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Student name: Bùi Thị Thùy Doan Student ID number: 31201029115
Student name: Nguyễn Thị Lan Hương Student ID number: 31201028849
Student name: Trần Diệp Bách Hương Student ID number: 31201029128
Student name: Dương Hoàng Ngọc Trâm Student ID number: 31201028996
Student name: Trần Thị Thu Trang Student ID number: 31201029195
Student name: Trịnh Hoàng Linh Trang Student ID number: 31201028788
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Lecturer or Tutor name: Doan Anh Tuan
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Title: Group Final Report

Length: 39 pages Due date: July 26 Date submitted: July 26
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Group Final Report- Applied Econometrics
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2
Group Project Report - Applied Econometrics
CORRUPTION AND ECONOMIC GROWTH:

A COMPARATIVE STUDY BETWEEN EUROPEAN DEVELOPED AND ASIAN DEVELOPING
COUNTRIES
Prepare by Group 2 - AE5:

Bù i Thị Thù y Doan
Nguyễn Thị Lan Hương
Trầ n Diệp Bá ch Hương
Dương Hoà ng Ngọ c Trâ m
Trầ n Thị Thu Trang
Trịnh Hoà ng Linh Trang
June, 2022
3
TABLE OF CONTENTS
1. Introduction 7
1.1. Factors of the research 7
1.2. Problem statement 7
1.3. Research questions/ purpose of study 8
1.4. Research contribution 8
2. Literature review & Hypothesis Development 10
2.1. Literature review 10
2.2. Hypothesis 11
3. Data & Methodology 12
3.1 Data selection 12
3.1.1. Sample size - Countries 12
3.2 Basic model 14
3.3 The Interaction between Inflation and Corruption 20
4. Empirical Results 22
5. References: 36
4
1. Introduction
1.1. Factors of the research
1.1.1. Corruption
Corruption is a significant impediment to economic growth. Corruption, by definition, is a
covert action that occurs away from the spotlight and is difficult to quantify objectively
(Blackburn, Bose & Haque, 2010). Corruption results from the incentives of public and
private agents to collaborate in the hiding of government information. These incentives are
dependent on aggregate economic activity, which is dependent on the prevalence of
corruption.
1.1.2. Economic development
Economic development refers to programs, policies, and activities that aim to improve a
community's economic well-being and quality of life. What "economic development" means
to individuals will vary depending on where they live. Each community has its unique set of
possibilities, problems, and priorities ("What is Economic Development? - Province of
British Columbia", n.d.).
1.2. Problem statement
Corruption has a negative impact on growth and development, according to overwhelming

evidence (Sami Ben Ali & Saha, 2016). It inhibits foreign direct investment, increases
government spending (Wei, 2016), and pushes government spending away from education,
health, and infrastructure upkeep and toward less efficient (more manipulable) public
initiatives (Blackburna, Boseb & Haquea, 2006). Also, It reduces economic efficiency,
decreases capital development, and, ultimately, slows economic growth. Furthermore,
income disparity worsens (A.Lash, 2004). Moreover, there is considerable evidence that the
link between corruption and growth is bidirectional (Blackburn, Bose & Haque, 2010).
These findings imply that there is more to the link between corruption and development
than has previously been acknowledged. Whatever perspective one takes, the image that
emerges is one of significant variation in the occurrence of corruption between countries.
In contrast, there is research indicating that the corruption–growth nexus contains a
nonlinear connection in the sense that, while income growth may enhance corruption at a
low level of economic development, income growth actually decreases corruption at a
certain level of income (Sahaa & SamiBen Ali, 2017). As a result of the foregoing
5
circumstances, there is a motivation to investigate the problem - effect of economic

development on corruption in developed European countries and developing Asian ones.
1.3. Research questions/ purpose of study

Based on the relationship between economic development and corruption, the link
between the two aspects of economic development and corruption was raised. According
to the articles, corruption has an impact on economic development. The question then
becomes whether corruption has a positive or negative influence on economic
development. This study used wealthy nations in Europe and emerging countries in Asia as
examples from 2010 to 2019. It is questionable if European nations have minimal
corruption because they have built a robust economy, whereas Asian countries have not yet
completed their growth. As a result, corruption is viewed as prevalent and arbitrary across
Asia, or why some Asian nations can achieve high levels of economic development despite
high levels of corruption, while others suffer from economic stagnation (Lee & Oh, 2007).
Furthermore, much study is focused on Latin America, Africa, or a particular country,
rather than a set of countries in Asia, where several countries are developing economically.
Alternatively, the region contains a lot of economically developed nations, such as Europe
(Dutra de Paulo, Carvalho de Andrade Lima & Tigre, 2022). With all of the aforementioned
problems in mind, the purpose of this study is to offer some clarity on how economic
development influences corruption. Specifically, comparing the degree of effect of corruption
on economic development in developed European countries with developing Asian ones.
1.4. Research contribution

