GDP and Corruption Essay Example | Topics and Well Written Essays - 3000 words

GDP and Corruption - Essay Example The main objective of this paper is to use econometrics methods to show the relationship between GDP and corruption, results show that the higher the level of corruption in a country the lower the level of GDP, correlation coefficients show that as the level of corruption in a country increases GDP declines, results show that African countries have higher mean corruption levels than the other non African countries. A study by Mauro (1995) showed that corruption had an effect on the level of investment in a country, in his study he found out that corruption discouraged foreign direct investment. Ackerman (1998) states that if India was to reduce its corruption levels then it would attract foreign direct investment at the same level as the attraction attained through tax incentives, Another study by Tanzi and Davoodi (1997) showed that corruption tends to increase the level of government spending, these funds are not used for their intended purpose and therefore spending on education and health is reduced resulting to poor economic growth and human capital development. Bardhan (1997) study shows that corruption also affects income distribution and this increases poverty levels in a country, Krueger (1994) states that corruption affects the election of leaders and the decisions made by these leaders may adversely affect the economy. The level of GDP is a key indicator of the welfare and economic development in an economy, the level of GDP in a country is determined by a number of factors which include the interest rates, inflation, investment, infrastructure, human capital, capital stock, production, exports and consumption, however less emphasis has been put on the importance of eliminating corruption practices as a way to influence economic growth. In this paper we focus on the effect of corruption on the GDP level of a country, we use data on corruption index from transparency international and GDP level from the world bank, we use linear regression models to estimate the relationship between these variables and show that corruption affects the level of GDP, limitations include unavailability of data for countries and the violation of linear regression assumptions on auto regression given that we will be considering cross sectional data. The following is a description of the data and econometric modelling. Data: Data used was retrieved from transparency international website that indicate corruption index for the year 2007 for countries all over the world, data on GDP in US dollars for the year 2007 was retrieved from the world bank website. A sample of 152 countries was considered in the study and this was due to the availability of data. The following chart represents the countries considered in this study where countries are categorized into African and non African countries: Only 3 % of the countries are African while approximately 97% were non African countries, analysis on the GDP levels showed that the mean GDP levels for non African countries was relatively higher compared to the mean GDP for African countries, the following chart summarizes the results: Results also show that the mean corruption index value for African countries was relatively lower than the mean corrupti