasic,d
a
Applied Economics Research Centre, University of Karachi, Karachi, Sindh, Pakistan; bLahore Business School, University of Lahore,
Sialkot, Punjab, Pakistan; cDepartment of Economics, University of Azad Jammu and Kashmir, Mirpur, Pakistan; dDepartment of
Management Sciences, University of Azad Jammu and Kashmir, Mirpur, Pakistan

ABSTRACT ARTICLE HISTORY

Misuse of public power is generally known as corruption, and this issue becomes an inter- Received 1 October 2020
national dilemma in the economic world. However, different levels of corruption exist in devel- Accepted 11 April 2021
oping and developed countries. This study attempts to identify the economic determinants of
KEYWORDS
corruption in Pakistan and investigate the impact of trade openness on corruption. This study
Corruption;trade openness;
empirically inspects these impacts by using data for the period 1987–2017. This study is based economic growth; Pakistan;
on time series analysis; augmented dickey fuller test (ADF), Tobit Model of Censored Regression, ARDL, public spending
and Autoregressive Distributed Lag (ARDL) are used to estimate significant economic determi-
nants of corruption in Pakistan. It is found that literacy rate, GDP growth, and economic integra-
tion have a negative effect on corruption, whereas Inflation is found to have a positive effect on
corruption in Pakistan. However, investment, an extensive index, public spending, and income
distribution are statistically insignificant as economic determinants in the case of Pakistan.

Introduction
Corruption is generally defined as the misuse of public assets and powers for personal interest. Aidt (2003)1
stated that corruption is a common and intricate concept. The corruption may be found in several practices in a
society. Whereas corruption acts as a duty on capital and, it is different from official tax and indeterminate and
random, which is problematic to affect. Moreover, corruption is an extremely complicated community behaviour.
Some of the studies on corruption were mainly limited till 1980 to the subject of sociology, criminology, issues of
political economy, and public institutions. The research on corruption diverged to the other areas of social scien-
ces after 1980 and became a significant factor responsible for the decline in economic growth. Subsequently, at
the beginning of 1990, there has been a cybernetic bang of theoretical research on the corruption associated
with economics and its structure that could be cast-off in research studies.
Accordingly to Transparency International corruption perception index there are three types of corruption for
instance; Grand corruption, medium corruption and piety corruption. In grand corruption government officials are
directly or indirectly convoluted in it. In medium corruption, government and private institutions use their links
for personal incentives, while in piety corruption, individuals are involved to use their power for personal benefits.
This study deals with grand corruption, where government is directly or indirectly convoluted in it. The history of
Pakistan is associated with the misuse of public powers for individual interests. In Pakistan, approximately all pub-
lic sectors are involved in misappropriation for personal benefits. The effect of corruption is multiple, and its root
became deep in the social, cultural, political, and economic history in Pakistan. It spread like a viral disease not
only in the public sector but in private sectors. The judiciary institutions of Pakistan are also not saved from this
social sickness. Now, it became a social behaviour in any institution to take bribes. Pakistan trotted the post-1949
Korean War-boom and appeared to go into golden age after the fight for existence and succeeding development
of the economy. The confidence of any government pushes them to do overspending and over budgeting that
results in a future decrease in growth. The same happened with Pakistan as mismanagement of public spending,
misuse of the country’s economic resources, and misappropriation in the foreign-exchange calamities.
Concurrently, the politicians in Pakistan lost public trust and respect. Pakistan has consistently poor ranking at

CONTACT Malik Shahzad Shabbir Mshahzad786.pk11@gmail.com Lahore Business School, University of Lahore, Sialkot, Punjab, Pakistan
ß 2021 Denfar Transnational Development INC.
2 A. UROOS ET AL.

the Transparency International’s Corruption Perceptions Index with scores of 30 in 2015, 29 in 2014, and 28 in
2013. In 2013, the Pakistan score was 127; in 2014 score was 126 on the index with 177 and 175 countries,
respectively. Although last year’s Pakistan’s rank was 116 and score was 32 out of a total of 176 countries
assessed by Transparency International as against 2015s 117 ranks out of 175 countries; still, the country did not
make worse further as in the case during the previous three years of the present government. However, in 2019
the corruption rank for Pakistan is 120.
The corrupt politicians in developing countries may be responsible for allocating extra public properties on
those articles, which it is quieter to charge huge inducements and uphold them secretive. This study determines
the economic determinant of responsible factors of corruption in Pakistan and its impact on trade and invest-
ment. In precise, GDP and inflation are severely affected by corruption. Krueger (1974) strained that it is the pres-
ence of fees to stimulate the rent-seeking2 component. When the market is not so much competitive and low,
then higher bribes may be obtainable on substances by companies. Whereas, corrupt administrators may select
possessions, whose precise value is hard to scrutinise. Shleifer and Vishny (1993) stated that specific, high tech
goods will be mainly required.
In the new research literature, Institutional quality found to be a significant determinant of increasing inter-
national trade. Anderson and Marcouiller (2002) found that corruption is the prime impediment in business trans-
actions and its growth globally. Firm-level research studies are also available in the literature to explain the
existence of corruption in global firms. World history confirmed the existence of corruption and its impact on
economic transactions. The problem is more associated with democratic leadership due to the influence of a
powerful politician in the public sector and the weakness of public institutions3. The World Bank, in its report of
2001, has recognised that corruption is an only problem to economic and social development. In 2004, the World
Bank projected that annually US$1 trillion was compensated in inducements, and the economies that tackle cor-
ruption and recover supremacy could upsurge per capita revenues by 400 percent. Dreher, Kotsogiannis, and Mc
Corriston (2009) reinforced the findings of the report by putting an operational modelling4 approach to deter-
mine corruption as a dormant factor.
United Nations Development Program (UNDP) launched the ‘phones against corruption’ initiative in Papua
New Guinea, which allows citizens to report cases of corruption through mobile messaging (SMS) to the appropri-
ate state authorities for criminal investigations and prosecution at free of cost in July 2014. Since its implementa-
tion, 6,254 cases of corruption have been reported from different 1,500 users through text messages, and two
public officials were arrested for mismanagement of funds of more than US$2 million. Moreover, approximately,
other 250 cases of alleged corruption are being investigated (United Nations Development Program (UNDP,
2014). Furthermore, ‘Phones against Corruption’ is part of a wider Provincial Capacity Building and Enhancement
Program, which aims to build capacity of the country’s treasury functions at national and sub-national levels
(United Nations Development Program (UNDP), 2016). An estimated $148 billion dollars a year is lost by African
countries alone due to corruption, and almost $1 trillion dollars is paid in bribes every year globally (United
Nations Development Program (UNDP), 2017).
According to the survey of the World Bank (2016), for seven countries found that corruption is the biggest
impediment to investment. More than 35% of firms surveyed had been daunted by otherwise smart investment
as the host countries’ status for corruption. Export Credit Guaranteed Department (ECGD)5 identified that induce-
ment and dishonesty misrepresent competition, delays open and rational trade, and signifies an undesirable cost
to trade. IMF researchproposed that corruption decreases investment by 5%, and a 1 point increase in the corrup-
tion index may affect a decrease of foreign investment by percent. Krueger (1974), Shabbir and Yaqoob
(2019),Shleifer and Vishny (1993), Mauro (1995) and Tanzi (1998) believed that corruption delays economic
growth and misrepresents resource allocation. Nye (1967) proposed that corruption can support economic
growth. Saleem et al. (2019) demanded that corruption can permit commerce players to effort universally and
incompetent administrative dealings, falling adverse impact of red tape. The principal econometric research on
the effect of corruption on investment and economic growth crossways countries was completed by Mauro
(1995). The empirical findings showed that 1 standard deviation enhancement in corruption index reasons for ris-
ing investment by 5% and development of GOP per capita to increase by 0.5 percentage.
Presently, the political leadership of Pakistan is facing Panama cases and other charges of corruption.
Economic stability and economic growth are seriously affecting due to the issue of corruption in political leader-
ship. Pakistan is stagnant at international rankings. Pakistan’s economic growth is stagnant at 4%, and it is facing
 TRANSNATIONAL CORPORATIONS REVIEW 3