This research contributes to the literature in several ways.
First, our paper is related in spirit to recent studies about the role of corruption in
economic growth (Mo, 2001) . However, since the original research has been conducted a
long time ago ( from 2001) we want to develop another to provide a more up-to-date
result. And at the same time, we can clarify the relationship between these two .
Second, since both developed and developing countries are hindered by high levels of
corruption, it is crucial to examine whether curbing corruption better can lead to more
developed economies. Using panel data on 10 countries in Europe and Asia from 2010 to
2019, this research investigates the corruption-economic development nexus, specifically
whether a reduction in corruption leads to developing economies. The impact on
6
developing, and developed countries in the region is then considered. After adjusting for
social, economic, and institutional factors, the focus is not only on discovering linear
impacts, but also on exploring the existence of any non-linear relationships.
Thirdly, different from the original research (Mo, 2001) , which focuses on 54 countries
from Asia, America and Africa areas, this research will deepen into 12 countries from two
different continents - Asia and Europe. Since they come from separated areas, these
countries certainly will have a totally different level of political and economic freedom,
which is expected to produce different outcomes.
Finally, aside from the variable that the original research used, we add more variables
which are The human development index (HDI), Economic Inequality (EIN), Political
instability (PI), and Resource Efficiency (RE), in order to produce a more reliable and
objective result for the research.
The rest of the paper is laid out as follows. The relevant literature on the economic
development–corruption link is discussed in Section 2. The data & methodology is
presented in Section 3.
7
2. Literature review & Hypothesis Development
2.1. Literature review
The link between economic development and corruption is investigated using a variety of
measures such as investment (Cieślik and Goczek, 2018), inflation (Al-Marhubi, 2000),
taxation (Fisman and Svensson, 2007), the efficacy of public allocation (Jain, 2001), and so
on. Moreover, Bilas et al. (2016) found that corruption has a detrimental impact on
economic development, GDP per capita, investment activity, international commerce, and
price stability, as well as changing the composition of government spending. This means
that economic development and corruption have a negative effect on each other.
BLACKBURN et al. (2011) discovered a two-way causal relationship between development
and corruption: bureaucratic wrongdoing impacts and is impacted by economic activity. As
a result of this two-way causation, there are threshold effects as well as numerous
development regimes: a low-development regime, a high-development regime, and an
intermediate-development regime. Podobnik et al. (2008) discuss a negative relationship
between corruption and a country's prosperity. It implies that impoverished nations have
higher levels of corruption.
However, Leff (1964) thinks that corruption can also help economic development by
making possible a higher rate of investment than would otherwise be the case. As Aubrey
has pointed out, however, these difficulties are very much compounded in the economic
and political environment of underdeveloped countries. This author believes that there is a
positive relationship between corruption and economic development that we usually
overlook, while it also depends on certain requirements, which will differ between nations
and industries. Similarly, some findings after running OLS estimation said there is a degree
of corruption that maximizes growth, such that corruption seems to be favorable to
economic growth at low levels of incidence and bad at high levels of incidence (Fiorino et
al., 2012).
In terms of research on specific countries, Bilas et al. (2016) conducted the study by
performing the Phillips-Perron Unit Root Test to find that higher levels of corruption
among European Union countries causes lower economic development. Evidence from
Croatia shows that corruption has such a substantial negative influence on economic
growth in Croatia that it is mainly direct and occurs without considerable time delay
8
(Piplica & ČOvo, 2017). Murphy et al. (2008) conducted research in Russia, the Philippines,
and Africa. The authors determined that corruption had a negative impact on economic
growth. They also contended that corruption might be expensive because a weak central
government allows agencies to impose large levels of bribes on private enterprises. The
research of Lee and Oh (2007) demonstrates why certain Asian nations (studied with
China, India, Hong Kong, and others) were able to attain significant economic development
despite high levels of corruption while others suffered from economic stagnation. In a
cross-section analysis of 69 economies, Lambsdorff (2007) discovers that corruption
considerably reduces average capital productivity and, as a result, GDP.
The investigation of economic development and corruption is not a new issue; yet, the
direct or indirect interplay of these two aspects still lacks some proof owing to reliance on
economic state. It was once mentioned by Ben Ali and Saha (2016) that the growth-
corruption nexus involves a nonlinear connection in the sense that, at a low level of
economic development, a rise in corruption leads to an increase in economic development.
Therefore, based on previous findings, we believe that economic development, especially
GDP per capita tends to have a negative relationship with corruption, which demonstrates
that the larger economic progress is in less corrupt countries. European developed
countries and Asian developing countries are chosen as investigated countries, as these two
regions clearly illustrate differences in economic growth, political systems, and religion,
which may help us identify how each region's corruption problem is influenced.
2.2. Hypothesis
H1: Real GDP per capita, representing economic growth, is negatively correlated with
corruption in both European developed and Asian developing countries.
H2: For Asian developing countries, the effect of corruption on economic development is less
significant than that in European developed countries.
9
3. Data & Methodology

3.1 Data selection
3.1.1. Sample size - Countries
We use in the study the data from two groups of countries that are European Developed
Countries (12 countries) and Asian Developing countries (11 countries). The table below
shows the chosen countries for the study:
European Developed Countries Asian Developing Countries
Spain Malaysia
New Zealand India
Sweden Vietnam
France Saudi Arabia
Italy Thailand
Germany Philippines
Greece China
Finland Indonesia
Czech Republic Israel
Poland Bangladesh
Denmark Mongolia
Luxembourg
Table 1: List of sample countries
The main reason why these countries were chosen as a sample as above is that there is a
distinct difference between these two groups of countries in terms of economy, policy,
ethnicity,.. Therefore, the collected data will be more likely to show obvious trends, making
our final conclusion more precise.
10
3.1.2. Time period

