Private investment, the quality of public investment, and the impact of corruption in emerging economies

In this dissertation we develop a neoclassical model of growth to investigate a number of hypothesized outcomes of corruption. By extending the neoclassical model of economic growth, we allow for the possibility that corruption influences the steady-state growth rate through its impact on private investment, public investment, human capital, and governance via numerous indirect channels.; We empirically investigate hypotheses emanating from our theoretical model utilizing a new investment database we helped assemble while at the International Finance Corporation (IFC). National accounts typically do not break gross domestic investment into its private and public sector components. Even when countries do attempt to differentiate between public and private investment, “private” investment often includes investment by state-owned enterprises. To correct for this potential bias, we build a dataset utilizing this correction, covering sixty-three emerging markets for the period 1984–1999, the largest panel dataset of this type built to date.; We empirically investigate the impact of corruption on human, private, and public capital, and then extend the analysis to investigate the impact of corruption on the quality of public investment. It is within this context we present a more comprehensive approach to the issue of crowding in—crowding out between public and private capital. Examining corruption's impact on the inputs of the production function allows us to investigate its influence on economic growth. We also investigate corruption's impact on governance.; Using fixed-effects error components estimators, as well as pooled OLS where appropriate, we find that proper econometric specifications yield dramatically different results than those presented in the literature. The impact of corruption on public and private investment is not as unambiguous as the literature suggests but the impact on human capital is particularly punitive. Corruption's impact on growth appears limited but improved governance fosters economic growth. The impact of corruption on the quality of public investment is less damaging than previous studies have shown. Corruption's impact on governance is unambiguously negative. Finally, we weigh in on the crowding in-crowding out debate. When properly estimated, there is no debate for our sample: public investment crowds out private investment.