a considerable trade decline from 2013. The literacy rate, mortality rate, unemployment, and health issues
became severe in Pakistan. Pakistan’s leadership has a mixed history of democracy and the military government.
Pakistan’s army is one of the best armies in the world. However, the corruption perception index was the same
in democracy as well as in the military government. Pakistan adopted the policy of privatisation and economic
reforms in different stages, but the issue of corruption raises day by day. The continuous corrupt behaviour of
Pakistani individuals and politicians affected growth and development in the country. Professionals stated that
the following factors are mostly affected by the corruption in Pakistan. Police and law enforcement, Judiciary and
the legal profession, Power sector, Tax and customs, Health and education, Land administration, Public Procurement.
According to the World Bank Survey, the causes of corruption in Pakistan lack transparency, problems in public
accountability, judiciary, and legal structure.
The research aims to determine the economic factors responsible for corruption through empirical techniques
for Pakistan. In literature, cross country analysis and panel data are used for finding economic determinants of
corruption; however, I used time-series data to find economic determinants of Pakistan. The corruption index is
used as an independent variable. The objective of the dependent variable is to find factors responsible for cor-
ruption in Pakistan. Moreover, GDP per capita, literacy rate, Gini coefficient, government expenditure, globalisa-
tion index, foreign direct investment, and openness index and inflation rate are used as dependent variables. The
unit root test is applied to check stationary of the variables. Whereas, the ARDL approach is used to find a long-
run relationship among variables. The Tobit Model of Censored regression is used to find economic determinants
of Pakistan. In this study, we use secondary data which will collect from Financial Yearbook Statistics FBS, Trade
Development Authority of Pakistan (TDAP) publications, State Bank of Pakistan’s Publication, International
Financial Statistics (IFS), World Development Indicators (World Development Indicators (WDI) 2016), Transparency
International (TI) annual index, International Country Risk Guide (ICRG).

Economic growth under different rulers of Pakistan

The Figure 1 indicates that military governments (Zia ullah, Ayub Khan, Yahya Khan and Pervaiz Musharaf) have
more economic growth ratios as relative compared to civil government (Bhutto, Benazir Bhutto, Iskandar Miraz,
Nawaz Sharif and Asif Zardari) in their ruler eras. The absence of stability in political government is one of the
spacious issues of Pakistan’s economy. Before East Pakistan’s separation in 1971, the administrative and manage-
ment system was inferior for the distribution of resources among provinces due to the unstable government of
Liaquat Ali Khan and the short ruling period of Nazimuddin, to Firoz Khan. The ruling politician during the period
of Liaqat Ali Khan and Feroze khan faced the same issue of the short time period of their government. Noon
Griffiths (1959) stated that “Pakistan is that country which was associated with a high degree of corruption and
involved in all levels of anti-social action. During traveling in Asia, I found the highest level of corruption only in
Pakistan, not in any other country of Asia.” The Corruption Perceptions Index ranks countries and territories based
on how corrupt their public sector is perceived to be. A country or territory’s rank indicates its position relative
to the other countries and territories in the index. This page provides the latest reported value for – Pakistan
Corruption Rank6 – plus previous releases, historical high and low, short-term forecast and long-term prediction,

8
7
6
5
4
3
2
1
0

Figure 1. Economic growth under different rulers of Pakistan. Source: World Development Indicator
4 A. UROOS ET AL.

