Corruption in Emerging Markets: A Multidimensional Study

Author(s): Turhan Kaymak and Eralp Bektas

Source: Social Indicators Research , December 2015, Vol. 124, No. 3 (December 2015), pp.
785-805
Published by: Springer

Stable URL: https://www.jstor.org/stable/24721670

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Soc Indic Res (2015) 124:785-805
DOI 10.1007/s 11205-014-0814-4 INJ CrossMark

Corruption in Emerging Markets: A Multi

Study

Turhan Kaymak * Eralp Bektas

Accepted: 3 November 2014/Published online: 15 November 2014

Springer Science+Business Media Dordrecht 2014

Abstract The role played by emerging markets in the global economy is well docu
mented. However, these markets' rapid economic development has not always been fol
lowed by commensurate advancements in their legal, political, and social institutions,
which can lead to higher levels of corruption. Essentially, emerging markets may not
possess the necessary governance mechanisms to deal adequately with this problem. As
such, this paper uses a number of established indices to measure the relationship between
corruption and a myriad of economic, financial, social, and political dimensions. A number
of hypotheses linking corruption in emerging markets to these dimensions are developed
and subsequently tested. We find that market growth rate, market intensity, market
receptivity, commercial infrastructure, reduced country risk, and economic freedom are
associated with lower levels of corruption in emerging markets. Our study adds to the
expanding literature on corruption by including variables that have not been tested before,
and by focusing on how graft influences emerging markets. We conclude with a discussion
of policy implications that are related to our findings.

Keywords Corruption ■ Governance • Emerging markets • Institutions

1 Introduction

The pervasive presence of corruption has been a bane on civilization throughout history
(Bardhan 1997) and is of key concern for policy-makers, development specialists, and

T. Kaymak (O)
Department of Business, Faculty of Business and Economics, Eastern Mediterranean University,
Via Mersin 10, Famagusta, North Cyprus, Turkey
e-mail: turhan.kaymak@emu.edu.tr

E. Bektas
Department of Banking and Finance, Faculty of Business and Economics, Eastern Mediterranean
University, Via Mersin 10, Famagusta, North Cyprus, Turkey

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 786 T. Kaymak, E. Bektas

firms alike. Indeed, the outg

reigns of power to his success
state emanating from deep-
nomic growth, prosperity,
economic, political, and social
levels in emerging markets. C
as the abuse of power by a
Hence, from a theoretical p
as it is essentially an unreco
agency theory to analyze co
acting in a manner not in th
The principal, however, is n
private gain due to high mon
public procurement, embezzle
the civil service, among oth
development (Lederman et
tionable law enforcement, p
effect on social morality. L
have uncovered that in diffe
subjective well-being due to
frustration. Similarly, in a c
governance practices can enh

2 How Do We Measure Co

Indeed, the causes of corrup

Some scholars concentrate o
itsrelationship with on anti-
and Ma 2009). Other researc
hence its insidious effects p
tions. Thus, individual behav
becomes the social norm (B
mining prescribed legal struc
Likewise, there are two stran
positive stance, stating that t
developing countries can on
wheels' of institutional dec
excessive regulation has led
acts(Huntington 1968). This v
principals) to correct the m
economic efficiency will be
sectors of Chile and Brazil, L
corruption can be economic
investments if bribers do not
than a corrupt and incompe
expropriation by the governm
Leff s (1964) work has subs
Lui (1985, 1986), and Becker

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A Multidimensional Study 787

