XIV Encuentro de Economía Pública Santander, 1 y 2 de febrero de 2007

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1 IV Encuenr de Ecnmía Pública Sanander y 2 de febrer de 2007 DOES CORRUPTION AFFECT EFFICIENC AND PRODUCTIVIT CHANGE? AN AGGREGATE FRONTIER ANALSIS SALINAS-JIMÉNEZ Mª del Mar Insiu de Esudis Fiscales and Universidad de Exremadura Insiu de Esudis Fiscales Avda. Cardenal Herrera Oria Madrid (SPAIN) Tfn: (+34) mar.salinas@ief.meh.es SALINAS-JIMÉNEZ Javier Insiu de Esudis Fiscales and Universidad de Exremadura Insiu de Esudis Fiscales Avda. Cardenal Herrera Oria Madrid (SPAIN) Tfn: (+34) javier.salinas@ief.meh.es Absrac Over he las decade here has been grwing ineres in undersanding he relainship beween crrupin and ecnmic perfrmance. The empirical evidence suggess ha crrupin cndiins he levels f incme and he grwh raes f he ecnmies wih resuls ha end mre suppr he exisence f indirec effecs hrugh invesmen as agains direc effecs n prduciviy. Neverheless very few sudies have fcused n explring he impac f crrupin n efficiency levels and prduciviy grwh. In his cnex he bjecive f he presen wrk is analyze hw crrupin influences prduciviy levels and grwh raes in a sample f O.E.C.D. cunries. T his end we shall adp a frnier apprach which will allw us n he ne hand sudy wheher crrupin cndiins he efficiency levels a which he ecnmies perae and n he her deermine he channels hrugh which i can affec prduciviy grwh wheher by influencing imprvemens in relaive efficiency levels r by shifing he prducin frnier. Key wrds: Crrupin efficiency prduciviy. JEL classificain: D73 H D24.

2 DOES CORRUPTION AFFECT EFFICIENC AND PRODUCTIVIT CHANGE? AN AGGREGATE FRONTIER ANALSIS Absrac Over he las decade here has been grwing ineres in undersanding he relainship beween crrupin and ecnmic perfrmance. The empirical evidence suggess ha crrupin cndiins he levels f incme and he grwh raes f he ecnmies wih resuls ha end mre suppr he exisence f indirec effecs hrugh invesmen as agains direc effecs n prduciviy. Neverheless very few sudies have fcused n explring he impac f crrupin n efficiency levels and prduciviy grwh. In his cnex he bjecive f he presen wrk is analyze hw crrupin influences prduciviy levels and grwh raes in a sample f O.E.C.D. cunries. T his end we shall adp a frnier apprach which will allw us n he ne hand sudy wheher crrupin cndiins he efficiency levels a which he ecnmies perae and n he her deermine he channels hrugh which i can affec prduciviy grwh wheher by influencing imprvemens in relaive efficiency levels r by shifing he prducin frnier. Key wrds: Crrupin efficiency prduciviy. JEL classificain: D73 H D24. I. Inrducin The prblem f crrupin is generally assciaed wih he qualiy f he insiuins and he funcining f he public secr s ha he lieraure n crrupin and ecnmic resuls is clsely relaed he sudy f insiuinal inegriy. This lieraure has undergne majr develpmens in he las decade simulaed by he appearance f varius indicars f crrupin and insiuinal qualiy which have enabled numerus empirical sudies be carried u. In general he empirical evidence suggess ha crrupin leads lwer levels f dmesic and freign invesmen less prducive public expendiure lwer prduciviy grwh and cnsequenly slwer grwh raes. Crrupin is perceived as especially wrrisme in less develped cunries while develped cunries are seen as being in cnrl f crrupin. Hwever as Kaufmann (2004) Fr a review f he empirical lieraure n crrupin and ecnmic aciviy see Jain (200). Bardhan (997) gives a deailed review f he hereical lieraure n crrupin.

3 bserves differences in erms f crrupin appear mainly beween cerain regins ning by way f example ha differences in he levels f crrupin beween he Nrdic cunries and he cunries f suhern Eurpe are greaer han beween his laer grup and he average f he emerging ecnmies. Indeed alhugh he levels f crrupin f O.E.C.D. cunries are relaively lw in cmparisn wih hse f her cunries here are als nable differences amng he O.E.C.D. grup. Neverheless ms sudies n crrupin have cnsidered brad samples including bh develped and less develped r develping cunries and lile wrk has been dne n sudying he effecs f crrupin in O.E.C.D. cunries. Sudies n he relainship beween crrupin and ecnmic aciviy have ended cenre n hw crrupin affecs invesmen r prducin grwh while he impac f his variable n prduciviy has received less aenin. Mrever efficien behaviur is generally assumed when sudying prduciviy hus making i impssible invesigae hw crrupin influences he efficiency a which differen ecnmies perfrm. The principal mivain f he presen wrk is sudy wheher crrupin affecs he ecnmic resuls f O.E.C.D. cunries frm a prduciviy-based perspecive. A frnier apprach is adped allwing us esimae he relaive efficiency levels wih which he differen ecnmies perae wih he aim f analyzing wheher crrupin has an influence n he esimaed levels f efficiency and he pahs by which i can affec prduciviy grwh. In accrdance wih hese bjecives he srucure f his aricle is as fllws: Secin 2 presens a brief review f wrk cncerning he effecs f crrupin n ecnmic aciviy wih paricular emphasis paid he aspecs relaed efficiency and prduciviy grwh. Secin 3 sudies he relainship beween crrupin and prduciviy in O.E.C.D. cunries. A frnier apprach is adped esimae he relaive efficiency levels and prduciviy grwh is decmpsed in efficiency gains and shifs f he prducin frnier by means f Malmquis prduciviy indices. These esimaes are used sudy wheher crrupin cndiins he efficiency levels and prduciviy grwh raes. Lasly Secin 4 presens he main cnclusins f his wrk. 2

