The Link between Corruption, Development, and Military Expenditures: Making the Case for Accession to NATO

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This article examines the relationships between corruption, development, and military expenditures among NATO and non-NATO countries. It is argued that the recent accession to NATO of Eastern European countries was not only a military process, but also a comprehensive reform process that will have important economic growth and human development consequences. Integration into the NATO structures is also expected to lower corruption.

I. Introduction

For Eastern European nations the relatively recent accession to NATO was not only a military process, but also a comprehensive reform that will have important long-term economic consequences. Reforming the defence system of a NATO candidate country is not possible without developing a sustainable market economy. To prepare the accession to the NATO structures, the governments of candidate countries had to adopt new legislation meant to strengthen economic growth and improve the climate for businesses. For instance, Romania adopted legislation to reduce corruption (legislation requiring politicians to disclose information about their assets, a law governing conflicts of interest for government officials, and a law regulating the financing of political parties), and introduced important economic and legislative measures to attract foreign capital. Despite recent legislative improvements to prepare for NATO and EU membership, however, various indicators that measure corruption continue to indicate a high level of corruption in some of the former Eastern European countries. Yet many observers expect that the economic reforms and the gradual alignment of national legislations to the new requirements imposed by NATO and EU will reduce corruption in the long run.

The consequences of corruption for economic development have been well documented by economists. The corruption level of a country has been linked to its economic growth rate, stimulating or discouraging native and foreign investment, and influencing the size and use of public expenditures. Mauro (1996), for instance, established that a corrupt country will achieve investment levels of almost 5 percent less than a relatively uncorrupt country and will loose about half a percentage point of domestic product growth per year. Corruption has also been found to lead to inefficient use of public funds in financing public services (Klitgaard, 1990). In addition, Wei (1997) presented evidence that investing in a relatively corrupt country, as compared with an uncorrupt one, is equivalent to an additional 20 percent tax on investment.

Corruption is also associated with an increase in military expenditures. Poor decisions are taken by corrupt bureaucrats, who often tend to favour expensive, complex, capital-intensive defence projects that make it easier to skim significant funds. As Kaufmann (1997) remarked, a large defence infrastructure contract may be favoured over the construction of hundreds of schools and health clinics. By increasing the percentage of military expenditures in total government spending, corruption distorts public expenditures and hampers developmental objectives; corrupt countries spend less on education than uncorupt countries.

Given the serious consequences corruption has on the development of emerging economies in Eastern Europe, the purpose of this study is to examine the relationship between corruption, development, and the funding of defense systems. The analysis will compare NATO members to non-NATO nations.

The paper is organized as follows. Section II discusses ways to measure corruption and estimate hidden economies. Section III presents the empirical results of a model that links corruption to human development. Section IV examines the relationship between corruption and military spending. A discussion of the empirical results is included in Section V.

II. Background

In recent years academics and international development agencies (i. …


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