The link between corruption, development, and military expenditures: making the case for accession to NATO.

• Author: Andrei, Tudorel
• Position: Report

Abstract

This article examines the relationships between corruption, development, and military expenditures among NATO and non-NATO countries. It is argued that the recent accession to NATO of Eastern European countries was not only a military process, but also a comprehensive reform process that will have important economic growth and human development consequences. Integration into the NATO structures is also expected to lower corruption.

1. Introduction

   For Eastern European nations the relatively recent accession to NATO was not only a military process, but also a comprehensive reform that will have important long-term economic consequences. Reforming the defence system of a NATO candidate country is not possible without developing a sustainable market economy. To prepare the accession to the NATO structures, the governments of candidate countries had to adopt new legislation meant to strengthen economic growth and improve the climate for businesses. For instance, Romania adopted legislation to reduce corruption (legislation requiring politicians to disclose information about their assets, a law governing conflicts of interest for government officials, and a law regulating the financing of political parties), and introduced important economic and legislative measures to attract foreign capital. Despite recent legislative improvements to prepare for NATO and EU membership, however, various indicators that measure corruption continue to indicate a high level of corruption in some of the former Eastern European countries. Yet many observers expect that the economic reforms and the gradual alignment of national legislations to the new requirements imposed by NATO and EU will reduce corruption in the long run.

   The consequences of corruption for economic development have been well documented by economists. The corruption level of a country has been linked to its economic growth rate, stimulating or discouraging native and foreign investment, and influencing the size and use of public expenditures. Mauro (1996), for instance, established that a corrupt country will achieve investment levels of almost 5 percent less than a relatively uncorrupt country and will loose about half a percentage point of domestic product growth per year. Corruption has also been found to lead to inefficient use of public funds in financing public services (Klitgaard, 1990). In addition, Wei (1997) presented evidence that investing in a relatively corrupt country, as compared with an uncorrupt one, is equivalent to an additional 20 percent tax on investment.

   Corruption is also associated with an increase in military expenditures. Poor decisions are taken by corrupt bureaucrats, who often tend to favour expensive, complex, capital-intensive defence projects that make it easier to skim significant funds. As Kaufmann (1997) remarked, a large defence infrastructure contract may be favoured over the construction of hundreds of schools and health clinics. By increasing the percentage of military expenditures in total government spending, corruption distorts public expenditures and hampers developmental objectives; corrupt countries spend less on education than uncorupt countries.

   Given the serious consequences corruption has on the development of emerging economies in Eastern Europe, the purpose of this study is to examine the relationship between corruption, development, and the funding of defense systems. The analysis will compare NATO members to non-NATO nations.

   The paper is organized as follows. Section II discusses ways to measure corruption and estimate hidden economies. Section III presents the empirical results of a model that links corruption to human development. Section IV examines the relationship between corruption and military spending. A discussion of the empirical results is included in Section V.

2. Background

   In recent years academics and international development agencies (i.e., International Monetary Fund, the World Bank) have become increasingly interested in estimating the corruption levels and the hidden economies throughout the developing world. Among the most influential works in the field of measuring corruption and its effects on economic development one notes the studies of Krueger (1974), Rose-Ackerman (1975), Mauro (1995), Bardhan (1997), Tanzi (1998), and Wei (1997).

   Corruption and hidden economies often lead to a serious decline in the amount of financial resources states have at their disposal and lower efficiency in the use of these funds. Financial resources are weakened directly through the granting of funds in a preferential manner, and indirectly through a reduced tax base, thus resulting in weaker defense, education, and health systems.

   The sudden crash of centrally planned economies in the early 1990s and the erosion of the role the state played in economic planning, the lack of efficient solutions for privatisation, and an inefficient justice system have all contributed to the emergence of new types of corruption. Within a relatively short period of time, a small number of individuals have accumulated massive fortunes and built influence. High corruption and the underground economy created the conditions for the emergence of powerful interest groups, who through their long-reaching influences have managed to undermine the law and gained influence over politicians and ministerial positions.

   Corruption tends to reach higher levels in those countries where the state is excessively involved in the economy (i.e., economic units with state capital hold an important weight in GDP creation and the government's policy favours certain groups), the political system is subordinated to interest groups, and public officials' salaries are much lower than those of professionals working in the private sector. Even though one could argue that, to a certain extent, corruption breaks some of the bureaucratic barriers imposed by a heavily controlling state, in the long run it leads to slowing economic growth and an increasing risk of weakening a country's national security as funds can be...