4 II. Crrupin and ecnmic perfrmance I has smeimes been argued ha crrupin may prme efficiency by enabling privae agens crrec exising gvernmen failures. Therefre argumens ha sress he psiive effecs f crrupin are based n ideas cming frm "secnd-bes" hery -given a se f disrins creaed by gvernmenal prcedures r plicies crrupin wuld permi agens evade hse regulains ha hinder ecnmic aciviy acing "grease he wheels" f he ecnmy (Leff 964; Huningn 968). In cnras he hyphesis ha crrupin favurs efficiency emphasis is generally given he prblem psed by he implici assumpin ha gvernmen failures are exgenus and independen f crrupin when in realiy such disrins and crrupin may be clsely linked each her. In his sense crrup pliicians r bureaucras may inrduce excessive regulain precisely because f is penial fr crrupin wih he bjecive f aracing mre ffers f bribes. Als ms f he lieraure sresses ha crrupin leads inefficien allcains by alering he incenives f ecnmic agens wih a par f he ecnmy's resurces being used in he search fr paries ineresed in paricipaing in crrupin aciviies and in keeping hse aciviies hidden insead f being deved direcly prducive aciviies. The effecs f crrupin n ecnmic resuls are n limied is impac n efficiency bu exend differen variables ha cndiin ecnmic grwh. In paricular he lieraure ends fcus n he negaive effecs f crrupin n invesmen. Paymen f bribes in rder ge licenses and he uncerainy ha hese aciviies inrduce wih respec guaranees and prpery righs end reduce he incenives fr invesmen. Als prducive invesmen may be reduced as is prfiabiliy relaive ha f "invesmen" in ren-seeking aciviies diminishes and hus crrupin will have an expulsin effec n prducive invesmen. Furhermre crrupin can affec public invesmen by reducing fiscal revenue and disring public expendiure affecing negaively he raes f grwh. The lieraure n ecnmic grwh ends ne ha capial accumulain can n by iself explain ecnmic grwh bu lays he emphasis n prduciviy grwh as he deermining facr f grwh (Easerly and Levine 200; Caselli 2005). In his sense i is ineresing sudy 3

5 wheher crrupin apar frm cndiining he level f prduciviy als affecs is grwh rae. The relainship beween crrupin and prduciviy grwh culd manifes iself in differen ways. Fr ne hing crrupin can disr he allcain f human resurces generaing incenives ha lead he bes qualified peple deve hemselves ren-seeking aciviies insead f prducive r innvaive aciviies hus negaively affecing ecnmic grwh (Bauml 990; Murphy e al. 99). Fr anher crrupin culd als negaively affec innvain aciviies since he develpmen f new prducs is usually clsely linked baining permis and licenses and he precin f he prpery righs f he innvains hrugh paens all f which may be direcly affeced by crrupin. Mrever Aid e al. (2005) sugges ha crrupin culd reduce prduciviy grwh hrugh w mechanisms: by is negaive impac n innvain and als by reducing learning-by-ding exernaliies hereby limiing he pssibiliies f expliing previus echnlgy develped by her ecnmies. Ms f he empirical wrk analyzing he influence f crrupin n prduciviy invesmen innvain and in sum ecnmic grwh has been based n crss-secinal analysis fr differen samples f cunries. Many have used grwh equains in which invesmen is included as a deermining variable. When variables designed measure sme aspec f insiuinal qualiy are als inrduced hey are inerpreed as affecing he efficiency r prduciviy f invesmen hereby having a direc effec n grwh. These variables culd als have an indirec effec n grwh if hey als influence he vlume f invesmen. In his case anher equain is specified in rder analyze wheher hse variables d indeed affec he levels f invesmen. Smeimes grwh equains are esimaed in a reduced frm where he invesmen variable is replaced by a se f variables ha deermine i. This allws he verall effec f crrupin n grwh be analyzed alhugh as bh direc and indirec effecs are picked up geher i is n pssible differeniae he mechanisms hrugh which his influence manifess iself. In general he empirical evidence pins a negaive impac f crrupin n ecnmic grwh. In he pineering wrk f Maur (995) based n a prducin funcin where grwh is a funcin f invesmen he effecs f insiuinal qualiy (prpery righs 4

