Public expenditure, corruption, and economic growth: the case of Italy

Abstract

Public services and goods can provide relevant inputs to private productive activities. Modern States organize the production of these inputs on the basis of taxes collected from the community. When this process is affected by bureaucrats' corruption the efficiency of public expenditure decreases. In this paper we deal with the long-run consequences of this form of corruption. A model of economic growth with public inputs to private production is put forward. The production of public goods needs inputs from the private sector that bureaucrats buy with some degree of discretion. The aim of an illegal agreement between the exchanging parties is to profit from the lack of information. Governments fight corruption through costly public purchases monitoring. The extent of corruption is a decision variable in the maximization of expected revenue. This model finds support in the econometric analysis of the Italian case. A dynamic panel data approach to economic growth based on data of 20 regions allows us to estimate the effect of corruption on the productivity of expenditure on public investment. This effect is significant and distinct from a direct negative one of corruption on the growth rate.(JEL O10, H50; key words: government efficiency, dynamic panel data, Italian economy)

Corruption and Sustainable Development

“…At the national level several other measures of corruption are available. These include data on the number of offi cials convicted for corruption (see, for example, Alt and Lassen (2003) in a study of US states, and Del Monte and Papagni (2001) in a study of Italian regions) and data concerning the amount of leakage from infrastructure projects in Italian regions (Golden and Picci, 2005 or Bhattacharyya and Hodler (2010). 31.…”

Does corruption inhibit foreign direct investment?

“…Brunetti, 1997;Poirson, 1998;Li et al, 2000;Mo, 2001;Del Monte and Pagagni, 2001;Leite and Weidmann, 2002;Gyimah-Brempong, 2002;Abed and Davoodi, 2002;Méon and Sekkat, 2005;and Castro, 2008).…”

Hold Your Nose and Vote: Why Do Some Democracies tolerate Corruption?

“…Well-known examples of democracies that have experienced long high-corruption periods include Italy, Japan, India, and the United States between the Civil War and the Great Depression. The importance of the problem cannot be underestimated: corruption is socially wasteful, harmful to growth (Mauro, 1995;Tanzi and Davoodi, 1998;Del Monte and Papagni, 2001), diverts resources to unproductive rent-seeking efforts, distorts incentives, increases inequality and poverty (Gupta et al, 2002), and prevents effective management of public expenditure. A country that fails to control corruption suffers substantial welfare losses.…”