Many economists have argued that the issue of corruption is not black and white with some forms of corruption actually good for the economy. According to new research, the ultimate effect of corruption on economic growth could depend on the political setting in a country.
In a new study, Shrabani Saha and Kunal Sen find that corruption which allows for greater economic freedom can be good for investments and growth. But the effects of this type of corruption will be largely determined by the state of democracy in the country.
Using growth data from over a hundred countries between 1984 and 2016 and combining this with different measures of democracy and corruption, the authors find that, on average, the effect of corruption on growth is positive in autocracies as compared to democracies. The authors suggest that the positive effect of corruption on growth in autocracies is because the authoritarian nature of political regimes can give firms the confidence that the ruling powers will deliver on the deals that they have entered into. These credible commitments are vital for investment and growth. The expectation is that the political leaders, even as they seek rents, will allow businesses to operate freely. In contrast in democracies, political commitment to businesses may seem less credible because of the frequent change in ruling parties.
But the authors find that the effects of corruption on growth vary with the degree of democracy-- a higher level of corruption lowers growth as the economy becomes more democratic. For instance, Finland, a mature democracy, was found to experience negative growth with increased corruption. While in less stable democracies, this relationship may not hold.