All the data collected are annual for the period of 10 years which ranges from 2010 to
2019. The reason why this period is chosen is that from 2020, the world is affected by the
COVID-19 pandemic, which left a huge impact on both social and economic life of each and
every country in the world. Therefore, the index and data from 2020 can be affected and
the correlation between corruption and economic development may be wrong as the error
is unpredictable.
11
3.2 Basic model
We consider the following baseline model specification:
lRGDpc i ,t =β 0 + β 1 Corruptioni ,t + β 2 Macro controlsi ,t +δEnvironmental degradation+Year Dummies t +Country D
(1)
Where RGDPpc is real GDP per capita which is a measurement of the total economic output
of a country divided by the number of people and adjusted for inflation. Corruption is the
corruption index of country i in time t, which includes two different types of data: Cor1 and
Cor2. Corruption Perceptions Index (Cor2), which is published by Transparency
International, refers to an index that scores countries on the perceived levels of
government corruption by country. About Cor1, it is the International Country Risk Guide
(ICRG) corruption index constructed by Political Risk Services. Since a high level of
corruption is expected to decrease the level of economic development (Lambsdoff. 1999),
therefore, β 1 is expected to be negative. However, this study wants to know whether β 1
whether the European developed countries’ model is different from that of Asia developing
countries or not. Some research for Asia, East Asia for example, found that despite a high
perceived level of corruption, these nations have done well to maintain a respectable GDP
growth rate (Rock and Bonnett, 2004). Therefore, β 1 in Asia developing countries’ model is
expected to be positive.
Macro controls are the vector of macro control variables, including CPI, HDI, GSIZE, EF,
DEMO, EDU, UNEM, ET, EIN, PI, Export, FDI and Inflation. CPI is the Consumer Price Index
that is an indicator measure change over time in the prices paid by consumers for a
representative basket of goods and services, and for this study, to avoid the volatility we
take the log. HDI - The Human Development Index is a measuring system used by the
United Nations to assess each country's degree of individual human development. It is
divided into four major categories: mean years of schooling, anticipated years of schooling,
life expectancy at birth, and gross national income (GNI) per capita. (Rasure, 2022) (Duta,
Kar and Saha, 2017). GSIZE is government size represented by the government’s final
consumption expenditure as a percentage of GDP. The size of a government, in terms of the
number of resources it commands, is directly linked to its capacity to oversee public
officers, sanction wrongdoing, and promote transparency in public affairs. A better-
12
resourced government is also able to offer competitive salaries to public officers, thus
reducing their incentive to embrace corruption. EF is the economic freedom index, which
measures jurisdictions based on factors including trade openness, tax burden, judicial
performance, and other factors. Higher levels of regulation and constraints on business
activities provide opportunities for public officials to capture rents, hence economic
freedom is supposed to diminish corruption. According to Ades and Di Tella (1999), a lack
of market competition favors public officials and promotes corruption. They further
contend that increased international trade competition increases market competitiveness
and reduces domestic producers' monopoly power, shrinking the profits available for
corrupt officials to extract. DEMO is the democracy index, constructed by averaging
political rights and civil liberties indices. Moreover, various studies reported that greater
democracy tends to reduce corruption. EDU is the average years of schooling, defined by
the average number of completed years of education for a country's population. In addition,
a high level of educational background is more able to reduce corruption. It also raises the
public’s awareness of their rights, responsibilities and duties (Ali and Isse, 2003). UNEM -
Unemployment refers to the proportion of the labor force that is unemployed yet available
for and seeking work. On the other hand, as noted in Saha and Gounder (2013), a higher
unemployment rate increases the level of corruption. ET is a measure of ethnic tensions
(ethnic conflict). Ethnic conflict is a type of conflict in which at least one party's aims are
framed in ethnic terms, and the conflict, its causes, and potential solutions are regarded
along ethnic lines; Our group has used fair trial to represent this index. Ađitionally, a more
diverse society may increase the level of corruption. EIN - Economic inequality refers to
discrepancies in income and wealth among various groups in society, group grievance has
been used for EIN data. PI is political instability, which is measured on a scale of 0 to 10
based on the severity of political protest and violence in each country in any given year.
(Xu, T., 2011).
13
Figure 1: Theoretical Model
Environmental degradation is the degradation of the environment caused by the depletion

of resources such as air, water, and soil, as well as the destruction of ecosystems and the
loss of animals (Economic and Social Commission for Western Asia (ESCWA), 2015). In this
study, we use CO2 in the World Development Indicators database to demonstrate this
variable and to be a dummy variable. Finally, Countries Dummies is a collection of dummy
nation variables, while Year Dummies is a collection of dummy time variables.
See Table 2 below for the specific definition of the variables and their source.
14
Table 2: Variables: Descriptions and sources of data
Component Variable Definition Data source
Economic lRGDPpc A measurement of the total economic output of a country divided by the number of World Development
Development people and adjusted for inflation. And it’s in the log. Amadeo (2020) Indicators - World Bank
From the risks posed by government instability, the threat of asset expropriation, The International Country
Cor1 transfer and payment delays, to forms of internal conflict, terrorism, and corruption. Risk Guide (ICRG) of
(Kenton, 2021) Political Risk Services
Corruption Published by Transparency International refers to an index that “scores countries on the
Transparency
perceived levels of government corruption by country.” A minimum of three data sources
Cor2
from 13 distinct corruption surveys and evaluations are used to get each country's score. International
(The PRS Group, 2022)
Macro controls Measures “the overall change in consumer prices over time based on a representative World Development
lCPI
basket of goods and services.” And it is in the log. (Fernando, 2022) Indicators - World Bank
Measuring system used by the United Nations to assess each country's degree of
individual human development. It is divided into four major categories: mean years of The United Nation
HDI
schooling, anticipated years of schooling, life expectancy at birth, and gross national
income (GNI) per capita. (Rasure, 2022) (Duta, Kar and Saha, 2017)
Measured as the proportion of government spending to an economy's total output, with
World Development
GSIZE total output commonly measured in terms of GDP (William D. Berry and David Lowery,
Indicators - World Bank
1984).
Measures jurisdictions based on factors including trade openness, tax burden, judicial
performance, and other factors. These variables can be weighted based on their impact The Heritage Foundation
EF
on economic freedom and combined into a single score that can be used to rank them.
(Will Kenton, 2021)
DEMO The democracy index, constructed by averaging political rights and civil liberties indices. The Freedom House
15
It is grouped into five categories: electoral process and pluralism, civil liberties,
functioning of government, political participation and political culture. (EIU, 2022)
The average number of completed years of education for a country's population is known
as the mean years of schooling. Repeated grades are almost often excluded. The Global Data Lab
EDU
population over the age of 15 or 25 is frequently referred to by this metric. (Max Roser,
2018)
Unemployment refers to the proportion of the labor force that is unemployed yet
UNEM available for and seeking work. This is the unemployment rate in the working age The World Bank
population (percentage of total labor force) ( Doreen Fagan, 2018)
The International Country
Ethnic tensions is a type of conflict in which at least one party's aims are framed in ethnic
Risk Guide (ICRG) from
terms, and the conflict, its causes, and potential solutions are regarded along ethnic lines.
ET Political Risk Services
Typically, the dispute is about political, economic, social, cultural, or geographical issues
rather than racial differences. (Sahaa & SamiBen Ali, 2017).
Economic inequality refers to discrepancies in income and wealth among various groups World Development
Economy
in society ("How is Economic Inequality Defined? | The Equality Trust", 2022). Indicators - World Bank
Political instability is measured on a scale of 0 to 10 based on the severity of political World Development
PI
protest and violence in each country in any given year. (Xu, T., 2011) Indicators - World Bank
Export values are the current value of exports (f.o.b.) converted to U.S. dollars and
expressed as a percentage of the average for the base period (2000). UNCTAD's export
value indexes are reported for most economies. For selected economies for which World Development
Export
UNCTAD does not publish data, the export value indexes are derived from export volume Indicators - World Bank
indexes (line 72) and corresponding unit value indexes of exports (line 74) in the IMF's
International Financial Statistics.
FDI Net inflows of investment to acquire a lasting management interest in an enterprise World Development
operating in an economy other than that of the investor. It is the sum of equity capital, Indicators - World Bank
reinvestment of earnings, other long-term capital, and short-term capital as shown in the
balance of payments. This series shows net inflows (new investment inflows less
disinvestment) in the reporting economy from foreign investors, and is divided by GDP.
16
Inflation as measured by the annual growth rate of the GDP implicit deflator shows the
World Development
Inflation
rate of price change in the economy as a whole. Indicators - World Bank
Carbon dioxide emissions are those stemming from the burning of fossil fuels and the
Environmental World Development
CO2 manufacture of cement. They include carbon dioxide produced during consumption of
degradation Indicators - World Bank
solid, liquid, and gas fuels and gas flaring.
Notes: The overall sample is an unbalanced panel that consists of 23 countries observations, covering the 10-year period from 2010 to 2019.
17
3.3 The Interaction between Inflation and Corruption
As the model above was affected by the changing of the environment, we expand the
equation (1) with the environmental degradation index to test the difference of corruption
on economic growth between low and high-populated countries.
l RGDpc i ,t =β 0 + β 1 Corruptioni ,t + Environmental degradationi , t (δ 1 +δ 2 Corruptioni ,t ) + β 2 Macro controlsi , t +Year

