Income and Corruption: 1790 to 2010

Talk by Randolph Luca Bruno (Università Cattolica del Sacro Cuore, Piacenza) as part of the Research Seminar Series of the IOS Economics Department.

It is well-known that higher economic prosperity correlates closely with lower corruption –affluent societies are typically more honest and rule-abiding than poor ones. Being based on cross-country correlations, however, existing studies cannot conclusively establish causation. This paper re-examines the impact of economic development on corruption using a newly assembled indicator from the Varieties of Democracy (V-Dem) dataset. This data provides reliable, expert-coded information on the prevalence of corruption at the country-year level since 1900 and, for some countries, since the French Revolution (1789). We exploit long-run variation over time to address various threats to causal identification, including bias from omitting cultural and historical factors and reverse causation from corruption to economic growth. Based on fixed-effects and instrumental variable regressions, we find robust evidence of a negative causal effect of per-capita income on the prevalence of corruption –especially corruption in the public administration. Yet, the benefits of rising prosperity are not instantaneous: it takes around 40-45 years for corruption to converge to the ‘steady state’ implied by the level of economic development. We also report evidence that the effects of income are mediated at least partly by some of the institutional changes promoted by economic development –such as improvements in democratic quality, property rights protection and, especially, state capacity. Our findings imply that growth-promoting policies may also be an effective antidote against corruption, albeit only in the long run.