economic calendar, survey consensus, and news. Pakistan Corruption Rank – actual data, historical chart, and cal-
endar of releases – was last updated in December of 2019.
Pakistan is not only a country in Asia that has a high ranking in the corruption perception index. However, the
consistency in the issue is alarming for policymakers. The income distribution system is worse in Pakistan. The
capitalist is earning more and more as compared to the poor. After the assassination of Mr. Liaqat Ali Khan, the
government was not recovered from the political shock, which deters economic growth in the country. The insti-
tution was misused by politicians and individuals due to political instability and the weak judicial system in
Pakistan. The frequent change in policies left space for increasing corruption in budgeting and foreign policies. A
substantial administrative gap was created due to sudden changes of government in initial years that results in
the weak control system of law and order agencies of Pakistan.
The era of Mr. Ayub Khan was considered as the era of dictatorship. He was not ready to share the powers
that created internal conflicts in the government. The period of Iskander Mirza (1955–1958), was not remarkable
due to the existence of various political parties, the involvement of more ministries in the administrative issues,
dismantling of laws and declaration of martial law. In 1970, the same situation had happened in the government
of Mr. Zulfiqar Ali Bhutto, who regretted to share his administrative power with the National Assembly and with
the leading government of East Pakistan. Due to internal conflicts of the government of East and West Pakistan,
a military government took over the administrative control of Pakistan in 1978 and Chief of the Army Staff, Mr.
Zia-ul- Haq has declared as the president of Pakistan in addition to his existing duties. He protracted his ruling
period after 1979 without a democratic way of selecting a leader.
It was proved from the history of Pakistan7 that no single government has administrative control on public
institutions due to the instability of their ruling periods. Four elected democratic governments have ruled in
Pakistan during 1990–1999; however, their ruling period also consisted of a short span like previous governments.
The political leadership works for individual gain in Pakistan in different eras with different names. The opinions
of parliaments in numerous cases were denied by the selected political leaders in history. Callard (1956)8 stated
that choices in making a legislature must not be allowed to conclude the same productively.

Literature review
Andving (2000) stated that institutions, rules and regulations, and economic policies are responsible for corrup-
tion in the world. Social and political factors included GDP, literacy rate, trade integration9, poverty, and language
barriers. Several types of research focussed on the empirical determinant of corruption in history. Mauro (1995)
found the impact of corruption on economic growth and other researchers like Paldam (2002), concentrated on
factors responsible for economiccorruption. The relationship between corruption and economic freedom was
studied by La Palombara (1994), Paldam (2002), Shabbir and Wisdom (2020). Gupta did an extensive research
study on therelationship between corruption and income distribution. The same topic was studied by Saleem,
Shabbir, Khan, et al. (2020), Shabbir and Muhammad (2019).
Adaman,Çarkog
lu, and Şenatalar (2001) identified the multidimensional portrait for the demonstration of eco-
nomic reasons for corruption. Economic development or growth is determined as the primary features and causes
of corruption. Various economic factors are found in previous studies that were responsible for the existence of
corruption in the economy. However, literacy rate, income disparities, trade liberalisation, unemployment, over-
spending of government, black market10, persistence increase in the price level, economic integration, poor rank-
ing of competitiveness, weak law and order, poverty and low economic growth are declared as essential factors
responsible for increasing/decreasing corruption in an economy.
The same topic was studied by Shabbir et al (2020), Al-Marhubi (2000). The same topic was chosen by La
Palambara (1994). The linkage between corruption and regulation is done by Amundsen (1999). Wei (2000) linked
corruption & trade openness. Shleiferand Vishny (1993) and Ades and Di Tella (1997) focussed on the economy’s
competitiveness. Mauro (1995), Treisman (2000), Easterly and Levine (1996) investigated the ethnolinguistic diver-
sity11. The above studies proved that corruption is a complicated and multi-dimensional notion.
The empirical finding of all these studies identified that economic factors were not solely responsible for cor-
ruption; however, political, social, and cultural features have significant impacts on corruption. Ndikumana (2007)
highlighted on the part of the option and misrepresentation in government expenditure. Acemoglu and Verdier
(2000) emphasised that corruption is the result of government interference. Mauro (1998) underlined that the
 TRANSNATIONAL CORPORATIONS REVIEW 5

level of preference is usually higher for capital expenses than regular expenses and suggested that higher public
investment is not unavoidably a required result in a situation categorised by corruption as it will outcome in the
uneconomical distribution of public properties.
Gyimah-Brempong (2002) supported the evidence that corruption is not suitable for economic progression,
which is proved by most of the empirical research. Ndikumana (2007) explained that the economies with higher
corruption tend to increase gradually as corruption reduces the progress of the salary of the deprived, decreases
pro-poor public spending, grounds cramming in social facilities, and persuades capital strength in manufacturing,
which results in unemployment as the effect of investment and growth Ndikumana (2007) investigated a compre-
hensive argument of these connections and their inferences for pro-poor growth. Mauro (1995), Saleem et al.
(2019), Tanzi, and Davoodi (1998) identified that corruption depresses domestic and foreign investment, raises
ambiguity on capital return, and increases the price of products that eventually decreases lucrativeness. Pellegrini
and Gerlagh (2004) stated that a reduction in the corruption index increases private investment by 2.5%, which
leads to GDP growth by 0.34%. Corruption corrodes efficacy in choices regarding public investment, particularly
by persuading preference for massive schemes.
Mauro prolonged his earlier research by adding more countries and identified that corruption significantly
delays economic growth and investment. Ehrlich and Lui used equilibrium models of endogenous growth and
examined the connection among corruption, growth, and government and determined that the associations
amongst the variables are non-linear. The dynamic general equilibrium model was used by Mendez and
Sepulveda to investigate the effect of corruption on growth. Li, Xu, and Zou (2000), calculated corruption and its
impact on income distribution and growth in a model of 47 countries and established that corruption has a
negative influence on growth, however, not very significant. Leff (1964) and Huntington (1968), Arif and Shabbir
(2019) investigated that corruption can competence improving as it eliminates government executed inflexibilities
that delay investment and restrict with economic choices satisfactory to progression. Rose-Ackerman (1997) fav-
oured his opinion and briefly taken in the idea that corruption greases the wheels of trade. Rose-Ackerman
(1997) explained that customs officials are predominantly likely to involve in corruption of all sorts. Parayno
(1999) defined the corrupt performance of the Philippines in which most businesses developed familiar to giving
minor inducements for customs facilities, and it was essential to pay to assist even excellent dealings. However,
misclassification and undervaluation in official entry statement treating were common behaviours by which com-
panies could avoid formal trade obstacles, in collaboration with corrupt custom representatives. Arduz (2000)
defined a structure in Bolivia called parallel customs12 in which customs officers imposed their private duties
rather than the formal trade tariffs. They discovered robust indication for mislabelling and misclassification of
imports as no proof of underreporting of imported magnitudes.
Bonaglia, Braga de Macedo, and Bussolo (2001) contended that openness to trade performs as oblige on cor-
ruption. Krueger (1974) discussed the quantitative limits to imports produce economic payments since the per-
mitted importers uphold a monopolistic control. Bhagwati (1982) supported the idea of a whole array of directly
unproductive, profit-seeking activities. Gatti (2004) displayed the process of non-liberal trade policies distress cor-
ruption levels and splits the impacts to the direct policy falsification and the foreign competition impact. Ades
and Di Tella (1999) identified that in a low competition situation, the limitations for rents are extraordinary and
that people must upsurge the checking of the officials that are lured by this opportunity to pursue rents. Wei
(2000) contended that people would invest in the formation of worthy organisations that battle corruption taking
into account the cost and benefit of doing so. The situation holds for openness come in as few states tend to be
logically extra exposed than others, because of their location. “Societies liberalise to world import, not just goods
and capital, nonetheless thoughts, facts, and customs”. Anderson, Peterson, and Go mez-Laverde (2002) suggested
a changed mechanism from which quality of institution may impact on the trade volume. They contend that hid-
den transaction charges linked to the uncertainty of international exchange that decreases trade. Acemoglu,
Johnson, and Robinson (2005) identified the impact of colonialism on the economic development of developed
nations. The study explained that economic profit13 is more significant in Asian countries as compared to Atlantic
countries. Asia is more profitable for the western world. North and Weingast (1989) stated that traders might
gain more profit through the proper monitoring of government rules and property rights for the inclusion of
more involvement in trade-related activities.
Congdon Fors (2007) stated that openness is an economic factor and responsible for corruption as compared
to any political factor in the country. Moreover, Knack and Azfar (2003) highlighted to one more significant
6 A. UROOS ET AL.