(2)
where subindexes i and t stand for the country and the time, respectively. Equation (1)
defines all variables, and we continue to apply sample constraints based on the country and
year dummies used in the model parameters. Notably, the coefficients δ 2 of the interaction
term Environmental degradationi ,t∗Corruptioni ,t will explain the level of environmental
degradation incorporated with Corruption will encourage or stifle economic development
in the research nations. In this Equation, CO2 is defined as dCO2 - a dummy variable that
takes value one if the emission in metric tons per capita is higher than its median.
We estimate all models given in Equation (1) and (2) by using Ordinary Least Squares
(OLS) regression of Adrien-Marie Legendre (1805). Since we want to see the differences
when applying two different Corruption data, Cor1 and Cor2, we conduct the test to know
whether random effect or fixed effect is the most suitable. As a result, with Cor1, the model
gives accurate solutions when using fixed effects.
18
Table 3: Summaries of variables
Variables Means Standard Median Minimum Maximum

deviations
lRGDpc 9.551 1.276 9.939 6.661 11.725
COR1 3.487 1.276 3 .58 6
COR2 54.561 22.367 49 0 95
Inflation 3.005 5.313 1.74 -16.909 42.301
HDI .821 .108 .874 0.557 .947
lCPI 4.734 .137 4.688 4.605 5.277
DEMO 2.522 1.979 1.5 1 7
EDU 7.999 4.662 7.8 .489 26.094
UNEM 8.189 4.442 7.694 .871 27.466
ET 2.582 2.093 2 .333 6
PI .145 .87 .25 -1.65 1.6
Economy 4.221 1.384 4.3 1.2 7.9
FDI 3.559 8.647 2.011 -37.173 69.606
CO2 6.525 4.247 6.331 .343 21.757

