The political economy of corruption and institutions: Empirical evidence from developing countries

Despite the ubiquity of academic literature on the causes and consequences of corruption, the researchers in both economics and politics have not studied its relationship with State's governance capacity. In this dissertation, our primary question is whether governance capacity affect corruption. To define governance capacity, we have used two measures. The first measure focuses on the quality and effectiveness of policy reforms. Precisely, this indicator measures the perceptions of individuals about the quality of civil service and quality of policy design and implementation. To measure this aspect of governance capacity, we use a measure of governance effectiveness developed and provided by the World Bank, The second measure of governance capacity that we call the political capacity focuses on a nation's resource extraction capabilities. On the one hand, it has been argued that countries with high extractive capabilities have strong institutional structures and policy design. On the other hand, rulers with strong political capacity have the incentives for rent seeking. Along with these questions, this dissertation explores the relationship between democracy, economic policies, governance effectiveness & capacity, and corruption. Our primary focus remains on the following questions: Does governance effectiveness affect corruption? Whether countries with strong political capacity can mitigate or foster corruption? Along with these important questions, we also explore the relationship between democracy and corruption. In particular, we examine how affect democracy affect corruption in the presence or absence of governance effectiveness and capacity. Understanding the answers behind these questions is an important step toward ongoing efforts to develop and implement policies and strategies to fight corruption.;A salient feature of this research is its specific focus on developing countries. We have investigated the aforementioned questions in detail for a set of 98 developing countries. Our focus on developing countries is based on the premise that, 1) the persistence and homogeneity of rampant corruption in developing countries suggest that share they common drivers of corruption (Khan, 2006); 2) The failure of anti-corruption policies in developing countries proposed by conventional economic and political analysis provides a rationale for a detailed investigation of corruption dynamics in these countries. 3) Almost all the cross-national studies on the causes and consequences of corruption focus on both developed and developing countries. To the best of our knowledge, we are not aware of any noteworthy study that specifically examines the dynamics of corruption in developing countries. Yet to have clear policy implications on controlling corruption, we believe that investigating causes of corruption in developing countries, separately from developed countries, is imperative. Our results suggest that governance capacity, whether it is policy effectiveness or political capacity, is key determinant in controlling corruption. These results remain robust to various estimation techniques and different samples. On the other hand, we found that the impact of democracy on corruption is not robust and sometimes the relationship is not liner. However, our results suggests the interaction of democracy and government effectiveness (policy effectiveness) is significant with the expected sign, and this relationship is robust. On the other hand, the effect of the interaction of democracy and governance capacity (political capacity) is not significant.