Quality of Civil Administration and Economic Growth: A Threshold Analysis

By Islam, Nazrul | The Journal of Developing Areas, Fall 2012 | Go to article overview

Quality of Civil Administration and Economic Growth: A Threshold Analysis


Islam, Nazrul, The Journal of Developing Areas


ABSTRACT

The paper distinguishes between "immediate measures of the quality of civil administration' (IM-QCA), such as corruption, and the "final measure of the quality of civil administration' (FM-QCA), which is the growth performance of an economy. The paper argues that, instead of being monotonic and linear, the relationship between civil service compensation and economic growth is characterized by vicious and virtuous circles, which are indicative of multiple equilibria. The paper uses the threshold regression methodology to test the multiple equilibria hypothesis and finds support for it. This finding questions the appropriateness of across-the-board salary reduction of civil servants as part of budget balancing austerity measures. Instead, the results of the paper suggest that civil service compensation can be an important policy tool for promoting economic growth, provided the complex, non-linear nature of the compensation-performance relationship, as revealed in this paper, is properly understood and taken into account.

JEL Classifications: O43, C29, H83

Keywords: Civil administration, governance, economic growth, civil service compensation; corruption

Author's Email Address: nislam13@yahoo.com

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Recent growth literature has identified total factor productivity differences (TFP) as the most important source of per capita income differences across countries and has pointed to institutions as an important determinant of TFP. One of the important components of institutions is civil administration, which plays a crucial role in formulating and implementing economic policies. In investigating the role of civil administration, many researchers have emphasized the issue of corruption. Several studies have shown that corruption affects growth and investment negatively. Some researchers have looked into causes of corruption and drawn attention to "compensation" as a determinant of corruption and quality of civil administration (QCA). The term "compensation" refers to the total of cash and in-kind salary, benefits, perquisites, and privileges that a civil service member receives officially in return for his or her services.

The present paper extends the research on QCA and its role in economic growth in two ways. First, it distinguishes between immediate measures of QCA (abbreviated as IM-QCA) such as corruption, red-tape, bureaucratic delay, etc. and the final measure of QCA (abbreviated as FM-QCA), which, from the economic point of view, is the growth performance of an economy. This distinction is important for two reasons. First, the relationship between corruption and growth performance may not be monotonic, implying that the impact of changes in compensation on IM-QCA may not be the same as that on FM-QCA. Second, generally prevalent measures of IM-QCA are of "negative' nature and are not geared to capture the pro-active role that the civil administration can play in the management of a developing economy. This paper traces the influence of compensation through its impact on both immediate and final measures of QCA and considers the relationship in its entirety.

The second way in which this paper extends the research is as follows. Existing studies of the civil service compensation-performance relationship have generally assumed this relationship to be not only monotonic but also uniform in magnitude. Accordingly, these studies have generally used the methodology of linear regression. However, in qualitative descriptions of this relationship, researchers have frequently noted the presence of vicious and virtuous cycles, suggesting the existence of multiple equilibria, so that linear regression is not the appropriate methodology for its study. Furthermore, non-linear models of the general variety (such as with quadratic term in the specification, etc.) may not serve the purpose either, because these cannot capture the presence of vicious and virtuous cycles.

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