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May 07, 2010

Daniel Kaufmann (Brookings): Can Corruption Adversely Affect Public Finances in Industrialized Countries?

Posted by Michel Lazare


PFM Blog readers will remember that we published two previous posts on Daniel Kaufmann's blogs. The first one when Daniel created his own blog (Warm Welcome to "The Kaufmann Governance Post") and the second when he started posting on the Work Bank's blog Governance Matters (Another Warm Welcome to Daniel Kaufmann Who Does It Again).

Nowadays, while keeping his personal blog quite active, Daniel is a Senior Fellow at the Brookings where he does research and publishes on governance and anticorruption.

One of latest articles is a well-crafted piece titled: Can Corruption Adversely Affect Public Finances in Industrialized Countries? in which Daniel "departing from traditional “developing country” focused studies of corruption, [asks] whether corruption may adversely affect public finances in industrialized countries. With recent data, [he explores] the link between corruption (and other governance variables) and the public budget deficit of industrialized countries.

Utilizing governance and budgetary data from over 35 industrialized countries, and controlling for other factors, his main findings are the following: 

"1. Industrialized countries vary in their ability to control corruption. According to the Worldwide Governance Indicators (WGI), by the end of 2008 Finland ranked number one for controlling corruption (with a rating of 2.3 out of a maximum of 2.5),  while the Netherlands ranked 7th (rating of 2.2), the U.K. ranked 16th (rating of 1.8), the U.S. ranked 18th (rating of 1.5). Spain ranked 31st (rating of 1.2), Portugal ranked 36th (rating of 1.1) and Greece ranked 82nd (rating of 0.1). Thus, the difference between Greece and Spain, or the difference between Spain and the Netherlands, is one standard deviation, and the difference between Greece and the top ranked Finland exceeds two standard deviations, a vast difference.

2. There is a strong relationship between corruption and fiscal deficits in industrialized countries. An improvement by one standard deviation in corruption control in 2005 is associated with about a 3.5 percentage point reduction in the average fiscal deficit between 2006 and 2009 (controlling for other factors), while a larger improvement in corruption control, by two standard deviations, is associated with a seven percentage point reduction in the fiscal deficit (see the chart below for the simple correlation)."

Daniel's work on these issues was also quoted in a Wall Street Journal article and featured on his blog.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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