model where corruption leads to mo

and Maher (1986) show that an ill-i
before granting a license, rank the b
efficient firms provide more genero
However, Aidt (2009) conducted
hypothesis that is said to exist bet
little support. To investigate this hy
micro-level and macro-level. Micro
veys of companies and managers w
in corrupt practices will do their b
developed in these firm-level stud
dealing with bureaucrats (Kaufman
start a new business (De Soto 1990
on bribery emerged to effectively
Republic of Georgia when it was tr
free market system is one of the fe
hypothesis. These micro-level stud
mostly point to the "sands in the w
The "sands in the wheel" hypothe
Buchanan and Tullock 1962; Rose-
approach, weak economic, legal, an
corrupt public officials to engage i
ciencies through the misallocation
tive, North's (1991) seminal work
excessive bureaucracy, Overregulatio
Indeed, at the macro level the rel
opment has been extensively studied
of corruption. Using North's (199
studies (1995, 1998) found support f
tional factors such as political stab
judicial system were found to be n
growth rates. Similarly, rent seekin
human capital, thus diverting res
Verdier 1998). A lack of legal assura
will also deter private investment
2008). Aidt (2009) also provides ev
sustainable development, and even p
capita, as a more robust measure t
Indeed, a metaanalysis of 114 studi
corruption has a negative relations
income countries, indicating that c
world.

As such, studies on the effects of

main channels. The first channel is t
will influence the cost and level of i
uncertain environment private inve
public investment as projects may b
of projects promising higher econom
resource allocation, leading to sub-o

'S Springer

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 788 T. Kaymak, E. Bektas

public sector indebtedness and

in human capital—individuals
as rewards are not distributed
lead to reduced economic gro
economic growth is by stunti
and dysfunctional public sec
effectiveness and accountabili
private investment and the bu
the economy (Ugur and Dasg
As corruption by its very n
measuring its presence has b
perceptions of corruption as a
this construct. As such, the
addressing perceptions of co
International Country Risk
ruption index found in its "
based approaches have been c
high level of economic perfo
diminishing and vice versa. Ho
(Jong-sung and Khagram 200
the impressions of local pop
nation's level of corruption.

3 Corruption in Emerging M

Ever since the catchy acron

Russia, India, and China was
important role that these mar
of discussion in investment a
shown varying degrees of eco
rise has signaled a secular shi
"East" and the "South". But o
as "emerging"?
When reviewing definitions
(2004) a number of common
by high growth prospects but
and subsequently face substa
social, and demographic fro
economic policies has not be
opment, leading to weak ove
ronment where corruption can
The Economist weekly newsp
of 26 emerging markets over
included in a "Market Poten
Database of Global Business S
attractiveness of these mark
and demographic variables th
markets. Interestingly, this g

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A Multidimensional Study 789

its rival Hong Kong, the latter ha

Beijing after it reverted from Brit
analyze these leading 26 emerging
market potential and corruption.
research has focused singularly o
made by Ugur and Dasgupta (2011)
when conducting their research. T
political, and social dimensions th
review the MPI's 8 dimensions tha
for a country's market potential s
the wheel" approach, as recent stud
emanating from the misallocation
officials.
The market size dimension is me
level of electricity consumption.
association between urbanization an
more accountability and transpare
reveal the degree of urbanization t
that a geographically dense populat
expose wrong-doings. Similarly, Ak
separate measures of corruption an
(2003) failed to find a relationship
both rural and urban populations)
oping countries as the economy
(Wolde-Rufael 2006). As such, mo
corruption and size of the market.

Hypothesis 1 There is a negative

emerging markets.

The market growth rate measure

primary energy use and the real GD
association between GDP growth
Dasgupta 2011) Energy use is com
market expands and the economy
mechanisms are established, furt
expect economic growth to mitigat

Hypothesis 2 There is a negative re

rate in emerging markets.

The market intensity dimension

using purchasing power parity alo
GNI is a similar measure to GDP a
consumption is typically on the oth
investment has been shown to be p
sub-optimal investment goals (Ta
may lead to investments that are n
their study of the relationship betw
private investment to be a signifi
countries. Indeed, when corruption

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790 T. Kaymak, E. Bektas

most productive areas as ren

(2008) find significant eviden
ment in highly corrupt coun
that government corruption
tax revenues go up, indicatin
Hence, we also expect that r
reduce corruptive acts.

Hypothesis 3 There is a negati

emerging markets.

