Abstract: |
This study investigates the impact of openness to trade and corruption on
economic development for a cross-section of 143 countries for the year 2000 by
analysing the effects of trade openness and corruption on income,
productivity, innovation, and income inequality. Institutional, cultural and
geographical factors, and country size are controlled for in the analysis. An
instrumental variable approach has been adopted in order to address the
endogeneity of corruption and openness to trade. The age of democracy and
gravity-based predictors are chosen as the instruments for corruption and
openness to trade, respectively. The estimates show that corruption negatively
affects income per capita, productivity, and innovation, while it does not
significantly impact income inequality (Gini). The control of corruption and
the openness to trade affect output per worker through the total factor
productivity. Both the control of corruption and openness to trade are
statistically significant determinants of the 90/10 income gap. Landlockedness
affects Gini Index directly, even after controlling for trade and corruption.
These findings have important policy implications. For example, on the basis
of the estimates, if Botswana improved its control of corruption to reach the
level of Finland, its per capita income would rise by 2.7 times. |