6 bureaucracy crrupin) n grwh and invesmen are esimaed separaely. I is fund ha an unfavurable insiuinal framewrk reduces invesmen and he pssibiliy ha crrupin affecs ecnmic grwh by influencing gvernmens' chice f prjecs is pined u. Addiinally Maur (998) analyzes hw crrupin affecs he cmpsiin f public expendiure reducing public expendiure n educain healh and infrasrucure mainenance. Knack and Keefer ( ) examine he effecs f differen insiuinal variables n grwh. Saring frm a reduced equain and esimaing a srucural equain ha includes invesmen hey find resuls ha are favurable he hyphesis ha crrupin affecs grwh negaively wih an indirec effec hrugh invesmen. Varius sudies sugges ha crrupin als affecs ecnmic grwh due is negaive effecs n freign invesmen (Wei 2000; Hellman e al. 2002) r n rade and business aciviy (Kaufmann 2004). Alhugh ms sudies analyze he effecs f crrupin n grwh r invesmen ne als finds sme wrk ha cenres n he direc effecs f crrupin n prduciviy grwh. Thus Tanzi and Davdi (997) shw hw crrupin leads an inefficien allcain f public funds which negaively affecs ecnmic grwh by increasing he vlume f public invesmen a he same ime as reducing is prduciviy. Olsn e al. (2000) calculae al facr prduciviy (TFP) in a residual frm and hen analyze which variables explain is variain acrss cunries. They find resuls ha suppr he influence f differen measures f insiuinal qualiy ne f which is crrupin. Sme recen wrk cenres n he analysis f prduciviy levels insead f grwh raes. This apprach is based n he idea ha he quaniy f inpus and he efficiency wih which hese are ransfrmed are deermined by he cunry's insiuins which herefre cndiin he upu level f he ecnmy. Hence insiuinal variables seem influence n nly he grwh rae f an ecnmy bu als is incme r prduciviy levels (Rdrik e al. 2004). In his vein Hall and Jnes (999) find ha dispariies in physical and human capial nly parially explain he differences in prduc per wrker a grea par f hem being due differences in he Slw residual. These auhrs find ha differences in prduciviy are fundamenally due he differences exising in he insiuins and gvernmenal plicies which hey erm scial 5

7 infrasrucure 2. Lambsdrff (2003) sudies hw crrupin affecs he prduciviy f capial suggesing ha he negaive impac f crrupin n prduciviy is manifes in he crrelain f his variable wih a pr qualiy f he bureaucracy. In sum he available empirical evidence suggess ha crrupin cndiins an ecnmy's incme and prduciviy levels and grwh rae wih resuls ha are generally mre favurable he exisence f indirec effecs hrugh invesmen as agains direc effecs n prduciviy. Hwever i is wrh ning ha ms f he wrks ha sudy he channels hrugh which crrupin affecs grwh have cenred n analyzing is effecs n invesmen while dealing wih is effecs n prduciviy in he bes f cases nly residually. Als while i is generally admied ha crrupin may affec he efficiency wih which an ecnmy perfrms here is lile wrk ha sudies he acual impac f his variable n efficiency levels. Thus ms f he sudies based n prducin funcins r grwh accuning assume ha he ecnmies perae efficienly prducing he maximum upu aainable frm he available resurces and echnlgy. Hwever as Olsn e al. (2000) bserve he aainable level f prducin culd be limied by he srucure f incenives inheren in he insiuinal r pliical framewrk s ha wrkers r enerprises migh n have enugh incenives use he available resurces r echnlgy efficienly. Sme recen sudies analyzing he effecs f insiuinal qualiy n prduciviy have indeed cnsidered he pssibiliy ha he ecnmies perae in an inefficien way. A schasic frnier apprach is adped in he wrk f Adkins e al. (2002) Klein and Luu (2003) Mén and Weill (2005) and Duculiags and Ulubasglu (2005) wh sudy he relainship beween such variables as ecnmic and pliical freedms r differen gvernmenal indicars and he esimaed efficiency levels. Using a nn-parameric esimae f he prducin frnier Lall e al. (2002) and Cherchye and Mesen (2003) fcus n sudying he prcesses f cnvergence 2 These auhrs define "scial infrasrucure" as he se f insiuins and gvernmen plicies ha influence he individual incenives f ecnmic agens. These incenives may fser prducive aciviies invesmen r he develpmen f new echniques r n he cnrary hey may lead predary behaviur such as crrupin r renseeking. 6

8 analyzing hw differen insiuinal variables cnribue cnvergence by favuring relaive imprvemens in erms f efficiency. III. Prduciviy and crrupin in O.E.C.D. cunries In his wrk a nn-parameric frnier apprach is adped in rder sudy he influence f crrupin n prduciviy levels and grwh raes. This will allw us n he ne hand analyze wheher crrupin cndiins he efficiency levels a which he ecnmies perae and n he her deermine he channels hrugh which i can affec prduciviy grwh wheher by influencing imprvemens in relaive efficiency levels r by shifing he prducin frnier. A. Efficiency levels and decmpsiin f TFP grwh In rder sudy he efficiency wih which prducive inpus are emplyed i is necessary esimae a prducin frnier which represens he maximum echnically aainable level f prducin. An ecnmy's relaive inefficiency level will hen be regarded as he difference beween he level f prducin acually bained and he prducin frnier. Prduciviy grwh may be due a mre efficien use f he inpus fr a given prducive capaciy r echnlgical imprvemens allwing an increase in ha capaciy. In his sense ne f he advanages f adping a frnier apprach is ha prduciviy grwh can be decmpsed in echnical prgress (represened by a shif f he prducin frnier) and gains in relaive efficiency (represened by a mvemen wards he echnlgical frnier). I als allws us sudy hrugh which pahs crrupin can affec prduciviy grwh. We shall use a nn-parameric echnique -Daa Envelpmen Analysis (DEA) 3 - esimae he prducin frnier and he assciaed efficiency levels f each f he ecnmies. Variains in al facr prduciviy will be esimaed by means f Malmquis prduciviy indices which in urn are 3 Daa Envelpmen Analysis is ne f he ms cmmnly used echniques amng nn-parameric appraches. The advanage f he laer is heir greaer flexibiliy since hey neiher require a paricular funcinal frm be specified fr he echnlgy nr any assumpin be made abu he disribuin f he inefficiency erm. 7

