Corruption and economic growth in Latin America and the Caribbean

• Published date: 01 May 2022
• Author: Lucas Dutra de Paulo,Ricardo Carvalho de Andrade Lima,Robson Tigre
• Date: 01 May 2022
• DOI: http://doi.org/10.1111/rode.12859

756 

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     wileyonlinelibrary.com/journal/rode  Rev Dev Econ. 2022;26:756–773.

© 2022 John Wiley & Sons Ltd

Received: 12 November 2020 

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  Revised: 30 December 2021 

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  Accepted: 4 January 2022

DOI: 10.1111/rode.12859  

REGULAR ARTICLE

Corruption and economic growth in Latin

America and the Caribbean

Lucas Dutra dePaulo

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Ricardo Carvalho de AndradeLima

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RobsonTigre

Department of Economics, Catholic 

University of Brasília, Brasília, Brazil

Correspondence

Ricardo Carvalho de Andrade Lima, 

Department of Economics, Catholic 

University of Brasília, Graduate Program, 

Office K- 246, Brasília, Brazil.

Email ricardocarvalho2009@gmail.com

Abstract

In  this  paper,  we  investigate  the  effect  of  corruption 

on  the  economic  development  of  the  Latin  American 

and  Caribbean  countries.  Using  panel  data  cover-

ing  the  period  from  2000  to  2018  and  leveraging  on 

two- way  fixed- effect  and  system  generalized  method 

of  moments  estimators,  we  show  that  a  one  standard 

deviation  increase  in  corruption,  as  measured  by  the 

reversed  Transparency  International's  corruption  per-

ception  index,  is  associated  with  a  decrease  of  12.2% 

in gross  domestic product  per capita  and a  decrease of 

3.05% in economic  growth. This supports the  view that 

corruption  “sands  the  wheels”  of  the  development  of 

Latin  American  and  Caribbean  countries  rather  than 

“grease  the  wheels”  perspective  that  corruption  may 

help  compensate  for  bad  governance.  We  also  assess 

the  potential  mechanisms  through  which  corruption 

affects economic performance,  providing evidence that 

corruption is associated with lower investment in physi-

cal capital  and  lower foreign  investment flow.  Finally, 

a panel  Granger causality  test indicates  a bidirectional 

causality  between  higher  corruption  and  lower  eco-

nomic development.

KEYWORDS

corruption, economic development, Latin America and the 

Caribbean, panel data

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PAULO et al.

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INTRODUCTION

Corruption is widely recognized as one of the main obstacles encountered by the Latin American 

and Caribbean  (LAC)  countries  to achieve  significant  development  and lower  levels  of  social 

inequality and  poverty (Pedauga et  al., 2017;  Rotberg, 2019).1  Corruption practices  in the  LAC 

countries originate  from  the  colonial era,  when  large  numbers  of  institutions favored  uncon-

trolled resource  extraction  to  enrich  a  small  local  elite  that  also  concentrated  political  power 

(Acemoglu &  Robinson,  2012; Treisman,  2000). According  to the  corruption  perception index 

(CPI) calculated annually by Transparency International, most LAC countries have consistently 

high levels of corruption and are located near the bottom of the distribution for the entire set of  

countries (Rotberg, 2019).

After  the  re- democratization of   many  LAC countries  in  the  mid- 1980s,  awareness  of  cor-

ruption  was  widespread,  resulting  in  increased  media  coverage  of  corruption  scandals  and 

strengthened public anti- corruption agencies. This  wave of anti- corruption measures  led to the 

opening of  several investigations and ultimately  to the arrest  of 12  presidents and former  pres-

idents of  Latin American  countries, such  as Alejandro Toledo and  Ollanta Humala  from Peru, 

Ricardo Martinelli from Panama, Maurício Funes from El Salvador, and Luiz Inácio Lula da Silva 

from Brazil. Also, several  billion- dollar corruption schemes have  been brought to light  and put 

under scrutiny. For  example, in  Brazil, a  money- laundering scheme  discovered by  the notable 

Operation Car  Wash (Operação Lava Jato2) caused an  estimated diversion  of US$2– 13 billion3 

and had  the  participation of  other  countries  in  the region.  Despite the  recent  effort, the  2019 

Global Corruption  Barometer shows that  most LAC citizens believe that  there has  been an  in-

crease in corruption in the region in the 12months preceding the  survey and that their govern-

ments are not making enough effort to fight it.4

In this context of  increasing concern about  corruption in Latin  America and the Caribbean, 

the  aim  of  this  paper  was  to  estimate  the  effect  of  corruption  on  the  economic  development 

of  the  region,  as  well  as  suggest  possible  mechanisms  through  which  corruption  affects  eco-

nomic development. Theoretically, there are  two conflicting perspectives  that relate corruption 

to economic growth. The first and most traditionally accepted view is that corruption “sands the 

wheels” of   development: corruption  tends  to be associated  with  more fragile  institutions  and 

causes a  decrease in  factor productivity, increases  transaction costs,  and generates uncertainty 

and misallocation of production inputs (Hall & Jones, 1996; Shleifer & Vishny, 1993). On the con-

trary, the second view  argues that  corruption would “grease the wheels”  of development  since 

corrupt behavior may correct government failures and allow individuals and firms to circumvent 

bureaucratic obstacles that prevent further economic progress (Leff, 1964).

Vast empirical literature  investigates the  effects of  corruption  on economic  growth and  de-

velopment. For instance, Ugur (2014) performed a meta- analysis extracting 327 estimates of the 

direct impact of corruption on gross domestic product (GDP) growth from 29 studies. The results 

of this meta- analysis suggest that corruption has a negative effect on per- capita GDP growth, but 

the magnitude  of  the effect  is small  in the  sample including  all countries.  The effects  indicate 

more harm when the reported estimates are based only on data from low- income countries. The 

synthesized evidence  suggests  that interventions  aimed  at reducing  corruption  in low- income 

JEL CLASSIFICATION

C23; D73; K40; O40