aspect. Sandholtz (2000) and Wei (2000) investigated the biasness in collecting data samples. The well-governed
countries were less introduced to corruption, while countries with less governance have more corruption.
Bonaglia et al. (2001) stated that trade openness highly responsible factor for corruption. Krueger (1974) con-
tended that quantitative limitations for imports create charges since the authorised importers keep a monopolis-
tic power. Ades and Di Tella (1999) identified that rents are at a high rate in a less competitive country as
compare to a more competitive country. The monitoring system may improve the situation and may revise the
rent-seeking behaviour. Anderson et al. (2002), Shabbir (2015) suggested an institutional mechanism based on
quality proposals for significant involvement to affect trade volume.
Charoensukmongkol and Moqbel (2014) found that a country’s investment in information and communications
technology (ICT) can have both negative and positive effects on corruption. Chatterjee, Chaudhuri, and Dutta
(2019) examined a relationship between new technology adoption and its impact on telecom sector through
structure equation modelling approach. Their study emphasised mobile phone communication using fast track
internet sources in selected countries such as Norway, South Korea, Sweden and the USA. They have surveyed
400 consumers of mobile phone from Metro telecom. The result reveals that low-cost alternatives as lower tech-
nology are the barrier to adopt new technology. Chinnaswamy, Rudra, and Sharma (2019) explored a relationship
among selected ASEAN countries regarding financial development and economic growth in these countries. Their
study developed a relationship through economic efficiency and physical capital accumulation and significant
improvement in financial development. The overall result indicates that financial development has a positive
association towards economic growth.
Asongu and Nwachukwu (2016) explored a relationship between institutional quality, mobile penetration and
entrepreneurship level among sub-Saharan African (SSA) countries. They took the data set from 2000 to 2012 and
used generalised methods of moments (GMM) for data analysis. The finding of this study describes that reducing
the cost of business start-up affects the insolvency. Tchamyou (2020) investigated the role of financial access, on
long life learning, education and inequality among 48 African countries from 1996 to 2014. The result of Gini
index indicates a negative interaction between financial channels and primary school enrolments. Owoseni and
Twinomurinzi (2019) described the dynamic capabilities of small and medium enterprises through the usage of
mobile apps for the survival of developing economies. The findings from 20 SMEs revealed a significant use of
social media apps, productivity apps and mobile banking apps. Kanyam, Daniel, and Susana (2017) observed that
ICT systems have offered remarkable prospects for endorsing good governance, increasing transparency and
reducing corruption. Thus, many development practitioners, such as policy makers, and copious global forma-
tions, who are dedicated for stimulating transparency and good governance. This study has incorporated the
view that mobile phones can be used as a tool of social accountability against corruption. Shabbir et al. (2019)
mobile phone penetration as a tool of accountability against corruption and promotes transparency and good
governance among selected Asia-Pacific countries. The consensus regarding fast internet speed plays a vital role
to eliminate the corruption through modern informational and communication technology system. This study
empirically investigates the causal relationship between internet adoption and mobile phone penetration to over-
come the issue of corruption. This study adopted the Granger causality approach to analysis the panel data
(2006–2016) for 12 countries. The results of Granger causality test did not find any evidence for bidirectional
causality from corruption to mobile phone penetration and internet adoption.

Literature review related to Pakistan

Naved Ahmed (1996) examined the association between corruption and government regulations for a cross-sec-
tion of countries on corruption indices by using threshold regressions. He inspected several corruption indices
used in the empirical literature, especially to find out the causes of corruption and analysed that the results are
alike and constant over time. He created C-r and C-c coefficients and identified low and high corrupt economies
through a perception index. He stated that corrupt economies have C-divergence. Hiren Sarkar and M. Aynul
Hasan (2001) identified a modest notion related to macroeconomic efficiency of investment that created its con-
nection with corruption and estimated the association among them. Muhammad, Shabbir, Saleem, Bilal, and
Ulucak (2021) validated the connection between corruption and distribution of income by applying panel data
for 71 developed and developing countries and study discloses that Income inequality is injurious to economic
growth if corruption rises income inequality rises but reduced economic growth and worsen poverty.
 TRANSNATIONAL CORPORATIONS REVIEW 7

Umbreen Javaid (2010) identified the relationship between corruption and returns on resources. The impact
was identified on living standards. Amanat Ali, Faiz-Ur-Rehman & Mohammad Nasir showed the sustainability of
the environment on trade and income.