The market consumption cap

class consumption in the eco
distribution and the Gini co
income inequality is related t
posited that a vibrant middle-
wrong-doings in society (Hu
will reduce graft in society as
actions of public officials as

Hypothesis 4 There is a ne
sumption capacity in emergin

The commercial infrastruct

telephone lines, mobile phon
density, internet users, numb
sion, all adjusted
of to the size
information in society and u
information should lead to h
2005). However, Goel and Nel
number of internet users and
information flow to enhance

Hypothesis 5 There is a ne
infrastructure in emerging m

The economic freedom dim

Economic Freedom Index and
Heritage Foundation and Fre
been developed by measurin
ernment, regulatory freedom,
has a free spending governm
defined property rights will d
On the other hand, the politic
liberties and political rights
index's scores commonly u
accountability, and thus stif
Azfar 2003; Svensson 2005; A
benefits of economic and polit

Hypothesis 6 There is a negat

inemerging markets.

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 A Multidimensional Study 791

The market receptivity dimension is

ness, as it refers to the per capita im
Trade intensity is believed to lower
reduces rents garnered by domestic
ernment employees (Knack and Azfa
to be less open to imports as they reg
(2007) review of the corruption lite
reduces corruption, a result attribute
producers and the subsequent shrinka
Therefore, we maintain that a coun
competition in the economy and thus

Hypothesis 7 There is a negative rela

in emerging markets.

The country risk dimension is a m

money and includes mostly fiscal is
money assigns weighting to the six
structural assessment, debt indicato
markets. This covers a wide spectr
financing problems this usually is an
levels of corruption. In an analysis
(working paper) have uncovered a r
ruption of public officials. Similarl
Lafountain (2006) find a relationship
with corrupt public officials end up
that a country with a weak fiscal con

iypothesis 8 There is a positive rel

merging markets.

4 Methods

In the methods section we present the data, and subsequently discuss the mod
analytical tools utilized to test the hypotheses.

4.1 Data

The dependent variable is measured using the "control of corruption" indicator foun
the WGI. This indicator is comprised by surveying the impressions of local populati
businesspeople, non-governmental organizations, and public-sector organizations on t
level of corruption in numerous countries. The data collected from these various groups
been rescaled and ranges from —2.5 to 2.5, with a higher score representing a lower lev
of corruption and a higher score indicating a greater degree of corruption. Data on
countries classified by the Economist weekly newspaper as emerging markets and su
quently incorporated into the MPI are analyzed for the period 1999-2011. A list of
countries included in the study and the average score on the corruption and MPI variab
can be found in the Table 1.

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 792 T. Kaymak, E. Bektas

p p —« p p p © p © p p p —_ p cm p p p p p p ©
O ^ m13.00 w o\ a *o o -' <*i ^ t o* "o n o 10 n^ a d 12.00
34.09 63.36 49.18 29.78 66.73 30.56 87.00 61.36 23.09 41.18 64.64 69.55 49.18 55.55 32.22 30.45 55.73 32.00 95.45 47.45 29.45 —
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34.50 — 12.92 92.08 20.33

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~~ 214.r383 169.25 294.(N92 156.00

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— NOpppOvpOcMpppp
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2.08 3.56 4.33 cm 3.00 2.00 m
5.33 5.58 4.33 7.67 3.75 7.58
I s ■" a23.67 " 8100.00 n "
m cm
12.42 47.33 11.17 12.67 34.00
Market size

Cl. •** NO — r
NO
8
ON oo r-» no r <N m NO CM ON r r ■^t
3 8 rf <N en rt r in 00 Tf On tT (N <N in On p CM O <n

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o o o 0.96
o 0.42
o o 0.26
o o o 0.40
o O d
2.24 o o — 0.37
o

Corruption Q-0.41 I -0.49 111

-0.28 -0.46 -0.81 II
-0.43 -0.29
III -0.27 -0.57 -0.94 -0.24 -0.16 -1.01

_g 0<JZJuj>-OZ^n^^2><Cy'fcjjcoci,u-^<c^Z
S <coouuuuJxxB
Abbreviations <
osa:xxoN0^2§ig^Swxo3o<g3:pw = IDNi22ScLCL.&DSMN^t-H>
ARG BRA CHL CHN COL CZE EGY HKG HUN IND ISR MYS MEX PER PHL POL RUS SGP ZAF KOR THA TUR VEN