Notes: The overall sample is an unbalanced panel that consists of 23 countries observations,
covering the 10-year period from 2010 to 2019.
Table 3 summarizes data for 9.551 average IRGDpc, however in our study, IRGDpc varied
only little, from 6.661 to 11.725. We may infer that the GDP growth of the ASEAN countries
has increased rather than decreased over time by looking at the mean GDP value as a
positive number. None of the variables have a very high standard deviation, as can be
shown. However, certain variables have a very wide range, such as FDI, which has a range
of -37.173 to 69.606, or inflation from -16.909 to 42.301 . This suggests that, despite the
fact that there isn't a noticeable change between the years, the economic circumstances
between European developed countries and Asia developing countries are rather varied.
One thing to consider is that the difference between the standard deviation and the median
of most variables is not significant except the lRGCpc and COR2.
19
4. Empirical Results
Table 4: Correlation between independent variables (with COR1)
The correlation coefficient matrix of the key regression variables is shown in this table. The sample consists of 23 European developed nations and Asian
underdeveloped countries. The figures are based on yearly data from 2010 to 2019.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
(1) COR1 1.0000
(2) HDI .6891* 1.000
(3) lCPI -.3450 -.5677*** 1.000
(4) DEMO -.5831*** -.5718*** .3168 1.000
(5) EDU .3394 .5010*** -.3370*** -.4449*** 1.000
(6) UNEM .1861 .3842*** -.3916*** -.2362 .0636 1.000
(7) ET .1364* .2519 -.0620 -.1258** .4406*** -.2393*** 1.000
(8) PI .6574*** .6959*** -.2374*** -.5388*** .3910*** .1493*** .3551*** 1.000
(9) Economy -.6351*** -.6631*** .2844*** .2867 -.1383*** .0300*** -.1937 -.5839*** 1.000
(10) FDI .0417 .0149 -.0362* -.0698 .0054 -.2404** .2351*** .1749* -.1240*** 1.000
(11) Inflation -.2071* -.4282*** .1259*** .2299 -.2740*** -.2986*** -.0160 -.1401 .2756*** .1836*** 1.000
(12) CO2 .2807*** -.3183* .5725*** -.0614*** .3519 -.1041*** .5882*** .4538 -.5324** .3258*** -.1892 1.0000
Vif 2.82
n 230
Note: * Significant at level 10%, ** Significant at level 5%, *** Significant at level 1%
20
According to table 4 above, correlation coefficient values are less than +0.8 or greater than -
0.8, which means that variables are not moving in the same direction. Therefore, it is good
news. In particular, The Consumer Price Index, Democracy index, economy and inflation
have a negative impact on corruption. The correlation value of the Consumer Price Index
variable with the corruption variable shows negative signs. According to Transparency’s
most recent data, nations with well-protected civil liberties typically score higher on the
CPI whereas countries that violate civil liberties typically score lower, demonstrating the
importance of defending human rights in the battle against corruption. Not only that,
countries with high democracy index have lower corruption levels. This is demonstrated
that these particular democratic elements affect how different people: executives,
legislators, judges, public servants, and everyday citizens, estimate the costs and benefits of
corruption and thus contribute to determining the extent to which corruption exists in a
given nation (Becker and Stigle 1974; Klitgaard 1988; Van Rijckeghem and Weder 2001).
This is similar to what we predicted that high-mortality countries would be easier to
control inflation than lower ones. The increase in inflation can reduce investments, slow
down economic growth, and encourage corruption (Braun and Di Tella, 2004: 80).
On the other hand, the table shows a positive sign when comparing the values of corruption
with other control variables such as Human development index, the mean years schooling
population, Unemployment, ethnic tensions, Political instability, Foreign direct investment,
and Carbon dioxide emissions. However, the relationship between Human development
index, the mean years schooling with corruption is unknown due to the controversy of
research papers. The correlation value of the corruption variable with the Unemployment
variable shows positive signs. According to the study, corrupt hiring practices by
government officials lead to higher unemployment rates for educated workers and young
people. This leads to more corruption because job seekers frequently offer bribes to
officials in order to obtain employment (Bouzid, 2016). In addition, countries with high
political instability lead to high levels of corruption and vice versa. The institutional
economics literature defines corruption as the use of public authority or resources for
personal gain (Rodriguez, Siegel, Hillman, & Eden, 2006). Corruption can manifest as
extortion, fraud, embezzlement, and bribery (Lambsdorff, 2007). Another study looks at
how changes in Foreign direct investment levels (FDI) affect corruption. Results show that
corruption levels increase with FDI's rate of change. Both the masculinity and uncertainty
avoidance aspects of national culture are linked to higher perceptions of corruption.
21
Furthermore, other findings show that key predictors of carbon dioxide emissions include
corruption, per-capita income, trade openness, and industrial value added.
Finally, the variance inflation factor (VIF) as a rule of thumb a variable may warrant
additional research if its VIF values are larger than 10. Many researchers use tolerance,
defined as 1/VIF, to assess the level of collinearity. And based on table 4 above, VIF is 2.82
(lower than 10), therefore, there is no multicollinearity needing to be corrected.
22
Table 5: Correlation between independent variables (with COR2)
The correlation coefficient matrix of the key regression variables is shown in this table. The sample consists of 23 European developed nations
and Asian underdeveloped countries. The figures are based on yearly data from 2010 to 2019.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
(1) COR2 1.0000
(2) lCPI -.3743*** 1.000
(3) DEMO -.5550*** .3168 1.000
(4) EDU .3572 -.3370*** -.4449*** 1.000
(5) UNEM .2785 -.3916*** -.2362 .0636 1.000
(6) ET .1218 -.0620 -.1258** .4406*** -.2393*** 1.000
(7) PI .6565*** -.2374*** -.5388*** .3910*** .1493*** .3551*** 1.000
(8) FDI -.1400*** -.0362* -.0698 .0054 -.2404** .2351*** .1749* 1.000
(9) Inflation -.3643*** .1259*** .2299 -.2740*** -.2986*** -.0160 -.1401 .1836*** 1.000
(10) CO2 .3039** -.3183*** -.0614*** .3519 -.1041** .5882*** .4538*** .3258*** -.1892*** 1.000
Vif 2.00
n 230
23
Table 5 shows correlation coefficient between COR2 with other control variables (because
some variables have been dropped due to having a multicollinearity with COR2). And the
results are almost the same except for Foreign direct investment (FDI). Unlike the
correlation value of the FDI variable with the corruption variable showing positive signs in
table 4, the correlation coefficient between these two variables shows negative signs.
Furthermore, the variance inflation factor (VIF) is 2.00 which is lower than 10, then there is
no multicollinearity happening with the data.
24
25
Table 6: Economic Development and Corruption
This table reports the differential impact of changes in corruption on economic development,
which is estimated by OLS regressions. Statistics based on annual data for the year 2010 -
2019. Model (1) and (2) report the basic regression results that include main independent
variables and corruption variables for all sample periods. While model (3), (4) show the
results of European countries, model (5) and (6) provide the result of Asian countries. Model
(1), (3) and (5) use fixed effects to estimate the results. The values of the t-statistics are in
parentheses.
Independent Dependent variable: lRGDpc