9 decmpsed in echnical prgress and changes in relaive efficiency allwing us analyze which par f prduciviy grwh is due each f hese facrs 4. This analysis is illusraed in Fig. which is based n he case f a single inpu () and a single upu () in rder simplify he represenain. The pairs ( ) and (+ +) represen bserved values fr an ecnmy while he maximum penial prducin in perids and + (pins E and A) crrespnd he reference echnlgy (S and S+). As ne bserves prduciviy grwh may be due eiher an apprximain he frnier r a shif f he prducin frnier iself. The change in relaive efficiency (erm EC in equain A.5 in he appendix) represens mvemens wards he frnier and is shwn graphically by he disance OF-OE and OB-OA. Likewise echnlgical change (erm TC in equain A.5) is measured by he gemeric mean f he shif f he frnier in perid (he disance OE-OC) and + (he disance OD-OA). Figure : Decmpsiin f TFP grwh The sample used in his sudy refers 22 O.E.C.D. cunries and cvers he perid In each case a single upu -he Grss Dmesic Prduc- and w inpus -capial and labur- are cnsidered. The capial sck esimaes are aken frm Kamps (2004). They were calculaed by means f he permanen invenry mehd based n hisrical invesmen series fr he O.E.C.D. 6 These esimaes are presened in hree caegries: privae nnresidenial capial; residenial sck; and public capial. Residenial capial was excluded since i is n linked prducive aciviy s he measure f capial sck adped in he presen sudy includes bh (nn-residenial) privae and public capial. Daa n real prducin was bained frm his same surce wih bh variables being expressed in erms f cnsan 995 dllars. Labur is measured in annual hurs wrked as esimaed by he GGDC frm he number f 4 A frmal presenain f he Malmquis prduciviy indices and heir decmpsiin is given in he Appendix. 5 The 22 cunries f he sample are: Ausralia Ausria Belgium Canada Denmark Finland France Germany Greece Hlland Iceland Ireland Ialy Japan New Zealand Nrway Prugal Spain Sweden Swizerland Unied Kingdm and Unied Saes. 8

10 peple emplyed in he ecnmy and he hurs wrked per emplyee accrding daa f he OECD and nainal surces 7. Table presens a summary f he esimaes f he efficiency levels and prduciviy grwh. The firs rw prvides descripive saisics f he esimaed relaive efficiency fr ur sample f O.E.C.D. cunries in he perid and he secnd rw he saisics relaing TFP grwh which is decmpsed in relaive efficiency change and echnlgical change (hird and furh rws respecively). Als he las w rws give he saisics relaing he level and grwh f prduciviy as measured cnveninally (real prducin per hur wrked). As ne bserves he mean efficiency level in O.E.C.D. cunries during hese years was arund 85%. Neverheless here were nable differences beween cunries in erms f prduciviy wih hese differences being mre marked when bh capial and labur were cnsidered as prducive facrs han when prduciviy was measured nly wih respec he hurs wrked. Thus in cnras cunries ha ended be lcaed n he prducin frnier hrughu alms he whle perid (i.e. Belgium and France and Canada unil 995) here was a minimal level f relaive efficiency (in he case f Prugal) ha hardly reached 56%. Wih respec prduciviy grwh his was clse 2% per annum in erms f hurs wrked while TFP grwh was n average arund % per annum wih variains beween he ecnmies being similar fr he w indicars. I is als newrhy ha TFP grwh was mainly due variains in he prducin frnier while he efficiency levels sayed relaively sable. Table : Prduciviy levels and grwh: saisical summary B. Crrupin effecs n prduciviy The empirical lieraure n crrupin has frequenly adped differen measures f insiuinal qualiy cvering variables relaed he aribues f he insiuins and he 6 See Kamps (2004) fr a deailed explanain f he surces and mehds used esimae he capial sck series. 7 Grningen Grwh and Develpmen Cenre (GGDC): Tal Ecnmy Daabase (Augus 2005). Deail f surces and mehds in hp:// 9