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Table1Averag ofselctdin catorsbycountry,19 -201 CountryU

8?2 2U 2
<CQUUUUUlXrC
Argentina Brazil Chile
CQ China
2 o S oooj-g-o
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U Colombia Czech Republic Egypt Hong Kong HungarydJ222a«Q»a*c£c/5c/52 « « g 2 o | .£ o
Indonesia India Israel Malaysia Mexico Peru Philippines Poland Russia Singapore South Africa South Korea Thailand Turkey Venezuela

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 A Multidimensional Study 793

As discussed earlier, the MPI datab

composed of economic, social, dem
markets. These indicators are also
Cavusgil (1997) provides a complet
eight dimensions employed to me
covering the years 1999-2011 to te
In addition to the variables that m
monly employed in the corruption
ernment effectiveness and rule of l
per capita gross domestic product
effects of cultural and geographical
as Latin, Old Communist, Asia and
variables.

As it is defined by the WGI web page http://info.worldbank.org/governance/wgi/index.

asp#doc) "Government effectiveness captures perceptions of the quality of public services,
the quality of the civil service and the degree of its independence from political pressures,
the quality of policy formulation and implementation, and the credibility of the govern
ment's commitment to such policies". Therefore countries with high score of government
effectiveness are expected to have lower corruption. Meon and Sekkat (2005) asserted that
inefficient government lowers investment and causes higher corruption. Regarding the
efficiency and effectiveness of government services Shim and Eom (2008) find that
e-government reduce corruption by promoting good governance and strengthening
reformist behavior of actors. For the size of government intervention, Goel and Nelson
(2010) find the higher size leads higher corruption. However, they also stated that cor
ruption is lower in countries with larger governments.
Another dataset that is also acquired from the above source of the WGI concerns the
rule of law. A strong legal system is expected to reduce corruption in the countries, since it
discourages corruption behavior by improving the confidence and enforcement of the laws
and regulations (refer to the http://info.worldbank.Org/governance/wgi/index.asp#doc for
exact definition). Treisman (2000) and Goel and Nelson (2010) find that countries with
English common law benefit from lower corruption. In the more regulated US environment
Johnson et al. (2014) showed that harmful effect of corruption is lower. Herzfeld and
Weiss (2003) also find a negative relationship between rule of law and corruption.
As stated previously, the majority of corruption studies have used GDP per capita
(GDPPC) as explanatory variable in their studies to analyze the income effect. The main
assumption here is that, as GDPPC increases the need and desire to engage in corrupt
behavior will be reduced. However, we should also state that a higher GDPPC is the
outcome of a growing economy and in such conditions rent seeking behavior can
encourage corrupt behavior. Murphy et al. (1993) find that corruption affects economic
growth by allocating resources inefficiently. Mauro (1995) asserted that corruption affects
economic growth through lowering investments. According to Shleifer and Vishny (1993)
corruption lowers economic growth by allowing for secrecy, weak regulation and bribery.
Montinola and Jackman (2002), and Goel and Nelson (2010) find higher GDPPC lowers
corruption levels. However, Paldam and Svendsen (2001) found that low corruption
countries may have higher corruption during the transition period. We use the World
Development Indicators gross domestic product per capita as in current US dollars to
measure this variable.

Cultural and geographical factors are also included in many corruption studies as
control variables. These control variables are expected to have significant effect on

Springe

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 794 T. Kaymak, E. Bektas

corruption since they also ma

national governance and institu
La Porta et al. 1999, 2000). In t
used in the study into five geo
Latin America, Middle East, As
for Africa, while they are cons
the Latin American countries
(2001) find negative and signi
transition period, also face hig
America and Old Communist c
negative and significant influe
Africa, Paldam and Svendsen(2
to this result Montinola and J
ficient for Africa.

