From A Regional To A Global Perspective: What Determines Growth?

From a regional to a global perspective: What determines growth?

Introduction

Our study identifies a relationship between growth (real GDP per capita), corruption, and political instability. For a better explanation of growth, we have added a third variable which is Investment Share of Real GDP. We know that this variable has major contributions to growth, and will hence enhance the accuracy of our growth model.

The Middle East with its countries established in the late 20th century is considered the world’s new born child. With every birth of state, economic growth is accompanied by the establishment of many political and governmental infrastructures. Studying the relatively slow growth in the region and noticing corruption and political instability as a flaw in most of its counterparts; we took the initiative of hypothesizing a relationship between corruption, political instability and growth, and applying it at a global scale. Although this was initially our intention, we also considered adding Investment Share of Real GDP to ensure that our model wholly integrates the major growth components.

The theory we produced was not based on any particular article, instead, it was hypothesized. That is, we first thought of the idea, then assembled the data and ran the regressions. We were impressed that our findings were very much in line with our hypotheses. Afterwards, we searched for articles that matched our theory, but we could not find a main article which discusses the same exact theory. This encouraged us into developing our own unique theory and further researching the topic. We found that incorporating corruption and political instability in our growth theory provided an appreciative measure of economic growth.

We used an orderly least squares regression to test the primary effect of corruption and political instability on growth. What we are attempting to prove in our theory is that countries with higher degrees of political instability and/or corruption suffer from lower growth rates. Our theory also proves the known effect of investment share on growth.

Our paper consists of a literature review of the various articles related to our topic. These articles were obtained from reliable databases such as Econlit. We then lay out the data and methodology used, specifying the sources, periods, statistical reports and tests carried out. Accordingly, we state the empirical results obtained. Lastly, we discuss our major findings, include the references used, and conclude with the appendix.

Literature Review

This section summarizes the main hypotheses tested in our paper. We relied on various articles from which we discussed the impact of corruption and political instability on growth. Knowing that a growth theory is not valid without incorporating investment in it, we briefly stated how investment share of real GDP affects growth.

Investment share of GDP plays an important role, not only on the output level per capita, but mainly on long-run growth. However, we would like to stress that there are other factors that contribute to the growth of real GDP such as economic, political and institutional quality. So, we will not focus nor expand on the Investment share of GDP - growth relationship through our study. Our first regression will be based on the basic relationship between investment share of real GDP and growth, and we will be adding new variables, that is the variables corruption and political stability which we are testing for.

• Corruption and Growth

Corruption negatively impacts the quality of investment, and subsequently growth. It raises transaction costs and uncertainty in any economy leading to inefficient economic outcomes. It shifts resources such as talent, technology, and capital away from more productive uses to less productive uses. Moreover, corruption undermines government stability. The government needs strong legislative power and support to carry out its responsibility and provide the public with its programs. This power and support is hindered by corruption.

In their article “Government Efficiency and Economic Growth”, Yeh and Vaughn Jr., argue that corruption, in particular the malfunctioning of government institutions, severely impedes investment efficiency and entrepreneurship which consequently retards economic growth. It is a well-known fact that bureaucracies of corrupt governments delay the distribution of licenses, and therefore; slow down the process through which technological advances are employed in new productive practices.

Yeh and Vaughn Jr. also mention their opponent’s viewpoint that corruption may raise economic growth in developing countries. Regulations in these countries tend to be burdensome and many corruptive practices by citizens such as the payment of bribes in order to avoid bureaucratic delay, will overcome the inflexibilities of the regulations.

However, after running regressions, they find that corruption causes an adverse impact on economic growth in developing countries. In developed countries however, there are factors such as professional associations, constitutional restrictions, and solid education systems which prevent corruption from occurring and influencing the growth rates.

What we believe on the other hand, is that the effect of corruption on economic growth can only be estimated empirically when corruption is not endogenous to the growth process. This means that we have to ensure that the causality does not apply the other way around that is income (growth) on corruption. For example, low incomes could result in poor institutional environments and, therefore, instigate bribery. However, empirical work proposes that corruption is better explained by the quality of economic institutions rather than by income.

Johann Graf Lambsdorff, in his article “How corruption affects productivity” also argued that corruption impedes the government from effectively achieving their desired public welfare. Capital goods are not optimal when influenced by corruption because it is the projects which promise “large side payments” and display “low risks of being detected” preferred to those projects which benefit the public at large. We can see that with corruption, bureaucracy is less concerned with expertise and becomes open to political pressure causing bureaucratic inefficiency. Control mechanisms designed to ensure the quality of investments may also be avoided.

First hypothesis: The relationship between corruption and growth is negative