Exploring the Links Between Corruption and Growth

This paper models the transmission channels through which corruption indirectly affects growth. Results suggest that corruption hinders growth through its adverse effects on investment, human capital, and political instability, while fostering growth by reducing government consumption and, less robustly, increasing trade openness. Overall, a total negative effect of corruption on growth is estimated from these channels. These effects are found to be robust to modifications in model specification, sample coverage, and estimation techniques as well as tests for model exhaustiveness. The negative effect of corruption on growth is found to diminish in economies with low governance levels or a high degree of regulation. No one-size-fits-all policy response appears supportable.