Measuring corruption is challenging because participants have incentives to hide it. According to the United Nations, annual costs from corruption are estimated at 5% of Gross Domestic Product (GDP). The IMF (2016) estimates that the annual cost of bribery is 2% of GDP and according to IMF (2019) corruption reduces tax income in at least 1.25% of GDP. Transparency International estimates that 10% of global net worth has been generated through illicit activities.
In this note (https://lnkd.in/d-QJBTmZ), I analyze how corruption affects optimal effective government expenditure and estimate the magnitude by which corruption affects observed expenditure. Based on a estimation of 91 countries in the 2012 to 2021 period, I provide evidence that a one point decrease in Transparency International’s Corruption Perception Index is associated with a 0.1385 decrease in Government’s expenditure.
To get a sense of the magnitude of this result, consider the average government expenditure of the 5 most corrupt countries, which is 21.3% of GDP, while the one of the 5 least corrupt countries is 41% of GDP. If those five most corrupt countries could reduce their corruption to the levels of the least corrupt, that would allow them to increase their government expenditure by 9.9% of GDP.