Variables
Full Developed countries Developing countries
(1) (2) (3) (4) (5) (6)
Intercept 4.5066*** 14.679*** 14.866* 11.2430*** 3.9767*** 13.2368***
(3.81) (10.83) (1.72) (2.24) (5.21) (9.16)
COR1 .0879*** .1270** .0400**
(4.59) (2.72) (1.88)
COR2 .0211*** -.0172*** .0539***
(10.31) (7.21) (7.98)
CO2 .0502*** .1403*** .0723*** .0965*** -.0017 .0822***
(7.07) (13.22) (5.66) (5.08) (-.21) (3.21)
Inflation -.0007 -.0179*** -.0275 .0019 -.0001 -.0072
(-.22) (-2.83) (-.94) (.05) (-.09) (-1.16)
FDI .0051** .0041 .0038 .0093** .0008 .0125**
(2.50) (1.06) (1.01) (2.13) (.46) (2.04)
HDI 8.0526*** 5.8279*** 9.6501***
(18.36) (2.65) (31.01)
lCPI -.3676* -1.5093*** -2.2206 -.5175 -.4658*** -1.1492***
(-1.83) (-5.63) (-1.26) (-.49) (-3.67) (-5.31)
DEMO -.0259** -.0981*** .2800* .1866 -.0031 .0014
(-2.16) (-4.76) (1.66) (.88) (-.31) (.05)
26
EDU .0213*** .0252*** .0155 -.0037 .0481*** -.0483**
(4.62) (3.16) (1.40) (-.31) (7.65) (-2.43)
UNEM .0041 .0256*** -.0063 -.0139 -.0034 -.0045
(.85) (2.85) (-.54) (-1.09) (-.31) (-.12)
ET -.0184* -.0647*** -.0665*** -.0805*** .0293 .1018
(-1.78) (-3.44) (-3.54) (-3.39) (1.41) (1.34)
PI -.1151*** .1098** -.0704 -.1179 -.0889*** .0009
(-3.75) (2.08) (-.64) (-.84) (-3.88) (.01)
Economy -.1301*** -.1454*** -.1359***
(-6.56) (-3.66) (-7.68)
Year fixed YES YES YES YES YES YES

effects
Country fixed YES YES YES YES YES YES

effects
Observation 230 230 120 120 110 110
No. Country 23 23 12 12 11 11
We find that corruption positively affects economic development and that it is statistically
significant in most cases for developing and developed countries. These findings indicate
that countries experience a higher level of GDP under increasing corruption.
As given in Models (1) and (2) for the full sample, the coefficients of corruption 1 and 2 are
0.0879 and 0.0211, respectively. This result shows that approximately 5.45% of GDP
increase in those countries will be explained by one-unit standard increase in the
corruption index on average. Similar results are reported in Models (5) and (6), indicating
that higher corruption tends to enhance country growth in Asia’s developing countries. In
the case of models (3) and (4), the corruption index from two different organizations show
contrasting results. While the corruption index constructed by Political Risk Services
showed a positive relationship between corruption and GDP growth, the one created by
Transparency International showed the opposite direction. However, on average, firms in
developed economies experiencing a one-unit increase in Corruption could increase their
GDP by 5.5%, higher than in developing countries (4.6%).
27
These results contradict with the results from Mo (2001). Instead of consolidating the view
that corruption has an inverse relationship with GDP, it demonstrated the opposite.
According to some researchers, this result is due to the theory that corruption increases
government agency administrative effectiveness and lowers transaction costs, which
ultimately has a beneficial impact on economic growth (Huang, 2016). Leff (1964), Bayley
(1966), and Huntington (1968) suggest that in certain situations, people or businesses may
bribe policymakers to reverse unfavorable outcomes brought on by current laws and
regulations and other political inflexibilities, which ultimately serves to promote economic
efficiency. In fact, political bribery has sped up the length of political procedures, according
to Lui (1985)'s study. Similar to Klitgaard (1988), Acemoglu and Verdier (1998) also used
the theoretical model to demonstrate that there is an ideal amount of corruption when a
country strives to maximize national output. According to the findings, even though the
ideal level of corruption may be minimal, it still persists because anti-corruption initiatives
incur costs of their own.
Overall, the results from Table 6 belied our first hypothesis: decreasing corruption
positively affects economic development.
Table 6 also shows our baseline results with the different effects of Carbon emission on
GDP growth. The coefficients on CO2 show that both developing countries and developed
countries with a high level of Carbon dioxide emissions tend to have high GDP. As given in
Model 3 and 4, on average, approximately 8.1% of GDP increase in developed countries of
European will be explained by one-unit standard increase in the corruption index. Similar
to model 5 and 6, the CO2 also showed a positive effect on GDP. These results are consistent
with previous findings that there is a two-way causal relationship; as economic growth
rises or falls, more CO2 emissions are stimulated at higher or lower levels, and as a result,
any reduction in emissions should have a negative impact on economic growth (Mardani,
Streimikiene, Cavallaro, Loganathan, & Khoshnoudi, 2019)
Table 6 also shows the estimated impacts of control variables. The estimated coefficients of
Inflation are slightly negative in the both European and Asian subsample, which implies
that higher level of inflation led to the reduction of the economic growth rate. This result is
in line with Barro (1995). In contrast, overall, the FDI index shows a positive effect on GDP,
where increasing the value of Consumer Price Index will lead to reducing GDP. Similarly,
28
the growth of HDI has a notably positive effect on GDP, in line with previous findings from
Elistia and Syahzuni (2018).
Regarding country-level characteristics, countries in our sample that in low levels of