11 evaluain f heir perfrmance. In he las few years hwever here have appeared differen measures f crrupin ha have cnribued significanly he develpmen f his lieraure 8. On he ne hand here is an exensive se f indicars prepared by inernainal rganisains r privae agencies wih he bjecive f evaluaing cmpanies' invesmen ppruniies in hird cunries. By he mid-990s w f he ms frequenly used ses f indicars in he lieraure n crrupin were hse f Business Inernainal (BI) applied in he pineering wrk f Maur (995) and hse f Inernainal Cunry Risk Guide (ICRG) applied in Knack and Keefer (995) and in Maur (998). They bh cnsis f a series f indices relaing differen insiuinal variables (amngs hers: bureaucraic efficiency pliical sabiliy and insiuinal efficiency in he case f BI; qualiy f he bureaucracy cnrac guaranees and prpery righs r risk f exprpriain in he case f ICRG) alhugh hey als include parial indicars f crrupin. On he her hand geher wih agencies ha elabrae indicars aimed a evaluaing invesmen risks and ppruniies her rganisms have a perspecive riened wards he figh agains crrupin. This has recenly given rise he develpmen f specific indicars f crrupin usanding amngs which are hse f Transparency Inernainal (TI) and he Wrld Bank 9. Bh are cmpsie indicars aggregaing varius indices elabraed frm surveys carried u by differen rganisms. TI's crrupin percepin indices (CPI) have prbably been he ms exensively used in he recen empirical lieraure n crrupin. These indicars elabraed frm pinin surveys and sudies cnduced amng business peple and analyss have been published annually since 995. In addiin CPIs have been cnsruced fr he perid (frm he Business Inernainal and Pliical Risk Service daabases) and fr he perid (using as well as he w freging daabases hse f he Wrld Cmpeiiveness Repr and f he Pliical and Ecnmic Risk Cnsulancy). 8 Arn (2000: 07-3) gives a summary f he insiuinal indicars ms cmmnly used in he empirical lieraure disinguishing beween bjecive and subjecive measures. Als Jain (200: 7-2) ffers a synhesis f he differen insiuinal measures cmmnly emplyed in he lieraure n crrupin. Jhnsn (200) discusses in deail he measuremen and analysis f differen indices f crrupin. 9 The Wrld Bank indicars cmprise six measures f gvernmenal qualiy wih ne f hem crrespnding he cnrl f crrupin. In paricular he six measures are: (i) vice and accunabiliy; (ii) pliical sabiliy; (iii) gvernmen effeciveness; (iv) regulary qualiy; (v) rule f law; and (vi) cnrl f crrupin. 0

12 In he presen wrk we use differen indicars f crrupin in rder check wheher he resuls are rbus chice f index. In paricular we use hse f Maur (995) which refers he perid and f Knack and Keefer (995) which refers he perid Bh indicars were aken frm Easerly and Levine (997). We als cnsider he CPI crrespnding he firs half f he 980s (980-85). Hence he differen crrupin indicars emplyed refer similar years -which cincide wih he beginning f he perid cnsidered in his sudy- and have been exensively used in he empirical lieraure. Table 2 presens a saisical summary f hese indicars and Table 3 gives he parial crrelains beween hem. In all he cases greaer values f he indices crrespnd less crrupin. The CPI and he Maur indicar are n a scale whse maximum is 0 while he maximum value n he scale f he Knack and Keefer indicar is 6. There are sme differences beween hese measures f crrupin. The Knack and Keefer indicar has he leas variain fr ur sample f cunries while he CPI and Maur indicars have quie a similar dispersin alhugh he Maur indicar ends have slighly higher values han he CPI. In spie f hese differences hwever he parial crrelains beween he hree indicars are very srng beween 0.85 and wih a significance level f 99%. Table 2: Crrupin indicars: saisical summary Table 3: Crrupin indicars: parial crrelains We firs esimae he effecs f crrupin n prduciviy levels. The resuls are presened in Table 4 including he esimaes wih a cnveninal measure f prduciviy (prducin per hur wrked) and wih he efficiency measure in he frnier apprach cnsidering bh capial and labur as prducive facrs. The esimaes pin a negaive impac f crrupin n prduciviy wih a psiive crrelain beween he crrupin indicars (higher values indicae less crrupin) and prduciviy levels. This negaive effec ends be greaer wih regard he level f efficiency esimaed by he frnier apprach

13 alhugh i is mre significan in he case f he prducin per hur wrked. Furhermre i is newrhy ha he Maur and CPI indicars give quie similar resuls whereas he Knack and Keefer indicar shws a greaer effec n prduciviy bu wih a lwer significance level. Table 4: Crrupin and prduciviy: effecs n prduciviy levels Wih respec prduciviy grwh we nex esimae he effecs f crrupin n he Malmquis prduciviy indices calculaed in he previus secin. This allws us sudy wheher crrupin has a significan effec n he TFP grwh raes and if s wheher his effec is apparen hrugh variains in relaive efficiency r shifs f he prducin frnier. In sudying prduciviy grwh ne mus bear in mind ha i can be cndiined by he ecnmy's base efficiency level. In his sense ne wuld expec he iniial efficiency level be psiively crrelaed wih echnlgical change since his will be he way fllwed by ecnmies ha are already highly efficien in rder increase heir prduciviy. Iniially less efficien ecnmies hwever culd raise heir prduciviy by imprving heir relaive efficiency s ha ne wuld expec a negaive crrelain beween iniial efficiency and efficiency gains. Since hese are w cnrary effecs he al effec f he iniial efficiency level n TFP grwh is difficul anicipae. Table 5 presens he resuls f esimaing he effecs f crrupin n prduciviy grwh als cnsidering hw he iniial level f prduciviy affecs is grwh rae. In examining he relainship beween he iniial level f efficiency and TFP grwh ne finds evidence favurable fr a prcess f cnvergence in erms f prduciviy amng he O.E.C.D. cunries -he ecnmies ha sar u frm lwer levels f relaive efficiency have n average a greaer TFP grwh. Crrupin als affecs prduciviy grwh wih he ecnmies shwing lwer levels f crrupin being hse ha have faser grwh raes. Again he resuls using he Maur and CPI indices were very similar while he cefficien esimaed wih he Knack and 2

