Trade Openness, Corruption and Factor Abundance: Evidence from a Dynamic Panel

• Date: 01 February 2014
• Published date: 01 February 2014
• Author: Suryadipta Roy,Biswajit Mandal,Sugata Marjit
• DOI: http://doi.org/10.1111/rode.12068

Trade Openness, Corruption and Factor Abundance:

Evidence from a Dynamic Panel

Sugata Marjit, Biswajit Mandal, and Suryadipta Roy*

Abstract

Using the Heckscher–Ohlin–Samuelson–Vanek (HOSV) framework, this paper illustrates a relationship

between corruption and the pattern of international trade that depends on the factor endowments of coun-

tries. The relationship between trade openness and corruption is empirically investigated by using a panel

dataset on trade openness, corruption and capital–labor ratio, and applying estimation techniques devel-

oped for dynamic panels. The regression results provide strong support to the hypothesis that the effect of

corruption on trade openness depends on relative factor abundance.

1. Introduction

This paper studies the interaction between corruption and relative factor abundance

on the trade openness of countries. The motivation follows from the stylized fact that

share of international trade in the gross domestic product (GDP, measured by trade–

GDP ratio) for the low income (labor-abundant) countries is substantially smaller in

comparison with the high income (capital-abundant) countries. If greater trade open-

ness benef‌its the low-income countries more than the high-income countries as

argued by Rassekh (2007) among others, what prevents the former from participating

in greater international trade? To explain this, we introduce corruption in the neo-

classical theory of international trade to understand how it affects the comparative

advantage of countries, and the resulting pattern of international trade. We view cor-

ruption mainly as a labor-intensive activity that distorts relative factor endowments.1

The idea is based on Bhagwati (1982) where corruption has been described as a

directly unproductive prof‌it seeking (DUP) activity. Our theoretical framework illus-

trates situations under which corruption can have different implications on trade

between countries based on the relative degrees of corruption in the labor-abundant

and the capital-abundant countries. We also discuss a scenario when corruption can

act as a source of comparative advantage (or lack thereof) in the presence of similar-

ity of relative factor endowments across countries in the Heckscher–Ohlin (H-O)

framework, and can promote trade. Finally, we empirically investigate if the effect of

corruption on trade openness depends on factor abundance by using cross-country

time series data on trade openness, corruption, and capital–labor ratio and by apply-

ing estimation techniques developed for dynamic panels. Thus the current paper adds

to the literature on the effect of corruption on the trade openness of countries, and

* Roy: Department of Economics, Phillips School of Business, High Point University, 833 Montlieu

Avenue, High Point, NC 27262, USA. Tel: +1-336-841-9163; E-mail: sroy@highpoint.edu. Marjit: Centre for

Studies in Social Sciences, R-1 Baishnabghata Patuli Township, Kolkata-91, India, and Sampling and Off‌i-

cial Statistics Unit, Indian Statistical Institute, Kolkata, India. Mandal: Department of Economics & Poli-

tics, Visva-Bharati University, Santiniketan, India. Roy wishes to thank Subhayu Bandyopadhyay and an

anonymous referee for helpful comments on an earlier draft. Financial assistance from the RBI endowment

at CSSSC is gratefully acknowledged. The usual disclaimer applies.

Review of Development Economics, 18(1), 45–58, 2014

DOI:10.1111/rode.12068

© 2014 John Wiley & Sons Ltd