education years, high levels of unemployment rate and high level of ethnic tensions tend to
be lower in GDP than other countries. This is demonstrated by the coefficients of average
number of completed years, unemployment rate and ethnic tensions and most cases are
statistically significant, consistent with numerous other studies. However, due to the mixed
results as well as the growth of GDP (GDP Growth), these linkages are not supported in the
scope of this study.
29
The Interaction between Inflation and Corruption
We are now curious if the link between corruption and economic development will change as
environmental degradation worsens. Table 7 accounts for the interaction terms between
Corruption and a dummy variable for Environmental degradation (dCO2). This table summarizes
the interaction between Corruption and Economic Growth on the differential influence of
Environment on the relationship between Corruption and Economic Growth, as calculated by OLS.
Models 1 through 6 provide the fundamental regression results for each subsample (e.g., full,
developing, developed countries).
When adding interaction variables into the models, the results still show the positive relationship
between corruption and economic development. The coefficients of interaction dCO2_COR1 are
negative and significant in both full and developed countries, indicating that the negative effect of
increasing the Corruption is significantly stronger for countries with higher levels of CO2 emission.
Therefore, compared with a low CO2 level, a one-unit increase in Corruption is associated with
about 35.1% lower economic development, and 10.76% lower for developed countries with a high
CO2 level. This finding is similar to the study of Ridzuan et al. (2019), implying that corruption can
amplify pollution emissions, indicating a less transparent industry and economic growth. However,
for Asian developing countries, the coefficient of the interaction dCO2_COR2 is positive and
significant, suggesting that each additional one point of CO2 emission increases the influence of
Corruption on Economic Growth. For this result, it was found that the correlation between CO2 and
corruption in developing countries is not ‘tangible’ enough (Akhbari & Nejati, 2019).
Similarly, model (2) has the same interaction variable’s coefficient results, which are negative and
significant at 1% even if we use another different database of Corruption. While the trend of
interaction coefficient in model (4) is similar to model (2), it is insignificant as the t-value is -0.02. It
is interesting that the Asian developing countries experience a positive influence between
Corruption and Economic Development when the level of CO2 emission rises since the coefficient of
dCO2_COR2 is positive and significant, consistent with Huang (2016). The author found that the
impact of corruption on economic growth is strongly positive, indicating that corruption generated
an increase in economic growth throughout Asian countries. Therefore, the difference of the impact
of corruption on economic growth between countries having high and low levels of CO2 is 3.74%.
In general, corruption in high CO2 countries facing 1% decrease in economic development would be
0.35 significant. The possible reason is public financing for environmental projects may be eroded
as a result of theft and bribery, leaving fewer checks on carbon dioxide emissions. Moreover,
depending on the economic strength of each country, the results are different as poorer countries
experience the direct relationship between CO2 emissions and Corruption (The Complex
30
Relationship between Carbon Emissions and Government, 2018) leading to the additional change in
environmental degradation in developing countries increasing the effect of corruption on economic
growth. As evidence, the coefficients of dCO2_COR2 in model (4) and (6) have a different trend as
the data also ties to the economic strength of the sample.
Table 7: The interaction between Corruption and Environmental degradation
This table reports the differential impact of changes in corruption on economic development,
which is estimated by OLS regressions. Statistics based on annual data for the year 2010 -
2019. Model (1) and (2) report the basic regression results that include main independent
variables and corruption variables for all sample periods. While model (3), (4) show the
results of European countries, model (5) and (6) provide the result of Asian countries. Model
(1), (3) and (5) use fixed effects to estimate the results. The values of the t-statistics are in
parentheses.
Independent Dependent variable: lRGDpc

Variables
Full Developed countries Developing countries
(1) (2) (3) (4) (5) (6)
Intercept 4.5869*** 17.447*** -16.345* 13.321*** 4.0529*** 12.9902***

(3.95) (10.63) (-1.60) (2.30) (6.02) (8.89)
COR1 .1122*** .1957*** -.0058
(5.05) (4.38) (-.28)
COR2 .0360*** .0118*** .0488***
(10.83) (2.72) (5.91)
dCO2 .0612*** 1.5239*** .1076*** -.2266 -.0055 -1.4113***
(7.79) (6.91) (7.82) (-.66) (-.79) (-3.13)
dCO2_COR1 -.0351*** - .1052*** .0676***
(-3.03) (-4.74) (5.13)
dCO2_COR2 -.0211*** -.00008 .0374***
(-5.92) (-.02) (3.51)
HDI 8.0480*** 9.7500*** 9.2801***
(18.71) (4.52) (32.72)
lCPI -.3973** -2.159*** 3.5761* -0.7239 -.4157*** -1.5905***
(-2.02) (-6.71) (1.78) (-.59) (-3.70) (-5.28)
Inflation -.0019 -.0247*** -.0311 .0233 .0009 -.0108*
(-.54) (-3.17) (-1.17) (.56) (.51) (-1.72)
FDI .0039** .0185*** -.00009 .0210*** .0004 .0129**
(1.93) (4.08) (-.03) (4.89) (.30) (2.09)
DEMO -.0304** -.0336 .2735* .0828 -.00006 .0551**
(-2.56) (-1.40) (1.79) (.35) (-.01) (2.21)
EDU .0151*** .0263** -.0055 -.0205 .0430*** -.0419**
(3.05) (2.56) (-.05) (-1.44) (7.65) (-2.08)
UNEM .0029 .0070 -.0026 -.0228* -.0079 .0515*
(.62) (.74) (-.25) (-1.56) (-.82) (1.65)
31
ET -.0128 .0170 -.0270 .0008 .0224 .2593***