Theoretical framework
Husted (1999) stated that the economist explores the basics of corruption, which directed thinkers to reflect a
comprehensive design of economic, political, cultural, and psychological factors. The basics of corruption are
numerous and compound because it has various kinds. This study analyzes the role of corruption in trade and
investment empirically. The other variables included are literacy rate, public spending, Gini coefficient, and inter-
national integration, government expenditure, investment, openness index through the Tobit Model of
Censored Regression.
Husted (1999) assumed that there is affiliation amongst the economic growth or economic development with
corruption. The shortageof natural resources of a country (economic) may appear as a vital feature that created
corruption. Alam (1995) & Myint (2000) declared that corruption is that spectacle that presents approximately in
all economies. However, it can arise more quickly in fewer developing countries than in developed countries. In
developed countries, some countervailing subtleties avert the spread-out of corruption: Increment in salaries and
wages, schoolings and suburbanisation, developments in infrastructure skills, the development of print and elec-
tronic media, developments in administrative and accounting expertise, enhancement in urbanisation, compos-
ition of the labour force. However, the variables responsible for corruption are correlated14 and have impacted
on economic development and growth of a country, we will focus only on the relationship between literacy rate,
public spending, Gini coefficient, and international integration, government expenditure, trade, and investment
and corruption.
Scott (1972) contended that when an economy possesses broader equal income distribution, then most of the
population in the country belongs to the middle class that created a lower level of corruption in the country.
You and Khagram (2004) stated that in a state where inequality is higher, then few wealthy people have more
considerable incentive and chances to practice bribery and deception to reserve and improve their position, free-
doms, and concerns. Shen and Williamson (2005) identified that people tolerate their survival, attempt to increase
an illegal income; as a result, corruption would be range in the country.
The issue of inflation causes corruption. Inflation decreases the real wages and also impact purchasing power
negatively. While the purchasing power reduces the necessities that are essential for encountered first. If the
need does not satisfy, then people adopted various illegal ways like deception, corruption, misuse. So, these
socio-economic corrosions increase corruption in a country. Paldam (2002) sated that many people have faith in
that inflation can be produced to moral hazard. Then, it may offer an opening for corruption such as deception,
dishonesty, misappropriation. Misinformation also increases inflation. Braun and Di Tella (2004) stated that uncer-
tainty increases due to high and variability in inflation and also impacted on the agent’s attitude of cost of
accounting. Inflation impact the level of corruption meanderingly.
Additionally, Investment and economic growth can reduce high and variability in inflation. Consequently,
Braun and Di Tella (2004) investigated that the reduction in investment and economic growth results in a higher
level of inflation. Similarly, Paldam (2002) the inequality in the income distribution can be improved by inflation
that also increases corruption. Chafuen and Guzman (2000) identified that restrictions on the production affected
corruption. Economic freedom is also a responsible factor for corruption as well as the unequal distribution of
economic resources. This study used the globalisation index instead of economic freedom. Economic freedom
explains the public sector activities of a country. Corruption is usually associated with the government due to
monopoly powers in institutions. Tanzi (1998) stated that government intervention created productive results and
a less corrupt economy. The smaller number of resources created little opportunities for corruption. Taxes and
government restrictions are responsible for reducing corruption. Khuong et al. (2021) and Ogus (2004) identified
that massive bureaucracies created government intervention (regulations and licenses) and increased the exist-
ence of corruption. It is a universal faith that a bigger economy & economic freedom decreases corruption (Goel
and Nelson, 2005).
8 A. UROOS ET AL.

Economic model & data specification

This study is different from other studies as it used time-series data (1987–2017) for determining economic factors
responsible for corruption in Pakistan. The other studies related to corruption used simple OLS regression and
cross country analysis to find economic determinants. However, in this study, censored regression – Tobit Model
is used to determine significant economic factors that are responsible for corruption in Pakistan. The data of the
dependent variable Corruption Perception Index (CPI) is taken from the International Country Risk Guide (ICGR),
and the data ranges from0 to 10. Simple OLS technique is inconsistent and gives biased results of regression
models if the data has lower ranges. “(Gujarati, 199915, p. 572 )”.
The following model is used to find economic determinants of corruption in Pakistan and its impact on trade
and investment.
CPI ¼ b1 þ b2 GDP þ b3 GE þ b4 GINI þ b5 EDU þ b6 INF þ b7 FDI þ b8 GI þ b9 Openness þ l
However, GDP per capita is used as a proxy for economic development, the variable used by different
researchers previously like Sandholtz and Gray (2003). Secondary school enrolment is used as a proxy of educa-
tion level. KOF Index of Globalisation is used to represent international integration. The same index used by
Sandholtz and Koetzle (2000), Shabbir et al. (2019), and Sandholtz and Gray (2003). It includes economic, social,
and political freedom. The yearly data of the Globalisation Index is also available for time series analysis. Gini
coefficient is used as a proxy of the income distribution, and its data is taken from World Development
Indicator16. The range of the Gini index is between 0 and 100. The perfect economic equality represented by 0
and vice versa. The other variables in the model are the inflation rate. Inflation is an essential factor for corrup-
tion. The consumer price index (CPI) is used as a proxy of inflation. Inflation reduces real income and causes cor-
ruption. The inflation data has been taken from World development Indicator (WDI). Whereas, the export and
import as a percentage of GDP is used as an openness index. FDI inflows are used to represent a foreign invest-
ment in Pakistan and Government expenditure shows public spending. In recently, Saleem et al (2020) used
proxy as imports and exports for trade openness, FDI as proxy of Investment and GDP as proxy of economic
growth for selected south Asian economies.
Explanatory variables of economic model and their expected signs

Table 1 indicates that data on corruption (Corruption Perceived Index) is taken from the International Country
Risk Guide (ICGR). ICGR produced monthly data of 140 developed, emerging, and underdeveloped countries since
1980. The ICGR methodology is used by the IMF (International Monetary Fund) in different calculations and ana-
lysis. ICGR provided the longest data series of country and political risk analysis. The index score range is
between 0 and 10. The countries close to 0 means more corrupt, and the countries close to 10 means all clean.
The key benefits of this index are that it provides data from 1975 and accomplishes the requirements of the
researchers of time series analysis. GDP per capita is used to measure economic growth in a country. GDP per
capita is defined as the ratio of total output and the population of the country. The variable is used in literature
as a proxy of economic growth and development in the country.

