Corruption and Economic Growth Nexus: Empirical Evidence From Dynamic Threshold Panel Data

The relationship between corruption and growth has two primary theories. The concept of “sand the wheels” implies that corruption impedes economic advancement, while the notion of “grease the wheels” contends that corruption facilitates the process of growth (according to this concept, in highly corrupt states with weak institutions and a large amount of bureaucracy (under certain circumstances, such as specific conditions, situations, economic structures, or phases of economic transformation), public officials tend to manipulate: to speed up certain decisions (sometimes significant for the economic growth of the state) if they receive a bribe while moving through legal channels may be slow and sometimes make these decisions impossible). The prevailing consensus in empirical research has primarily backed the “sand the wheels” theory, with minimal acceptance seen for the “grease the wheels” hypothesis. This paper examines the link between corruption and economic growth of 9 East Asian nations and 14 Middle East and North African countries between 1996 and 2019. By embracing the fundamental assumption that the influence of corruption on economic growth may not follow a linear trajectory, linear and non-linear dynamic models were used to incentivize the corruption levels at which its impact on growth transforms. The study finds an inverted U link between corruption and growth, suggesting a threshold of 0.2228, where corruption in these counties has a beneficial impact on growth and a harmful impact above it. The paper also examines the potential indirect influence of corruption on economic growth via the investment channel, explicitly defining the corruption threshold. The empirical findings in these counties show a significant positive relationship between investment and growth when corruption exceeds the threshold value of 0.3028. It means that under certain circumstances and economic contexts, corruption can potentially foster investment, particularly when bureaucratic inefficiencies and strict regulations impede investment endeavors (through various means, including facilitating the acquisition of permits, licenses, and financing and establishing a more foreseeable business environment). This phenomenon is especially evident in industries where time-critical possibilities require prompt decision-making. The findings indicate a statistically significant and advantageous influence of the Rule of law on economic growth (when considering the impacts of institutional factors), a positive considerable link between regulatory quality and prosperity (even when the squared corruption variable was included), a statistically significant negative effect of government spending on growth. According to the results of the calculations, the article emphasizes that in the countries of East Asia, the Middle East and North Africa, the issues of ensuring the Rule of law, accountability, transparency and reduction of bureaucracy are of particular relevance.