(-1.25) (.74) (-1.42) (.03) (1.22) (5.07)
PI -.1067*** .2120*** -.0428 .1508 -.1004*** .0802
(-3.54) (3.35) (-.43) (.94) (-4.95) (1.01)
Economy -.1213*** -.0383 -.1234***
(-6.17) (-.90) (-7.82)
Year fixed effects YES YES YES YES YES YES
Country fixed YES YES YES YES YES YES
effects
Observation 230 230 120 120 110 110
No. Country 23 23 12 12 11 11
32
5. Conclusion
Economic development is positively impacted by corruption, particularly in industrialized

nations. According to some research, countries with rising levels of corruption have higher
GDPs. This outcome is attributable to the assumption that corruption boosts administrative
efficiency and lowers transaction costs in government organizations, which ultimately has a
positive economic impact.
In developed nations with increasing levels of corruption, the rise in environmental

degradation as measured by CO2 emissions appears to inhibit economic development, in
contrast to developing nations. Given that the correlation between corruption and
economic development in developing Asian nations is positive and considerable as CO2
emissions increase, it is interesting to note. For developed countries, the connection
between corruption and the environment and how it affects economic growth is indirect
because the impact isn't great. Therefore, in order to provide a deeper understanding,
further research needs to be done.
Limitation: Even though we apply 2 different corruption variables, the results are similar
showing the same trend and relationships in the models. For Cor2, because there is a lack
of data for developed countries , the results in our research can not be provided in the
most accurate way. Therefore, for further research, we need to collect more data and also
consider carefully about adding additional independent variables.
33
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GROUP ASSIGNMENT COVER SHEET

Student name: Bùi Thị Thùy Doan Student ID number: 31201029115

Student name: Nguyễn Thị Lan Hương Student ID number: 31201028849

Student name: Trần Diệp Bách Hương Student ID number: 31201029128

Student name: Dương Hoàng Ngọc Trâm Student ID number: 31201028996

Student name: Trần Thị Thu Trang Student ID number: 31201029195

Student name: Trịnh Hoàng Linh Trang Student ID number: 31201028788

UNIT AND TUTORIAL DETAILS

Unit name: Applied Econometrics Unit number:

Title: Group Final Report

Student’s signature: Doan

Group Project Report - Applied Econometrics

CORRUPTION AND ECONOMIC GROWTH:

Prepare by Group 2 - AE5:

1.1. Factors of the research

1.2. Problem statement

Corruption has a negative impact on growth and development, according to overwhelming

circumstances, there is a motivation to investigate the problem - effect of economic

1.3. Research questions/ purpose of study

1.4. Research contribution

2. Literature review & Hypothesis Development

2.1. Literature review

3. Data & Methodology

European Developed Countries Asian Developing Countries

New Zealand India

France Saudi Arabia

Czech Republic Israel

Table 1: List of sample countries

3.1.2. Time period

3.2 Basic model

We consider the following baseline model specification:

lRGDpc i ,t =β 0 + β 1 Corruptioni ,t + β 2 Macro controlsi ,t +δEnvironmental degradation+Year Dummies t +Country D

Figure 1: Theoretical Model

Environmental degradation is the degradation of the environment caused by the depletion

Table 2: Variables: Descriptions and sources of data

Component Variable Definition Data source

3.3 The Interaction between Inflation and Corruption

l RGDpc i ,t =β 0 + β 1 Corruptioni ,t + Environmental degradationi , t (δ 1 +δ 2 Corruptioni ,t ) + β 2 Macro controlsi , t +Year

Table 3: Summaries of variables

Variables Means Standard Median Minimum Maximum

lRGDpc 9.551 1.276 9.939 6.661 11.725

COR1 3.487 1.276 3 .58 6

COR2 54.561 22.367 49 0 95

Inflation 3.005 5.313 1.74 -16.909 42.301

HDI .821 .108 .874 0.557 .947

lCPI 4.734 .137 4.688 4.605 5.277

DEMO 2.522 1.979 1.5 1 7

EDU 7.999 4.662 7.8 .489 26.094

UNEM 8.189 4.442 7.694 .871 27.466

ET 2.582 2.093 2 .333 6

PI .145 .87 .25 -1.65 1.6

Economy 4.221 1.384 4.3 1.2 7.9

FDI 3.559 8.647 2.011 -37.173 69.606

CO2 6.525 4.247 6.331 .343 21.757

(1) COR1 1.0000

(2) HDI .6891* 1.000

(3) lCPI -.3450 -.5677*** 1.000

(4) DEMO -.5831*** -.5718*** .3168 1.000

(5) EDU .3394 .5010*** -.3370*** -.4449*** 1.000

(6) UNEM .1861 .3842*** -.3916*** -.2362 .0636 1.000

(7) ET .1364* .2519 -.0620 -.1258** .4406*** -.2393*** 1.000

(8) PI .6574*** .6959*** -.2374*** -.5388*** .3910*** .1493*** .3551*** 1.000

(4) DEMO -.5831* -.5718* .3168 1.000

(5) EDU .3394 .5010* -.3370* -.4449*** 1.000

(6) UNEM .1861 .3842* -.3916* -.2362 .0636 1.000

(7) ET .1364* .2519 -.0620 -.1258 .4406* -.2393*** 1.000

(8) PI .6574* .6959* -.2374* -.5388* .3910* .1493* .3551*** 1.000

(4) EDU .3572 -.3370* -.4449* 1.000

(6) ET .1218 -.0620 -.1258 .4406* -.2393*** 1.000

(7) PI .6565* -.2374* -.5388* .3910* .1493* .3551* 1.000

Intercept 4.5066* 14.679* 14.866* 11.2430* 3.9767* 13.2368***

COR1 .0879* .1270 .0400**

COR2 .0211* -.0172* .0539***

CO2 .0502* .1403* .0723* .0965* -.0017 .0822***

FDI .0051 .0041 .0038 .0093 .0008 .0125**

HDI 8.0526* 5.8279* 9.6501***

lCPI -.3676* -1.5093* -2.2206 -.5175 -.4658* -1.1492***

DEMO -.0259 -.0981* .2800* .1866 -.0031 .0014

EDU .0213* .0252* .0155 -.0037 .0481* -.0483

ET -.0184* -.0647* -.0665* -.0805*** .0293 .1018

PI -.1151* .1098 -.0704 -.1179 -.0889*** .0009

Economy -.1301* -.1454* -.1359***

Intercept 4.5869* 17.447* -16.345* 13.321* 4.0529* 12.9902***