Investigating the Nonlinearity in the Corruption - Social Spending Nexus: An Economic Development Perspective.

• Author: Ali, Mohamed Sami Ben

INTRODUCTION

It is not easy to "quantify" corruption. However, perception of corruption is quantifiable. Governments can even be arranged along a rank by the degree to which they are considered as being corrupted. Corruption has been defined in different ways because of the various forms that it can take, including extortion, bribery, fraud, and embezzlement. Macrae (1982) defines corruption as "an arrangement for a private exchange between two parties (the 'demander' and the 'supplier'), which (1) has an influence on the allocation of resources either immediately or in the future, and (2) involves the use or abuse of public or collective responsibility for private ends."

Corruption has a decisive relationship with economic development (Ben Ali & Saha, 2016) as it can obstruct or at least delay development of economies (Ahmed et al., 2012). Indeed, corruption can affect economies in various dimensions of growth as it increases inflation, abuse economic revenues (Blackburn & Powell, 2011) and negatively affects macroeconomic performance. It impedes economic growth as it reduces investment in almost all sectors (Mauro, 1995; Wei, 2000; Lambsdorff, 2003). Also, corruption increases costs of any business (Shleifer & Vishny, 1993; Ades & Di Tella, 1997). Recent empirical literature also suggests that corruption may either discourage investments or condense them in less productive fields.

One of the main effects that has been highlighted in the literature is the one that corruption may exert on public resources by distracting them when it affects distribution and government spending (Mauro, 1998; Olken, 2006). It can therefore lead to income inequality through different channels, including education and health, where corruption increases the cost of government operations and, therefore, decreases the availability of resources. In this study, we specifically focus on the impact of corruption on both health and education. Most of the literature aiming to shed light on the impact of corruption on public spending focuses on the linear relationship. This paper focuses on this relationship by investigating the potential nonlinear effect that may occur between corruption, education and health care spending and contributes in a different way to the current literature. First, we exploit the nonlinearity in corruption to endogenously determine the threshold above which the effect on public spending could change. We also consider different levels of economic development to check for the stability of this relationship through different levels of economic development. We first start this study by reviewing the literature regarding the corruption-social spending nexus. Section 3 presents the data, the models and the methodology used. Section 4 presents and discusses the results. The last section concludes.

THE CORRUPTION--SOCIAL SPENDING NEXUS: A LITERATURE OVERVIEW

According to Monte and Papagni (2001), there are diverse ways corruption can decrease economic development. These authors argue that economic resources can be wasted as a result of corruption when public resources reward the more able rather than the best. Tokunova (2014) considers that corruption is a private exchange, which has an immediate or future impact on the allocation of resources. In almot all countries, but especially in developing ones, corruption is detrimental to efficiency, since it affects government spending allocation through various channels and sectors. Some theoretical justifications about the impact of corruption on expenditure of different sectors were described by Smarzynska and Wei (2002), arguing that corruption leads to less transparent local administration. Moreover, corruption negatively affects the agreements between both production and services sectors and spending decisions on these sectors, which in turn leads to waste of resources. Both Eicher (2002) and Smarzynska and Wei (2002) found that corruption causes a negative influence on expenditure because of reduction of spending incentives.

Some arguments in the literature are that corruption can have a positive relationship with investment expenditures to support development activities. For example, Kim (2010) stated that, "hosting countries with higher level of corruption of government sand lower level of democracy, attract more investment inflows." However, Kim (2010) argues that the relationship between expenditure by investors and corruption is conditional to the achieved level of development that the country has. Nonetheless, Khan and Akbar (2013) indicated that corruption reacts with some other factors, such as government stability, socioeconomic conditions, investment profile, ethnic tensions, democratic accountability and bureaucracy quality and most of these factors have a significant negative relationship with development expenditure in developing countries. However, in developed and high-income countries or upper middle-income countries these factors do not have a significant negative relationship with investment expenditures (Khan & Akbar, 2013).

Although corruption has a negative impact on society as a whole, it has more influence on higher education (Rumyantseva, 2005). These findings were confirmed by Mauro (1998), who argued that a high level of corruption is usually associated with lower education and health spending. This result was later confirmed by numerous authors, including Cheung (2008) who gives further insights to the relation between corruption and this kind of public spending. He shows that corruption declines public faith in higher education and education quality, trains youngsters to be unethical and inspires them to distorted values and culture. Corruption impedes performance in education and health sectors, as expenditures have to be more in the form of bribes. Moreover, corruption increases the cost of education and harms the education beneficiaries (Hallak & Poisson, 2002). In another line of thought, Tanaka (2001) supports, however, the idea that corruption may play an essential factor to speed up processes and avoid some of the bureaucratic procedures in the short term in developing countries. Yet, corruption becomes a barrier for process completion in the long term. People that are more educated show less acceptance of attitudes across the range of corrupt performance. This reveals that suggestions of improving access to education in developing countries may decrease the occurrence of corruption norms and, eventually, the corruption itself (Truex, 2011).

Corruption is also a major danger to health system performance, as it negatively affect health outcomes (Vian, 2008; Hanf et al., 2011; Holmberg & Rothstein, 2011). Corruption in the health sector is an international problem. Both rich and poor countries suffer from a significant degree of corruption in the health sector (Ensor, 2004). Numerous studies argue that health spending is negatively and significantly associated with corruption (Mauro, 1998). Recently, Rispel et al., (2015) confirmed these results and showed that corruption has not only harmful consequences on patient care, but is a cause of low morale of healthcare workforces. Moreover, the negative impact of corruption is mainly through health service, convenience and efficiency (Lewis, 2007). Recently, Cockcroft (2014) confirmed these findings and argued that corruption negatively affects productivity as well as proficiency of health sectors. Moreover, corruption has different effects on health care that may arise with providers, as explained by...