Sevak Tsaturyan and Dr. Phillip Bryson, Institute of Business Management
In our research we have attempted to address the negative impacts of corruption on economic development, trade and foreign direct investment in developing economies. Historically, it has been argued that political corruption is a very significant hindrance of economic development, especially in transitional economies. Economists from major organizations and institutions have performed numerous empirical analyses finding the negative correlation between corruption and economic performance measured in GDP. They have found this correlation to be especially significant when foreign direct investment is a factor of development. Assumptions have been formed that investors avoid corrupt economies due to business insecurities and the high costs associated with bribes and other corrupt practices in developing countries. Furthermore, it has been outlined that where corruption is present, trade of goods and services is limited due to the protectionist acts financed by domestic producers. In our study we have attempted to test these assumptions in a sample regression analysis and with a case study of a developing country, Armenia, which has had continual decline in its corruption indices for the last several years.
We have found that when it comes to total economic performance, corruption does in fact act as a major hindrance. According to our studies there appears to be a very strong negative correlation between corruption indices and economic performance measured in real per capita GDP of a sample of 39 countries for over a period of 11 years. However, when we insert the real Foreign Direct Investment indices as a coefficient variable, this correlation seems to be unaffected. When regressing Foreign Direct Investment with that of corruption in the sample of 39 countries, we see no strong relationship between the two. This indicates that while economic development is hindered in the presence of high-level corruption, this hindrance is not a result of decreased foreign direct investment. In terms of trade, we have found that high levels of corruption do not necessarily limit imports of goods and services into the country. On the contrary, we have found that as corruption increases, imports of goods and services seem to increase with it. This may indicate that corrupt economies do not only limit their imports but they further increase the flow of goods and services into their country.
In order to retest our own findings we have used the example of Armenia to see if corrupt economies do in fact continue to receive foreign direct investment or if FDI suffers as a result of higher levels of corruption, as assumed by traditional theorists. In the case of Armenia we have seen that although corruption levels have increased as a measure of Transparency International’s Corruption Perception Index, gross fixed investment as a measure of FDI in Armenia has continued to jump to ever-higher levels over the past ten years. This strengthens our findings that foreign investors do not view corruption as a serious threat when considering investing in a given country. Conclusively, our most significant finding is that many firms do not refuse to get involved with corrupt countries on moral grounds, viewing corruption as little more than an inconvenient transaction cost. A bribe can be incorporated into a cost-benefit analysis and deciding to proceed with its planned business, a corporation can then build such payments into its budget.
Furthermore, as a future research recommendation we suggest that in order to test this hypothesis, a larger data set than what we have taken should be used in attempt to confirm or reject our findings. We also leave the relationship between corruption and imports and its accuracy and implications to future research.
The results of our research and analysis have been presented in the annual Anti-Corruption Conference in Guatemala City, Guatemala sponsored by the Transparency International, which is the world’s largest anti-corruption watchdog, an NGO based in Germany. The conference took place in mid November 2006. I traveled to Guatemala and presented the results of our analysis at a workshop in this conference. Our research and presentation at the conference generated a great deal of interest among many economists and organizations such as the World Bank and the World Trade Organization, with whom I have made some useful contacts. A great portion of our results was submitted to the Honors Department in partial fulfillment of my graduation with Honors. Another article, resulting from our research findings will be presented for publication at the Journal of Comparative Economics early January 2007.
I wanted to express my extreme gratitude to the Office of Research and Creative Activities for their financial support, which made this research possible.