ECONOMETRICS

CORRUPTION,PUBLIC
INVESTMENT AND GROWTH

Presented by
Ravi Kumar Singh(MBF)
Sonam Verma(MBF)
Summarize the case.
INTRODUCTION

This case is all about the corruption scandal in which a bribe city
called Tangentopoli has been ruled Italy for several decades, which
has a largest share of capital spending in GDP.

After the scandal broke out the capital spending fell sharply,
because of the reduction in the number of projects and cost of the
projects.

The basic hypothesis of this case is the political corruption, which

have a big effect on GDP of a country.
 After the world war II, countries need more capital
for its growth.

Countries need to take different kinds of basic

decision, which has a big influence of specific
politicians.

The decisions like

a) The size of the total public investment budget
b) The general composition of the budget
c) Size and design of each project.
 Corruption distorts the whole decision making process
regarding with investment budget.

Widespread corruption in investment budget reduces

rate of return on new investment as well as existing
one.
 Empirical analysis concerned to use indices of
corruption data from two sources
Business International.
Political Risk services.

Regression result talks about the relationship of

corruption with public investment, Govt. revenue and
operation& maintenance expenditure.

Higher corruption reduces the economic growth over

the different period of time.
What kind of data has Author used?

Panel data is used i.e. combination of time series and

cross sectional.
Time period: 1980-1995.
What is the method used to evaluate
the corruption?

Methods used for corruption are:

Empirical Analysis.

Regression Analysis.
 How is the variable measured?

The variables have been measured in the relationship

with corruption.
 How the variable introduced in the regression
equation?
Hypothesis 1, 2 &3 :-

Real per capita-GDP( independent variable)

Government revenue ( independent variable)
Corruption index( independent variable)

Hypothesis 4:- Public investment(dependent variable)

Government revenues( dependent variable)
O &m expenditure( dependent variable)
Quality of public investment( dependent variable)
What are the different hypothesis used in the Paper?

HYPOTHESIS 1:- High corruption is associated with high public investment.

Test:-

We regress the public investment GDP ratio as a dependent variable and corruption index as a independent
variable.

Then we use two variable i.e. real per capita GDP and government revenue to see if the corruption- investment
relationship is effected.

We add real per capita GDP for the stage of economic development and different levels of development may require
different needs for public investment.
 Government revenue GDP ratio is added because the higher are these
revenues the easier it is to finance public investment.

RESULT:-

At 1% significant level , we cannot reject this hypothesis because corruption is highly

associated with public investment.

Government revenue GDP Ratio has a statistically significant positive coefficient

indicating that such revenue are important sources of financing public investment.

A high value of the index means a country has high corruption ;

Estimation technique is OLS.

HYPOTHESIS 2:-High corruption is associated with low
government revenue.
TEST:-

We regress government revenue-GDP Ratio as dependent variable and

corruption as independent variable.

We then add real per capita GDP to control for stage-of economic
development effects.
Result
At 1% significant level, we cannot reject this hypothesis because high
corruption is associated with low revenue .

We add real per capita GDP to control for stage-of-economic development

effects.
HYPOTHEISIS 3:- High corruption is associated with
low O&M expenditures.

TESTS:-
In this hypothesis, we use two proxies

1. Expenditure on the goods and services, a component of

current expenditure, expressed as a fraction of wages and
salaries;

2. Wages and salaries expressed as a fraction of current

expenditure.
 RESULT:-

One can reject this at 1% significant level only for the

developing country,

Once we control for real per capita GDP, we can reject this at
1% significant level for all 3 samples,

First proxy is a noisy indicator of O & M Expenditure.

 For the second proxy we cannot reject this hypothesis at 1%
significant level for all 3 samples whether or not we control
for real per capita GDP,

Countries with high corruption do tend to have high ratios of

wages and salaries to current expenditure,

The evidence is much stronger statistically and economically

for the developing country sample than OECD sample.
 Hypothesis 4:- High corruption is associated with poor
quality of infrastructure.
RESULT:-

It cannot be rejected at 1% significant level,

Countries with high corruption do tend to have poor quality of

infrastructure,

In terms of statistical significance, the impact of corruption is

strongest on the quality of roads, power outages and railways
diesel in use,
 When we control for real per capita GDP, corruption changes
its sign in only one regression and loses its statistical
significance at the usual level in three model,

The fit of every regression improves,

The costs of corruption should also be measured in terms of

the deterioration in the quality of the existing infrastructure,
Are there any single, multiple and step-
wise Regression model?

In all the hypothesis, we use single, multiple and

stepwise regression model.
What are conclusion of the different
hypothesis of the paper ?

Hypothesis 1:- Corruption can reduce growth by increasing

public investment while reducing its productivity.

Hypothesis 2:- Corruption can reduce growth by increasing

public investment that is not accompanied by its recurrent
current expenditure i.e. adequate non-wage O&M
expenditure.
(It shows higher corruption is associated with higher total
expenditure on wages and salaries)
 Hypothesis 3:- Corruption can reduce growth by
reducing the quality of the infrastructure.
A deteriorating infrastructure increase the costs of doing
business for both government and private sector thus leads to
lower growth and output.

Hypothesis 4:- Corruption can be reduce by lowering

government revenue needed to finance productive spending.
Corruption has strongest impact on the quality of roads, power
outages and railway diesel in use
Are any dummy variables used in
the model?

NO dummy variable is been used in the model .

ANOVA and ANCOVA model being
used?

As no dummy variable is used in the model i.e.

ANCOVA is not used .

ANOVA Is used in form of

Adjusted r square
t statistics
Which variable author has considered as
a proxy in the growth of the country and
corruption of the economy?
The following are variable used as a proxy:-

1. GDP,

2. THE RATIO OF WAGES AND SALARIES TO CURRENT

EXPENDITURE,

3. GOVERNMENT SPENDING.