Empirical estimation and results

The descriptive analysis designates us a range of variation between maximum and minimum of all policy varia-
bles along with their probability values. The probability value acknowledged us regarding normality of residuals.
The Table 1, shows a detail of all variables along with their values of mean, median, maximum, minimum, stand-
ard deviation and rest of all. However, kurtosis test indicates that patents and GDP variables have short or small
tail, while all other variables have long or higher tail as compared to rest of all variables. Finally, Jarque-Bera test
confirms that values of residual for GDP, FDI and GE variables have normally distributed as compared to rest of
variables in Table 1.

Augmented Dicky Fuller – unit root test

The relationship among time series variables is examined through the cointegration test. It is necessary to check
stationary of variables before applying the cointegration test. The non-stationary variables will produce likely
 TRANSNATIONAL CORPORATIONS REVIEW 9

Table 1. Descripative statistical analysis.

Test GDP GE GI INF FDI GC EDC TRADE
Mean 10.323 0.657 0.351 3.831 3.443 1.634 0.636 3.428
Median 10.349 0.583 0.346 3.742 3.531 1.742 0.518 3.562
Maximum 11.435 1.578 1.2958 5.382 3.636 2.154 1.514 3.642
Minimum 10.543 0.000 2.273 2.729 3.043 0.643 0.000 3.020
Standard Deviation 0.368 0.316 0.751 0.753 0.132 0.367 0.342 0.153
Skewness 0.257 1.321 0.032 0.343 1.625 1.058 1.356 1.646
Kurtosis 1.476 4.831 3.737 1.746 5.632 3.859 4.862 5.690
Jarque-Bera 1.682 10.368 0.852 3.041 24.847 7.246 10.387 24.036
Probability 0.418 0.005 0.638 0.210 0.001 0.023 0.004 0.002

results when applying regression analysis. Hence, it is essential to apply the Unit Root Test first to check station-
ary of variables included in the model.
The unit root test is mostly requisite to check the time series data whether the data have a stationary trend or
not. If data is non-stationary, then the first difference has to be applied to reach stationary data. Granger,
Newbold, and Econom (1974) applied the Augmented Dick Fuller Unit Root test to check stationary of time series
data. The table below shows the results of the Unit Root test applied to the variables used in this study. The unit
root test indicates that the null hypothesis is rejected only when first-order differencing/(I) of all variables
selected at 5,10 or 1 percent level of significance.
The result shows in Table 2 that education level, Gini coefficient, and FDI are stationary at a level while infla-
tion, Globalisation Index, GDP per capita, Government expenditure, Openness index, and Government expendi-
tures are non-stationary at a level; however, they are stationary at first difference. Thus, the null hypothesis is
acknowledged for Inflation, Globalisation Index, GDP per capita, Government expenditure, Trade, and
Government expenditures at the level.

Cointegration analysis- ARDL approach

Generally researcher applied Engle and Granger (1987) test, Johansen cointegration test (1991 & 1995). However,
due to some constraints linked with these econometric techniques, autoregressive distributed lag (ARDL)
approach is considered for cointegration analysis. The ARDL model is most flexible model. It may be applied in
the case of variability in integration. In this study, ARDL is applied due to the combination of stationary I(0) and
non-stationary I(1) variables in the model. The result of ARDL shows that there is cointegration between corrup-
tion (CPI) and GDP per capita (GDP), literacy rate (EDU), government expenditure (GE), Gini coefficient (GINI), glo-
balisation index (GI), inflation (INF), investment (FDI) and openness(trade).
The value of residual of ADF test in this study is greater than critical value and it is stationary at level (I). The
estimation shows that variables are cointegrated used in this study and have long run relationship. It implies that
any deviation in short run would lead to equilibrium in long run. Corruption and other nine variables used in
ARDL model with two lags to determine long run relationship.
The ARDL equation for this study is as below:
X
p X
p X
p X
p X
P X
P X
P
DCPIt ¼ d0 þ et DCPIt1 þ ǿt DGDPt1 þ kt DEDUt1 þ dt DGINIt1 þ at DGIt1 þ bt DGEt1
i¼1 i¼1 i¼1 i¼1 i¼0 i¼0 i¼0

X
P X
P X
P
þ gt DINF t1 þ rt DOpennesst1 þ ut DFDIt1 þ et
i¼0 i¼0 i¼0

In the above model the sign of summation is used to represent error correction terms and shows long run
relationship among variables.
The above Table 3 discusses the result of bounds test shows combines F-statistics. In the first step of ARDL,
estimate all equations by OLS and joint significance test are conducted with lagged variables. Pesaran, Shin, and
Smith (2001) has given critical values with significance level. It is assumed that variables in this study are inte-
grated of order zero I (0) and second estimation is based on the assumption that variables are integrated I
(1).The null hypothesis is rejected that no cointegration between CPI, GDP, GI, GINI, GE, EDU, OPENESS and FDI. In
10 A. UROOS ET AL.

Table 2. Results of unit root test

At level First order difference
Remarks
Variables ADF test stats Order of integration ADF test stats Order of integration
CPI 3.26 – 4.25 /I 
GDP 0.06 – 3.10 /I 
EDC 3.17 – 5.43 /I 
GINI 2.75 – 5.43 /I 
GE 0.79 – 6.42 /I 
INF 1.45 – 3.93 /I 
GI 2.02 – 2.71 /I 
FDI 2.65 – 3.51 /I 
OPENESS 1.22 5.5 /I 
Critical values: Critical values:
1% ¼ 3.67 1% ¼ 3.67
5% ¼ 2.97 5% ¼ 2.97
10% ¼ 2.62 10% ¼ 2.62
Note: 10% level of significance; 5% level of significance; 1% level of significance.