4.2 The Model

To test the significance and the effects of our hypothesized variables on corruption in
empirical model we employ four regression models. The first model is our baseline mo
and it is utilized to analyze and understand the possible effects of the MPI of Cavu
(1997) and Cavusgil et al. (2004) on corruption. In this model we regress all MPI vari
on corruption. In the second model, we add the logarithm of gross domestic produc
capita (GDPPC), one of the most commonly used variables in the literature, to invest
the impact of GDPPC on corruption. The aim of the third model is to understand the r
governance in the determination of corruption, therefore, we extend the second mode
including the rule of law and government effectiveness. In addition to the above varia
geographic location, which accommodates for cultural and social factors, are also add
build the fourth model.

To analyze the effects of the MPI, gross domestic product per capita, governance
structures, and geographical (cultural) factors on corruption we use the following econo
metric model:

Corit = a + ß flrns,, + ß2nigrlt + /i3mi„ + ß4mcc„ + ß5ciit + ßbefit + ßllmr+ ßscru

+ ß9 lg dppcj, + ßwgeit + ßuge2it + ßl2rofli, + ßnrofl2it + ßx4la,
+ ßl5oc, + ßlbas, + ßxlme, + ßnaf, + (1)

is the corruption level measured by the WGI over the sam

is the logarithm of market size measured by the MPI ove
is the market growth rate measured by MPI over the sam
is the market consumption capacity measured by MPI ove
is the commercial infrastructure measured by MPI over t
is the market consumption capacity measured by the MP
period
is the logarithm of market receptivity measured by MPI over the sample period
is the market consumption capacity measured by MPI over the sample period

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 A Multidimensional Study 795

is the logarithm of GDP per ca

sample period
is the government effectiveness measured by the WGI over the sample period
is the squared value of government effectiveness measured by the WGI over
the sample period
rule of law measured by the WGI over the sample period
is the squared value of rule of law measured by the WGI over the sample period
is the dummy variable for Latin America
is the dummy variable for Asia
is the dummy variable for the Middle East
is the dummy variable for Africa
is the error term

To test our model we planned to use time-series cross-sectional (TSCS) data for 26 emerging
market economies as identified by the Economist over the years 1999-2011. However, Saudi
Arabia and Pakistan were removed from the analysis due to missing data concerning these
two countries over this time period. An analysis using the TSCS approach allows us to bring
emerging markets data together so as to better uncover the determinants of corruption in
emerging markets. According to Becker and Katz (1995) when running a regression analysis
on TSCS data more robust results can be obtained by using the panel corrected standard error
(PCSE) approach. On the other hand, Kristensen and Wawro (2003), Wilson and Butler
(2007), Reed and Webb (2010), and Reed and Ye (2011) assert that PCSE have weaknesses
also. Therefore, our model is also estimated by using the fixed effect model (FEM) with
clustered robust standard errors (Petersen 2009). Beck (2001) also suggests that FEM is more
appropriate when analyzing TSCS data. Finally, as dummy variables are used in measuring
geographic variables, the random effect model (REM) is also used in this study. Thus,
although we have four regression models, due to the structure of the data, we employ three
different estimation techniques (FE, PCSE, and REM) and hence test seven separate models.
Before we ran the regression models our data was also analyzed to diagnose possible prob
lems with employing a regression analysis, mainly the assumption of linearity of the vari
ables. As a result of our analysis of the data structure suggested that we use the logarithmic
version of market size, market receptivity and GDP per capita, and, the quadratic form of the
government effectiveness and rule of law data. Potential heteroskedasticity and autocorre
lation problems are also accounted by employing robust estimators in our regressions. The
summary statistics for the data is provided in Table 2.
Before using the PCSE method, a test for contemporaneous correlation and serial
correlation is performed and serial correlation is accounted for by employing the Prais
Winston (AR1) model in our analysis. For the FEM, as suggested by Petersen (2009),
Kristensen and Wawro (2003) and Thompson (2011), before choosing the cluster, we test
the significance of unit effect and time effect. Since the unit effect is significant, clustering
is done on a country basis. Multicollinearity issues are also investigated by employing the
variance inflation factor (VIF). The VIF shows that multicollinearity does not exist
between our variables.

