A Sectoral Analysis of the Corruption-Growth Relationship

Notwithstanding the large body of research that has been conducted on the effects of corruption on economic growth, findings on this relationship remain heterogeneous. Aggregate analyses on both a cross-country and regional level appear insufficient in explaining why corruption is conducive to growth in some settings while being harmful in others. In this study, I reveal that sectoral differences play a decisive role. The regressions are estimated with fixed effects models, using panel data from 1995-2015. The effects of corruption on growth are examined across three sectors (resources, manufacturing, services) and six regions (Asia, Central Asia, Sub-Saharan Africa, Middle East and Northern Africa, OECD countries, Latin America). Two major findings can be reported. First, both on an aggregate and regional level, growth in the resource sector is not significantly affected by high levels of corruption. Contrary, corruption negatively affects overall growth, as well as the growth in the manufacturing and services sectors. Second, corruption in combination with high resource rents hampers growth, wheraes the sole effect of high resource rents tends to stimulate regional growth in Asia, Latin America and MENA. This suggests that the adverse growth effect of corruption outweighs the adverse growth effect of resource abundance.