Table 3. Emperical results of bound test.

Dependent variables AIC lags F – statistics
(GDP, EDU, GI, GE, GINI,INF,FDI,OPENNESS) 2 18.71
Significance I(0) Bound I(1) Bound
10% 1.95 3.06
5% 2.22 3.39
2.5% 2.48 3.7
1% 2.79 4.1
‘Lower and upper-bound critical values are taken from Pesaran et al. (2001)’.

this study, 2 lag length criteria and Akaike information criteria17 (AIC) is selected for estimation. The estimated
result is reported in table 7.2. The reported result confirms the existence of long run relationship
among variables.

Censored regression analysis – Tobit model

The study used censored regression model –Tobit Model to estimate economic determinants of Pakistan. The
estimation results reported in below table-6.1. GDP per capita, literacy rate, Gini coefficient, globalisation
index, investment, government expenditure, trade openness and inflation are tested empirically to find signifi-
cant factors of corruption in Pakistan. F-statistics of employed censored regression is statistically significant at
the 5% significance level, the model is significant. We have used extreme value of distribution for error term
when applied Tobit Model. The estimation results show that all the coefficients of explanatory variables have
expected signs. Trade openness, Globalisation Index, inflation, government expenditure and education level is
statistically significant economic determinants of corruption in Pakistan.
The above Table 4 indicates that result shows that Gross Domestic product per capita has negative signs and
found statistically insignificant at 10% level. The estimated result proposed that if 1 point increase in GDP per
capita reduces corruption index by 6.95 points. The other statically significant determinant of corruption in
Pakistan is inflation rate which is positively related to corruption and it suggests that 1 point increase in inflation
rate increases corruption by 0.0029 points. Globalisation index is statistically significant and negatively related to
corruption in Pakistan. 1 point increase in the globalisation index reduces corruption by 0.036 points. Public
spending or government expenditure is negatively related to corruption and it is statistically significant in
Pakistan it suggests that 1 point increase in education level reduces corruption 1.02 points. Openness index is
negatively related to corruption and it is statistically significant in Pakistan it suggests that 1 point increase in
education level reduces corruption 4.71 points. Education level is negatively related to corruption and it is statis-
tically significant in Pakistan it suggests that 1 point increase in education level reduces corruption 0.025 points
in Pakistan. The other dependent variables are Gini coefficient and investment inflows found statistically insignifi-
cant economic determinants of corruption in Pakistan.
 TRANSNATIONAL CORPORATIONS REVIEW 11

Table 4. Empirical results of censored regression (Tobit Model).

Variable Coefficients Z-statistics Prob
GDP 6.95E-05 1.207762 0.2271
GE 1.20E-12 1.667336 0.0954
GI 0.036597 1.656110 0.0977
INF 0.002916 4.597192 0.0000
FDI 0.048355 0.340621 0.7334
GC 0.013102 0.420158 0.6744
EDC 0.025621 1.907721 0.0564
TRADE 4.71E-11 2.973101 0.0029

Recursive residuals and the CUSUM test

Graphical examination of the recursive parameter estimates may be beneficial in evaluating the stability of the
model. It would be useful to have a formal statistical test that we could apply to test the null hypothesis of
model stability. The CUSUM test, which is based on the residuals from the recursive estimates, provides such a
test. We calculated a statistic, called the CUSUM statistic, for each t. Under the null hypothesis, the statistic is
drawn from a distribution, called the CUSUM distribution. If, the calculated CUSUM statistics appear to be too
large to have been drawn from the CUSUM distribution, we reject the null hypothesis (of model stability). The
output is the graph of the CUSUM statistics and bands representative the bounds of the critical region for a test
at the five-percent significance level in graph 1 and 2 below respectively.

Discussion
It has observed that literacy rate, GDP growth and economic integration are found to have a negative effect on
corruption. Whereas, Inflation is found to have a positive effect on corruption in Pakistan. The government size is
also an important determinant of corruption in Pakistan. Government spending as percentage of GDP is taken to
find the corruption and public spending relationship. However, there are different conclusion regarding relation-
ship of public spending and corruption. Fisman and Gatti (2002) found a negative relationship between public
spending and corruption. Enrolment in secondary school is taken as a proxy of literacy rate. It is an influential
factor responsible for corruption in Pakistan. Lack of religious knowledge, laws and legal implications creates an
environment for increasing corrupt behaviour in Pakistan. Ades and Di Tella (1999) used data of education level
in their analysis for finding relationship between literacy rate and corruption. A wide literature review is available
on the relationship between corruption and investment. Tanzi (1998) estimated that corruption is not suitable for
investment and economic growth in the country. Foreign direct investment inflows as percentage of GDP are
used to determine relationship among corruption and investment in Pakistan. The investment creates opportuni-
ties for employment and it is negatively related to corruption. The variable used generally in literature for trade
openness is the ratio of export plus import as percentage of GDP. Ades and Di Tella (1999) estimated relationship
among trade openness and corruption. Export plus import as percentage of GDP is used in this study as a proxy
of trade openness. The higher the openness index18 is the larger the effect of trade on domestic activities.
Globalisation or international integration can be measured through globalisation index. Many economist likes
Sandholtz and koetzle (2000), Sandholtz and Gray (2003) used the summation of exports and imports as share of
GDP to find out the economic integration. This study uses the globalisation index (KOF Index of Globalisation)19,
as it includes economic freedom, social freedom and political freedom with weights of 36%, 38% and 26% corres-
pondingly in the index. Economic globalisation is distributed in to two portions: one is Actual Flows that consists
of export plus import as % of GDP, FDI stocks as % of GDP, FDI flows as % of GDP, and income Payments to for-
eign nationals as % of GDP, and the second is restrictions which comprises. Inflation is defined as the persistence
increase in the general price level of goods and services in a country over a period of time. When the general
price level increases, the purchasing power of consumer reduces. World Bank data is used in this study for infla-
tion rate. GINI Coefficient is used to measure income inequality. This study used World Bank Data based on the
income distribution. Income inequality is calculated through the percentage share of income of the richest indi-
viduals 10 percent of a country’s population. The range of Gini coefficient is from 0 to 100. The minimum value
of Gini coefficient shows more equal distribution and score of 0 represents complete equality, while maximum
value of Gini coefficients show higher inequality of income distribution and 100 score represent whole inequality.
12 A. UROOS ET AL.

