Influence of corruption on economic growth rate and foreign investments

In order to investigate whether government regulations against corruption can affect the economic growth of a country, we analyze the dependence between Gross Domestic Product (GDP) per capita growth rates and changes in the Corruption Perceptions Index (CPI). For the period 1999-2004 on average for all countries in the world, we find that an increase of CPI by one unit leads to an increase of the annual GDP per capita by 1.7 %. By regressing only European transition countries, we find that ∆CPI = 1 generates increase of the annual GDP per capita 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. 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 1000 billion 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 GDP. Preprint submitted to Elsevier 3 December 2008 Previous studies have mainly reported a negative association between corruption level and country wealth [1,2,3,4], i.e., on average richer countries are less corrupt. There is ongoing debate concerning the relation between corruption and economic growth [5]. Some earlier studies suggested that corruption may even help the most efficient firms bypass bureaucratic obstacles and rigid laws [6], while recent papers do not find a significant negative association between growth and corruption [1,2]. The majority of studies have found an insignificant negative association between the corruption level and foreign investments [2,7,8], without reporting a specific functional dependence. 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) [9] 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 corrupt and 10 corresponds to the lowest corruption level. For GDP per capita we use annual nominal GDP per capita in current prices in US dollars [10], and GDP per capita in constant dollars [11]. The CPI is an absolute measure of corruption which does not depend on country wealth. However, besides in absolute terms of corruption level countries may be also compared in relative terms where corruption level is compared depending on the countries’ wealth as measured by the GDP per capita. In Table I, we show the first ten least corrupt countries as ranked by Transparency International according to the 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 I 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 [12], 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. In an earlier study some of us have reported a power-law functional dependence between GDP per capita and CPI for all countries in the world [4]: CPI = N (GDPpc) μ (1)