5 Results

The baseline regression model is designed to understand the impact of market potentia
indicators, in ceteris paribus, which can be used as a guideline in emerging (foreign

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 196 T. Kaymak, E. Bektas

Table 2 Summary statistics

Variable Obs Mean SD Min Max

Corruption 258 .0989667 .8302431 -1.249845 2.417994

Market size 258 12.88172 21.91753 1 100

Market growth rate 258 50.67025 62.92435 1 100

Market intensity 258 50.28315 22.3266 1 100

Market consumption capacity 258 90.49632 179.8614 1 100

Commercial infrastructure 258 46.89568 27.06057 1 100

Economic freedom 258 54.96057 26.54835 1 100

Market receptivity 258 18.05018 23.60704 1 100

Country risk 258 46.93411 23.3643 1 100

Lgdppc 258 8.58123 1.028289 6.018151 10.76359

Government effectiveness 258 .371141 .7316721 -1.103162 2.407654

Rule of law 258 .4023704 .7679558 -1.589386 2.25

Latin 258 .2877193 .4534959 0 1

Old communist 258 .1684211 .3748981 0 1

Asia 258 .3789474 .4859783 0 1

Middle east 258 .122807 .3287929 0 1

Africa 258 .0421053 .2011826 0 1

market entry decision by foreign companies and investors (Cavusgil 1997).' Since we used
both FEM and PCSE in our estimations, the baseline model corresponds to FEM1 and
PCSEM1 in Table 3. Since we did not reverse code the corruption data, there is a need to
explain how to interpret the data that we used. The corruption data is used as provided by
the WGI, and in this index a higher score for a country indicates lower corruption. Hence, a
positive coefficient of independent variables wil be interpreted as having a positive effect
on the corruption score which means lower corruption.
In our baseline Fixed Effects Models (FEM1, FEM2 and FEM3), the market size variable,
which is the combination of urban population and electricity consumption, takes on positive
and generally statistically significant values. According to the FEMs, in emerging markets a
greater market size is associated with less corruption. This outcome is in line with Goel and
Nelson's (2010) and Akcay's (2006) findings. Also, although its coefficient is very small, in
the models market growth rate takes a positive and significant value. As in Aidt (2009), and
Ugur and Dasgupta (2011) this shows that economic growth, in terms of primary energy use
and real GDP, that the growing economies of emerging markets has the potential to reduce
corruption. Market intensity, market consumption capacity, economic freedom and market
receptivity take positive but statistically insignificant values. These results show that GNI per
capita, private consumption as percent of GDP, political and economic freedom and, trade
openness do not have any significant influence on corruption in emerging markets. The
country risk variable as expected, takes a positive and significant value in our estimation.
This can be accounted for by the economic traits of emerging market economies. As it is
known, most of the emerging market economies face many political and economic risks.
Hence, higher political and economic instability coupled with a weak institutional and
regulatory environment may lead to higher corruption.

To the best of our information market potential indicators have not used in previous studies on corruption.

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 A Multidimensional Study 797

The Panel Corrected Standard Est

show that most of the variables, exc
significant and positive effects on c
intensity, commercial infrastructur
infrastructural advancements, bet
corruption in emerging markets. T
conducted by Goel and Nelson (20
hand, an increase in market size
corruption levels. These findings su
emerging markets are associated wit
findingas urbanization is mostly be
monitoring of public officials by ci
sudden increase in urbanization is
development, and individuals who
aware of the importance of transpa
GDP per capita is one of the mos
therefore, our second model is utili
regression. Adding GDPPC has lead
of market size variable and nothin
coefficient of GDPPC that is contra
(1995), Paldam (2002), Montinola a
be considered a controversial issue.
the emerging markets are growing
tunities throughas th privatization,
behavior. Hence, we think negative
markets. This finding is also in line
findings of the PCSE models.