The study is helpful for policy makers as it proposed strengthening of education sector, lowering inflation rate,
stabilise economic integration, increase trade liberalisation and concentrate on improving public sector spending
to address the issues created by corruption. Government intervention in said sectors is essential for smooth eco-
nomic growth and development in the country. It is necessary for Pakistan to improve institutional mechanism to
address the issue of corruption. Privatisation and trade liberalisation should be adopted as a policy to increase
competition and for the reduction of rent seeking behaviour in Pakistan. The institution of anti-corruption agen-
cies of Pakistan should play an active role for strengthening of institutions and long term economic growth.

Conclusion
With development goals, as the major agenda of governments in the third World, corruption is seen as a signifi-
cant impediment in the achievements of declared Millennium Development Goals. Corruption is a social issue
however; it is deeply affected economic growth of any country. The research on corruption is limited in the eco-
nomic literature due to unavailability of desired data. Lack of data obviously is a big factor in attempting to
quantify corruption. Most of the work on the issue has been in the domain of political science, sociology, public
administration and criminology. Whatever work that has been undertaken on this issue in economics has been
limited to either uncovering the economic reasons for corruption, or attempting to quantify the magnitude of
what is euphemistically called the ‘black market’. Moreover, Pakistan is facing the issue of slow economic growth,
trade deficit, balance of payment deficit, lack of FDI and income disparities from last couple of decades.
Furthermore, Pakistan needs to focus on quality of education level, control inflation rate favourable economic
integration policies to combat the issue of corruption in the country. However, literacy rate, GDP growth and eco-
nomic integration have a negative effect on corruption and Inflation has a positive effect on corruption
in Pakistan.
This study provides some new characteristics of corruption. The model used in the study found the association
of economic factors like economic growth, inflation, international integration, inflation, public spending, literacy
rate, income distribution, investment and trade openness to corruption in case of Pakistan. The estimated result
shows that education level, inflation, Globalisation Index, openness index, government expenditure, are significant
economic determinants of corruption and GDP per capita, Investment and Gini coefficient are non-significant
determinants of corruption in Pakistan. This study identified the role of corruption in deflating growth and under-
pins the demand for institutional reforms.

Notes
1. See Aidt (2003), Corruption is a persistent feature of human societies over time and space. Corruption is an act in which
the power of public office used for personal gain.
2. Rent seeking: It is the use of the resources of a company, an organization or an individual to obtain economic gain from
others without reciprocating any benefits to society through wealth creation.
3. A public institution is a juristic person in a country which is backed through public funds and controlled by the state.
When public institutions are created, they lead to many other establishments such as new laws.
4. Operational Modeling is a business first approach to help you optimize your use of Open Text.
5. The ECGD is a government department whose statutory powers are set out in the Export and Investment Guarantees Act
1991 (as amended by the Industry and Exports (Financial Support) Act 2009).
6. https://tradingeconomics.com/pakistan/corruption-rank
7. See book of V. Y. Belokrenitsky and V. N. Moscalenko – The Political History of Pakistan 2007
8. See the paper ‘The Political instability of Pakistan’ by Callard (1956).
9. Economic integration is the unification of economic policies between different states through the partial or full abolition
of tariff and non-tariff restrictions on trade taking place among them prior to their integration.
10. Black Market: A black market, underground economy, or shadow economy is a clandestine market or transaction that
has some aspect of illegality or is characterized by some form of noncompliant behavior with an institutional set
of rules.
11. See paper of Stelios Michalopoulos-2007 ‘The Ethno-linguistic diversity’
12. A sort of parallel customs system that made it possible to bring anything into the country without leaving a paper trail –
in exchange for a fat bribe.
13. An economic profit or loss is the difference between the revenue received from the sale of an output and the
opportunity cost of the inputs used. In calculating economic profit, opportunity costs are deducted from
revenues earned.
 TRANSNATIONAL CORPORATIONS REVIEW 13

14. Correlation is a statistical technique that is used to measure and describe the STRENGTH and DIRECTION of the
relationship between two variables. Correlation requires two scores from the SAME individuals.
15. Dr. Gujarati has published extensively in recognized national and international journals, such as the Review of Economics
and Statistics, the Economic Journal, the Journal of Financial and Quantitative Analysis, the Journal of Business, the
American Statistician, and the Journal of Industrial and Labor Relations.
16. The primary World Bank collection of development indicators, compiled from officially-recognized international sources.
It presents the most current and accurate global development data available, and includes national, regional and
global estimates.
17. The Akaike Information Criterion (AIC) is a measure of the relative quality of statistical models for a given set of data.
Given a collection of models for the data, AIC estimates the quality of each model, relative to each of the other models.
Hence, AIC provides a means for model selection.
18. ‘Openness to merchandise trade’ is the value of merchandise trade (exports plus imports) as a percent of gross domestic
product (GDP).GDP per capita is calculated using purchasing power parity (PPP) in constant 2011 dollars.
19. The KOF Globalization Index measures the three main dimensions of globalization: economic, social and political. In
addition to three indices measuring these dimensions, we calculate an overall index of globalization and sub-indices
referring to actual economic flows, economic restrictions, data on information flows, data on personal contact and data
on cultural proximity. Data are available on a yearly basis for 207 countries over the period 1970–2014.

Acknowledgement
The authors are grateful to the anonymous referees and the editorial team of the journal for their extremely useful sugges-
tions to improve the quality of the article. The authors have not received any financial support for the research, authorship
and/or publication of this article.

Disclosure statement
No potential conflict of interest was reported by the author(s).

ORCID
Ghulam Yahya http://orcid.org/0000-0002-0346-026X

Data availability statement

The data is available on request.

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