14 Keefer index was less significan (alhugh i remained significan a a 90% level). Nneheless all hree indicars pin crrupin having a negaive effec n TFP grwh. Table 5: Crrupin and prduciviy: effecs f prduciviy grwh raes The resuls f esimaing he impac f crrupin n he cmpnens f TFP grwh - variains in relaive efficiency and shifs in he echnlgical frnier- are presened in Tables 6 and 7. Firsly ne nes ha he afremenined prcess f prduciviy cnvergence is he resul f he gains in efficiency undergne by he iniially less efficien ecnmies wihu he iniial efficiency level being significanly crrelaed wih shifs f he prducin frnier. Hence Table 7 als presens he resuls f he esimaes made by excluding he iniial efficiency level in sudying he effecs f crrupin n echnlgical change. Wih respec he effecs f crrupin n he cmpnens f he TFP ne bserves ha while his variable shws he expeced sign i des n reach significance in explaining he variains in efficiency. This suggess ha a leas in he grup f O.E.C.D. cunries crrupin des n limi he less prducive ecnmies' pssibiliies f expliing he exising echnlgy. Crrupin has hwever a negaive influence n echnlgical change (a a significance level f 99% wih he CPI indicar and 95% wih he Maur indicar) suggesing ha he negaive effec f crrupin n he TFP grwh is manifesed hrugh is impac n shifs f he prducin frnier. Table 6: Crrupin and efficiency change Table 7: Crrupin and echnlgical change IV. Cnclusins Sudies f he relainship beween crrupin and ecnmic aciviy have fen ned ha because f he disrins ha i inrduces in he incenives f ecnmic agens 3

15 crrupin may cndiin he efficiency wih which prducive resurces are used. Neverheless ms f hese sudies implicily assume ha he ecnmies perae efficienly prducing he maximum upu aainable frm he resurces and echnlgy available and ne finds hardly any wrk ha has inquired in he impac f crrupin n efficiency levels. In he presen wrk a frnier apprach has been adped in rder sudy he efficiency wih which prducive inpus are used esimaing a prducin frnier ha represens he maximum echnically aainable level f prducin and he assciaed levels f relaive efficiency. The sample cnsidered referred 22 O.E.C.D. cunries during he perid The resuls using differen crrupin indicars shwed ha his variable affecs negaively he efficiency levels a which hese ecnmies perfrm. The lieraure n crrupin suggess ha crrupin des n nly cndiin an ecnmy's prduciviy level bu als is rae f grwh. Ms empirical wrk has sressed he influence f crrupin n grwh hrugh is indirec effecs n invesmen while is effecs n prduciviy grwh have been less sudied. In his sense ne f he advanages f adping a frnier apprach is decmpse prduciviy grwh in gains in relaive efficiency and shifs f he prducin frnier. This allws ne sudy he pahs hrugh which crrupin can influence prduciviy grwh. The resuls suggesed ha crrupin affecs TFP grwh wih ecnmies ha have lwer levels f crrupin recrding n average faser grwh raes. This negaive effec f crrupin n prduciviy grwh is manifes hrugh is impac n shifs f he echnlgical frnier while is influence was n fund be significan in explaining he variains f efficiency in O.E.C.D. cunries. Crrupin is generally assciaed wih prblems f develpmen f he less advanced ecnmies. Nneheless despie he lwer levels f crrupin perceived in he O.E.C.D. cunries he resuls f he presen sudy sugges ha crrupin als represens an ecnmic prblem fr many f he mre develped ecnmies since i cndiins bh heir prduciviy levels and heir raes f echnlgical prgress hereby negaively influencing heir pssibiliies f grwh. 4

16 Appendix Le S be he echnlgy f prducin a perid (=...T): S = {( ) : can prduce } (A.) where and are he vecrs f inpus and upus respecively. Fllwing Shephard (970) he disance funcin a perid is defined as 0 : D ( ) = min{ θ :( θ ) S } (A.2) which allws a perfec characerizain f he echnlgy since ( ) S if and nly if D ( ). In rder define he Malmquis prduciviy index we need relae he inpu and upu vecrs a perid he echnlgy f he nex perid S + : D ( ) = min{ θ :( θ ) S } (A.3) Similarly we culd define D ( ) where he inpu and upu vecrs a perid +wuld be relaed he perid echnlgy. On he basis f he abve cnceps Färe e al. (994) define he fllwing Malmquis prduciviy index: / D ( ) ( ) D ( ) = + D ( ) D ( ) M (A.4) As i can be bserved his index is he gemeric mean f w Malmquis indices he firs relaed he echnlgy f perid and he secnd he echnlgy f perid +. This is in fac an index f prduciviy change beween perid and + and can be decmpsed in efficiency change (EC) -change in relaive efficiency beween perids and 0 The subscrip refers upu based disance funcins. See Färe (988) fr a discussin f inpu and upu disance funcins. A similar prduciviy index based n Malmquis (953) was prpsed by Caves e al. (982). Hwever hese auhrs assumed D ( ) and D + ( + + ) be equal uniy s ha echnical inefficiencies were n cnsidered. 5