Two of the governance variable found in the WGI dataset, government effectiveness
and rule of law, are added in quadratic form as control variables in our third model. Both of
the variables signs and coefficients are in line with the previous studies of Meon and
Sekkat (2005), Goel and Nelson (2010), and Johnson et al. (2014). Results show that an
improvement in government effectiveness and rule of law in emerging markets lowers
corruption. However, the significant quadratic coefficients of government effectiveness and
rule of law in PCSE model suggest that at the initial stages of the rule of law and
government effectiveness there will be an increase in the corruption, nevertheless in the
later stages a less corrupt society will emerge.
In our last model, which uses the REM method, we attempt to uncover the effect of
cultural and geographic differences on corruption. As it can be seen from Table 3, this
model's findings resemble a combination of the fixed effect and PCSE models. Most of the
MPI variables, except market growth rate and country risk, are insignificant. Concerning
the cultural variables, similar to Paldam and Svendsen (2001) and Montinola and Jackman
(2002), our results suggest that Asian countries are the most corrupt, then the Old Com
munist and the Middle East countries. Africa, which is captured by a constant term, takes
positive but insignificant value. However, as there is only one African country (South
Africa) in our 24 country dataset, one cannot draw any firm conclusions from this finding.
The negative coefficient of Latin is also insignificant.
Thus, our results provide a number of findings. Market growth rate, market intensity,
commercial infrastructure, economic freedom, and decreased country risk are associated
with lower levels of corruption in emerging markets. As such, we mostly find strong

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 798 T. Kaymak, E. Bektas

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PCSEM2 -.280 (-1.17) -.114*** (-4.57) .005*** (4.67) .004*** (3.16) -.008*** (-6.99) .009*** (6.53) .007*** (5.76) .053 (1.57) .016* * (8.21) -.126*** (-4.50)

PCS EMI -1.243*** (-8.96) -.100*** (-3.52) .004*** (4.19) .003** (2.26) -.005*** (-5.46) .006*** (5.23) .007 (5.55) .056 (1.55) .014*** (6.34)

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FEM1 -0.556** (-2.38) .171** (2.43) .001*** (1.96) 0.000 (0.26) 0.000 (0.36) -0.000 (0.27) 0.002 (1.28) 0.013 (0.43) 0.003 (2.87)***

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OLMarket size 2Market growth rate -5 -5 0 Economicfre do8 2 CountoO o O 3 3
Variables Constant UjESEuiSjUJOOc** Market intensity Market consumption cap city Com ercial infrastructure m LMarket receptivity ry risk LGDP per capita Government Ef ectiven s GovernmentEf ectiven s SQR Rule of Law Rule of Law SQR

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 A Multidimensional Study 799

(-0.29) (-2.34) (-3.68) (-1.80)

Table 3 continued VariblesFEM1 2FEM3PCS1 EM2PCS3REM Latin-.028 Oldcomunist—.30* Asia-.358* MEast-.20* R-squared0.1620.3870.2930.4 FforEMandWlforPCSEandRMmoels2.76*43 7.96*132*0 6345*7,10* Observation256 256 256 WGIcoruptindexsthdepn tvarible.Numrsinpaethsdenotrbus andzsticresptivly *' Staisclygnfiatcoe nsathe10,5nd%levsrpctiely.Mucoineartysomajrpble,sincforeahviblteVIFs<10

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 BOO T. Kaymak, E. Bektas

Cd
o
(J • HUN
• KOR
• CZE •
• MYS

• TUR

» MEX CUM •™A

• ARG

20 40 60 80 100 120
MGR

Fig. 1 Corruption and market growth rate

support for Hypothesis 2, Hypothesis 3, Hypothesis 5, Hypothesis 6, and Hypothesis 8 in

the PCSE regression models.
Lastly, Figs. 1, 2, 3 and 4 provide a visual representation of the significant findings on a
country by country basis. Figure 1 shows the relationship of corruption with market growth
rate, while Figs. 2, 3, and 4 display the relationship between corruption and market size,
country risk, and GDP per capita for each country respectively. Please note that based on
the WGI a high score on the corruption axis actually indicates a low level of corruption.

