18th Economics & Finance Conference, London

IS CORRUPTION SO BAD FOR SUSTAINABLE DEVELOPMENT? A THRESHOLD NON-LINEAR ANALYSIS

FREDJ FHIMA, RIDHA NOUIRA, KHALID SEKKAT

Abstract:

In order to add new evidences to the ongoing debate about whether corruption greases or sands the wheels of growth and sustainable development, this paper analyzes how the quality of governance may lead to non-linearity in the effect of corruption on three key variables that are growth, human development and environmental performance. Based on a panel data set of 65-85 countries of different development levels for the period 1996-2019, the estimation results of the Hansen (1999)* threshold model for different indicators of corruption and governance from the World Bank and the International Country Risk Guide reveal that, for the developed countries with high governance quality corruption always hinders growth, human development and environmental performance (no thresholds exist). However, for developing countries – and for the whole sample – the results establish the existence of a significant threshold indicating that the impact of corruption on these three variables is a regime specific depending on the quality of governance. When the quality of governance is low, high corrupt countries achieve higher levels of economic growth, human development and environmental performance, which is consistent with the “grease the wheel” hypothesis. * Hansen, B. E. (1999). Threshold effects in non-dynamic panels: Estimation, testing, and inference. Journal of Econometrics, 93(2), 345–368.

Keywords: Corruption; Governance; Sustainable development; Threshold models