17 6 +- and echnlgical change (TC) -he gemeric mean f he shif in he frnier beween hese w perids: TC EC M = + where ) ( ) ( D D EC = and 2 / ) ( ) ( ) ( ) ( = D D D D TC (A.5) In rder esimae he cmpnen disance funcins f he Malmquis index we use he daa envelpmen analysis (DEA) 2 nn-parameric echnique f linear prgramming. By assuming cnsan reurns scale 3 and expliing he fac ha he disance funcins can be esimaed as reciprcals f Farrell efficiency measures 4 he specific prblem calculae ) ( D can be expressed as: [ ] max ) ( + = λ λ λ φ φ φλ i i x y s D (A.6) The her hree disance funcins are calculaed similarly subsiuing he apprpriae perid index (i.e. r +). 2 Mehd develped by Charnes e al. (978) based n Farrell (957) echnical efficiency measures. 3 Grifell-Tajé and Lvell (995) shw ha he Malmquis index may n be an accurae measure f TFP change when nn-cnsan reurns are assumed. Furhermre he cnsan reurns scale assumpin is sufficien cndiin guaranee ha he pimizain prblem has a sluin. 4 Specifically [ ] ) ( / } ) :( max{ } ) :( min{ ) ( F S S D = = = θ θ θ θ where ) ( F is he Farrell upu based measure f echnical efficiency.

18 References Adkins L.C. R.L. Mmaw and A. Savvides (2002) Insiuins freedm and echnical efficiency Suhern Ecnmic Jurnal 69: Aid T. J. Dua and V. Sena (2005) Grwh gvernance and crrupin in he presence f hreshld effecs: hery and evidence Cambridge Wrking Papers in Ecnmics CWPE Arn J. (2000) Grwh and insiuins: a review f he evidence The Wrld Bank Research Observer 5(): Bardhan P. (997) Crrupin and develpmen: a review f issues Jurnal f Ecnmic Lieraure 35: Bauml W.J. (990) Enrepreneurship: prducive unprducive and desrucive Jurnal f Pliical Ecnmy 98: Beck P. J. and M.W. Maher (986) A cmparisn f bribery and bidding in hin markes Ecnmic Leers 20(): -5. Caselli F. (2005) Accuning fr crss-cunry incme differences in Aghin P. and S. Durlauf (eds.) Handbk f Ecnmic Grwh (679-74). Elsevier. Caves D.W. L.R. Chrisensen and W.E. Diewer (982) The ecnmic hery f index numbers and he measuremen f inpu upu and prduciviy Ecnmerica 50: Charnes A. W.W. Cper and E. Rhdes (978) Measuring he efficiency f decisin making unis Eurpean Jurnal f Operainal Research 2: Cherchye L. and W. Mesen (2003) Insiuinal infrasrucure and ecnmic perfrmance: Levels versus caching up and frnier shifs Public Ecnmics Wrking Paper Series K.U.Leuven CES. Duculiags C. and M. Ulubasglu (2005) The impac f ecnmic and pliical freedm n efficiency inpu usage echnical change and upu cmpsiin Wrk presened a he Eurpean Public Chice Sciey Meeing. hp:// 7

19 Easerly W. and R. Levine (997) Africa's grwh ragedy: plicies and ehnic divisins Quarerly Jurnal f Ecnmics 2(4): Easerly W. and R. Levine (200) I's n facr accumulain: sylized facs and grwh mdels Wrld Bank Ecnmic Review 5(2): Färe R. (988) Fundamenals f Prducin Thery Berlin: Springer-Verlag. Färe R. S. Grsskpf M. Nrris and Z. Zhang (994) Prduciviy grwh echnical prgress and efficiency changes in indusrialised cunries American Ecnmic Review 84: Farrell M. (957) The measuremen f prducive efficiency Jurnal f he Ryal Saisical Sciey (A) 20(3): Grifell-Tajé E. and C.A.K. Lvell (995) A ne n he Malmquis prduciviy index Ecnmics Leers 47: Hall R. and C.I. Jnes (999) Why d sme cunries prduce s much mre upu per wrker han hers? Quarerly Jurnal f Ecnmics 4(): Hellman J.S. G. Jnes and D. Kaufmann (2002) Far frm hme: d freign invesrs impr higher sandards f gvernance in ransiin ecnmies? Wrld Bank Insiue. hp:// Huningn S.P. (968) Pliical Order in Changing Scieies New Haven: ale Universiy Press. Jain A.K. (200) Crrupin: a review Jurnal f Ecnmic Surveys 5(): 7-2. Jhnsn M. (200) Measuring crrupin: numbers versus knwledge versus undersanding in Jain A.K. (ed.) The Pliical Ecnmy f Crrupin (57-79). New rk: Ruledge. Kamps C. (2004) New Esimaes f Gvernmen Ne Capial Scks fr 22 OECD Cunries IMF Wrking Paper 04/67. Kaufmann D. (2004) Crrupin gvernance and securiy: challenges fr he rich cunries and he wrld in Glbal Cmpeiiveness Repr 2004/2005. Wrld Bank Washingn D.C. hp:// Klein P.G. and H. Luu (2003) Pliics and Prduciviy Ecnmic Inquiry 4(3):