6 Conclusion and Policy Implications

Corruption has the capacity to disrupt a nation's values, the latter being a must for a stable
and prosperous society. It does this by interfering in the economic and political decision
making processes and thus it can have a pernicious effect on the policy role of govern
ments. Corruption needs a proper environment to germinate and grow. In this regard
emerging market countries' economic and political conditions may provide for an
appropriate setting. Their rapid growth potential, when coupled with unresolved political
issues and a weak institutional environment, may encourage rent seeking and corrupt
behavior.

This study's findings, covering 24 leading emerging markets over a 12 years period, are
important for citizens of these markets, potential international investors, and policy
makers. Although this paper does not measure for causality, a number of important
associations between variables that represent the potential of emerging markets and the
level of corruption were uncovered. Emerging markets that follow more liberal economic
policies, invest in public infrastructure, and have solid financial systems are associated

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 A Multidimensional Study 801

a:
O • HUN
" .CZ?<ViAF'KOR
MYS

• TUR

•«5l8tA .MEX
.1ARYG
• PHL

• IDN

20 40 60 80 100
MS

Fig. 2 Corruption and market size

• HUN

• ZAF • POL

• MVS

• TUR

• C<*CUM

• EGY

• PHL

20 40 60 80 100

CR

Fig. 3 Corruption and country risk

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 802 T. Kaymak, E. Bektas

• ISR

• HUN

• ZAF *POL .CZE *KCIR

• MYS

•"BRA

• TUR

.MEX
• ARG
•in»^hN
• PHL

10000 20000 30000

GDPPC

Fig. 4 Corruption and GDP per capita

with lower perceptions of corruption. Corruption is also negatively related wit

sence of effective government and the rule of law, as our control variables ind
As such, strong institutions are needed not only to enact robust and transparent
regulations that promote free enterprise, but also are necessary to provide for a c
infrastructure that benefits society as a whole. Thus, citizens should demand t
governments spend money on projects wisely, as our results suggest that investm
functioning information and distribution network (channels) are associated
corruption.
An interesting non-finding concerns the middle class. Theory suggests that a
middle class becomes more involved in monitoring the behavior of public off
demand greater transparency (Husted 1999). Similarly, the market size variable
part covers levels of urbanization in society, has uncovered a mixed associat
corruption. These findings may be due to the characteristics of emerging mark
are experiencing large transitions in legal, political, social and economic fronts
not have the institutional capacity or social traditions necessary to seek greater
transparency in matters of the state. Indeed, the great and sudden shift of popula
rural to urban areas has led to economic benefits. However, new migrants may
concerned with their economic well-being and not expect transparency or ho
officials accountable for their actions. When heavy migration is coupled with a w
framework an urban, middle-class may emerge in a corrupt environment.
Our study does make a number of valuable contributions to the field of cor
Instead of simply using GDP per capita as a determinant of corruption we inc
numerous dimensions that include economic, social, political, demographic, and
variables to explore this vital issue. As such, we act on the calls made by Aidt
Ugur and Dasgupta (2011) for researchers to investigate corruption from differen

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 A Multidimensional Study 803

and in different settings. Our focus

not differentiate between develop
unique challenges in their quest f
investigation.
This study does have a number of weaknesses. First, the indices that we employ for both
the dependent variable and independent variables, the WGI and MPI, respectively are
secondary measures. MPI in particular is a collage of numerous publicly available data sets
and the index's developers do not provide us with a theoretical underpinning behind the
inclusion of some of these variables. Second, we have included only 24 emerging econ
omies in our analysis which are covered by MPI, and this may not be representative of the
total population. Finally, a regression analysis does not measure for causality, and thus we
cannot address the ultimate question—what is the root cause of corruption and graft in
society?
Nonetheless, numerous avenues of future research of corruption in emerging markets
are available. Different statistical methodologies that incorporate time series analyses and
structural equation modelling may better unravel the determinants of corruption. A more
fine-tuned approach to corruption, such as looking at its effects on a sector by sector or
company by company basis is feasible. Similarly, one could investigate how corruption
influences individuals, such as its relationship with trust and happiness. The role of culture,
and whether it is related to corruption, is another area worthy of further investigation. If
one bears in mind that emerging markets will dominate the global economy in the coming
decades, having a clearer understanding of this age old problem is of vital concern.

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