Corruption and Distribution of Public Spending in Developing Countries

By Delavallade, Clara | Journal of Economics and Finance, Summer 2006 | Go to article overview

Corruption and Distribution of Public Spending in Developing Countries


Delavallade, Clara, Journal of Economics and Finance


Abstract

This paper empirically examines the impact of corruption on the structure of government spending by sector. Using the three-stage least squares method on 64 countries between 1996 and 2001, we show that public corruption distorts the structure of public spending by reducing the portion of social expenditure (education, health and social protection) and increasing the part dedicated to public services and order, fuel and energy, culture, and defense. However, civil and political rights seem to be a stronger determinant of expense on defense than corruption. Our results are robust to instrumentation by the latitude of the country.

(JEL K4, O57, H5, D73)

Introduction

In all countries, and more noticeably in developing countries, corruption is detrimental to state efficiency. It hampers budget equilibrium, diminishes expenditure efficiency and distorts its allocation between different budgetary functions.

First of all, the state budget equilibrium is undermined in a corrupt political context. Corruption reduces state revenue (Tanzi and Davoodi, 1997; Tanzi, 1998; and Johnson et al., 1999). The impact of corruption on the amount of public spending is controversial. On the one hand, corruption is thought to enlarge total public expenditure as a part of GDP (Tanzi, 1998). On the other hand, Mauro (1997) shows that corruption has no significant impact on the level of public spending. Even if corruption increases the overall level of public expenditure, it is likely to reduce the part of it which really reaches the community since most, if not all, of the surplus may be captured by corrupt agents. As an illustration, a study carried out in Ugandan primary schools shows that only 30 % of the expenditure per pupil had actually reached schools between 1991 and 1995 (Ablo and Reinikka, 1998). Corruption raises the cost of expenditure and reduces the quantity of output provided by the state (Shleifer and Vishny, 1993).

Secondly, for the same level of spending and for a given budgetary function, public spending is less efficient in countries with high levels of corruption. Corrupt public agents tend to favor investment projects which generate the highest bribes and which are not necessarily the most efficient (Shleifer and Vishny, 1993). Corruption diminishes the impact of public spending on social outcomes and alters the quality of public services. Reducing corruption would enable to improve human development through the reduction of infant mortality and the improvement of primary school rates (Gupta et al., 2000).

Thirdly, corruption affects some given economic sectors' expenditure as a share of GDP: it has a negative impact on the pan of human capital investment (Ehrlich and Lui, 1999) and more precisely on education (Mauro, 1997), and a positive one on military spending (Gupta et al., 2001). A high level of corruption distorts expenditure structure. Corrupt civil servants favor investments in building and creation of projects rather than operation and maintenance ones (Tanzi and Davoodi, 1997).

Hence the impact of corruption on public spending allocation is important not only from an operational viewpoint - since more and more international loans are conditioned by states budgetary structure - but also from a scientific viewpoint. Previous studies on this topic have highlighted that corruption introduced distortions in expenditure level and efficiency. But none of them have highlighted its impact on the budget structure, only paying attention to one or another component of the budget. Yet, it is likely that corrupt public decision makers favor bribe-generating spending. In this paper we intend to answer two main questions. For the same level of government budget, does a high level of public corruption influence public spending structure? And, in that case, which budgetary sectors are favored by public corruption and which are infringed upon?

Using Government Finance Statistics data on national budgetary accounts of 64 countries between 1996 and 2001, our major contribution consists in analyzing the impact of corruption on the respective portion of each economic sector in the government budget. …

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