Influence of corruption on economic growth rate and foreign investment

We analyze the dependence of the Gross Domestic Product (GDP ) per capita growth rates on changes in the Corruption Perceptions Index (CPI). For the period 1999–2004 for all countries in the world, we find on average that an increase of CPI by one unit leads to an increase of the annual GDP per capita growth rate by 1.7%. By regressing only the European countries with transition economies, we find that an increase of CPI by one unit generates an increase of the annual GDP per capita growth rate by 2.4%. We also analyze the relation between foreign direct investments received by different countries and CPI , and we find a statistically significant power-law functional dependence between foreign direct investment per capita and the country corruption level measured by the CPI . We introduce a new measure to quantify the relative corruption between countries based on their respective wealth as measured by GDP per capita. PACS. 89.90.+n Other topics in areas of applied and interdisciplinary physics Corruption, defined as abuse of public power for private benefit, is a global phenomenon that affects almost all aspects of social and economic life. Examples of corruption include the sale of government property by public officials, bribery, embezzlement of public funds, patronage and nepotism. The World Bank estimates that over 10 US dollars annually are lost due to corruption, representing 5% of the world GDP . The African Union estimates that due to corruption, the African continent loses 25% of its GDP [1]. Previous studies have mainly reported a negative association between corruption level and country wealth [2–5], i.e., on average richer countries are less corrupt. There is ongoing debate concerning the relation between corruption and economic growth [6]. Some earlier studies suggest that corruption may even help the most efficient firms bypass bureaucratic obstacles and rigid laws [7], while recent papers do not find a significant negative association between economic growth and the level of corruption [2,3]. The majority of studies have found an insignificant negative association between the corruption level and foreign investments [3,8,9], without reporting a specific functional dependence. a e-mail: [email protected] b e-mail: [email protected] In order to find a quantitative relation between corruption level and economic factors such as GDP growth rate and foreign direct investments, we analyze the Corruption Perceptions Index (CPI) [10] introduced by Transparency International, a global civil organization supported by government agencies, developmental organizations, foundations, public institutions, the private sector, and individuals. The CPI is a composite index ranging from 0 to 10, where 0 denotes the highest level of corruption and 10 denotes the lowest. For GDP per capita we use annual nominal GDP per capita in current prices in US dollars [11], and GDP per capita in constant dollars [12]. The CPI 2006 index is defined based on data gathered from 12 sources originating from 9 independent institutions. All sources measure the overall extent of corruption, where evaluation of the extent of corruption in different countries is done by experts, residents and non-residents. The ranks, and not the scores of countries, are the only information provided from each source. The CPI 2006 combines assessments for the past two years only. Each of the sources uses its own evaluation system, and for that reason the data are standardized before a single mean value for the CPI is determined for each country. This standardization is carried out in two steps, using two statistical methods: matching percentiles and beta-transformation [10]. Table 1 shows the first ten least corrupt countries as ranked by Transparency International according to the 548 The European Physical Journal B Table 1. Rank of countries (left column) by Transparency International for year 2006 with CPI values (right column) for each country. 1 Finland, Iceland, New Zealand 9.6 4 Denmark 9.5 5 Singapore 9.4 6 Sweden 9.2 7 Switzerland 9.1 8 Norway 8.8 9 Australia, Netherlands 8.7 11 United Kingdom 8.6 16 Germany 8.0 17 Japan 7.6 18 France, Ireland 7.4 20 Belgium, Chile, USA 7.3 37 Botswana 5.6 40 Italy 5.0 70 China, India, Mexico, Brazil, Senegal 3.3 Ghana, Egypt, Peru, S.Arabia, 121 Russia 2.5 CPI values obtained in 2006 as well as some other countries. Besides some Western European countries, among the least corrupt ten countries are New Zealand, Singapore, and Australia. Chile and Botswana are the least corrupt countries in South America and Africa, whereas Singapore is the least corrupt Asian country. Table 1 provides information about corruption levels throughout the World in absolute terms, where each country, whether rich or poor, is given only its CPI value. In the modern economy, globalization leads to economic competition and comparison between countries, so we compare the corruption levels for different groups of countries in the world. Normalizing the CPI value for year 2006 on the population in each country [13], we find a normalized CPI value for the world to be 3.7, for the countries in Europe we find 5.4, for Asia and Latin America we find 3.3, and for Africa 2.7. An earlier study reported a power-law functional dependence between GDP per capita, GDPpc, and CPI for all countries [5]: CPI = N (GDP pc) (1) with scaling exponent μ ≈ 0.23 (see Fig. 1), and constant N = 0.548. This functional dependence spans multiple scales of wealth and remains stable over different time periods. The positive value of exponent μ indicates that richer countries are less corrupt. This power-law dependence provides information about the expected level of corruption for a given level of country wealth — e.g., a country above (or below) the fitting line is less (or more) corrupt than expected for its level of wealth. We may say that for a country above the fitting line the level of corruption is less than the expected level for the given country wealth [5]. This previous finding indicates that in order to compare the corruption level between two countries, countries may be compared not only in terms of absolute CPI values but also in terms of relative country wealth. To this 10 2 10 3 10 4 10 5