20 Knack S. and P. Keefer (995) Insiuins and ecnmic perfrmance: crss-cunry ess using alernaive insiuinal measures Ecnmics and Pliics 7: Knack S and P. Keefer (997) Des scial capial have an ecnmic payff? a crss-cunry invesigain Quarerly Jurnal f Ecnmics 2: Lall P. A.M. Feahersne and D.W. Nrman (2002) Prduciviy grwh in he Wesern Hemisphere ( ): he Caribbean in perspecive Jurnal f Prduciviy Analysis 7(3): Lambsdrff J.G. (2003) Hw crrupin affecs prduciviy Kykls 56(4): Leff N. (964) Ecnmic develpmen hrugh bureaucraic crrupin American Behaviral Scienis 8(3): 8 4. Lien H. D. (986) A ne n cmpeiive bribery games Ecnmic Leers 22(4): Malmquis S. (953) Index numbers and indiference curves Trabajs de Esadísica 4(): Maur P. (995) Crrupin and grwh Quarerly Jurnal f Ecnmics 0: Maur P. (998) Crrupin and he cmpsiin f gvernmen expendiure Jurnal f Public Ecnmics 69: Mén P.G. and L. Weill (2005) Des beer gvernance fser efficiency? An aggregae frnier analysis Ecnmics f Gvernance 6(): Murphy K. M. A. Shleifer and R.W. Vishny (99) The allcain f alen: implicain fr grwh Quarerly Jurnal f Ecnmics 06: Olsn M. N. Sarna and A.V. Swamy (2000) Gvernance and grwh: a simple hyphesis explaining crss-cunry differences in prduciviy grwh Public Chice 02(3-4): Rdrik D. A. Subramanian and F. Trebbi (2004) Insiuins rule: he primacy f insiuins ver gegraphy and inegrain in ecnmic develpmen Jurnal f Ecnmic Grwh 9(2): Shephard R.W. (970) Thery f cs and prducin funcins Princen NJ: Princen Universiy Press. 9

21 Tanzi V. and H. Davdi (997) Crrupin public invesmen and grwh IMF Wrking Paper 97/39. Wei S.J. (2000) Hw axing is crrupin n inernainal invesrs Review f Ecnmics and Saisics 82(): -. 20

22 Figure : Decmpsiin f TFP grwh S+ A B=+ C S D E F= O + Table : Prduciviy levels and grwh: saisical summary Mean S. Dev. Min. Max. ef_80_ fp_ch_80_ ef_ch_80_ ec_ch_80_ GDP/L_80_ GDP/L_ch_80_ Table 2: Crrupin indicars: saisical summary Mean S. Dev. Min. Max. CPI_80_ Crrup_K&K Crrup_Maur Table 3: Crrupin indicars: parial crrelains CPI_80_85 Crrup_K&K Crrup_Maur CPI_80_ (*) 0925 (*) Crrup_K&K 0848 (*) Crrup_Maur Pearsn crrelain. (*) Crrelain significan a 99%. 2

23 Table 4: Crrupin and prduciviy: effecs n prduciviy levels GDP/L_80_00 Ce (0.5897) ( ) ( ) CPI_80_ ( )** Crrup_K&K (2.0593)* Crrup_Maur (2.62)** (5.0305)*** (2.0884)* Ef_80_ ( )*** (.7605)* ( )*** (.98639)* σˆ R 2 (adjus.) saisic in parenheses; *** significan a 99%; ** significan a 95%; * significan a 90%. Table 5: Crrupin and prduciviy: effecs f prduciviy grwh raes fp_ch_80_00 ce.0389 (88.734)***.0067 ( )*** (73.78)*** Efi_ ( )** ( )** ( )** CPI_80_ (2.488)** Crrup_K&K (.78432)* Crrup_Maur ( )** σˆ R 2 (adjus.) saisic in parenheses; *** significan a 99%; ** significan a 95%; * significan a 90%. Table 6: Crrupin and efficiency change ef_ch_80_00 ce.0296 (90.475)*** (76.889)*** (77.083)*** Efi_ ( )** ( )** ( )** CPI_80_ (.9475) Crrup_K&K (.8856) Crrup_Maur (.432) σˆ R 2 (adjus.) saisic in parenheses; *** significan a 99%; ** significan a 95%; * significan a 90%. 22

24 Table 7: Crrupin and echnlgical change ec_ch_80_00 Ce (22.264)*** Efi_ ( ) CPI_80_ ( )***.0002 ( )*** (2.897)***.0037 (58.345)*** ( ) Crrup_K&K (.333).003 (89.237)*** (.3607) (66.50)*** ( ) Crrup_Maur (2.4626)** (94.)*** (2.407)** σˆ R 2 (adjus.) saisic in parenheses; *** significan a 99%; ** significan a 95%; * significan a 90%. 23