Relation Between

Corruption and Economic Growth In Pakistan

By Hamzah Hussain Bhatti

Introduction

Corruption is always a huge element in the economic growth of an economy. There are different type of corruption in the economy, small scale, medium term and large scale. All thee corruption types, when combined together, can be very lethal in their plan of action and can destroy the economy and bring a country upside down. This paper will discuss the impact of corruption on the economy a growth of Pakistan. The data for corruption will be used in terms of Corruption perspective index based on the surveys done by transparency international. The indicator used to portray the economic growth is the GDP growth rate of Pakistan. The impact of corruption over the gdp growth of Pakistan will be seen over the last 10 year in this paper and will somehow try to build a relationship between these two important indicators in the economy.

Problem statement:
What is the impact of corruption on the economic growth in Pakistan ?

Literature review:
Corruption is spiritual or moral impurity or deviation from an ideal. Corruption entails many forms including bribery and embezzlement. Corruption can occur on many different scales. There is corruption that occurs as small favors between a small number of people, while there is the corruption that affects the government on a large scale, and corruption that is so prevalent that it is part of the everyday structure of society. The research, Mauro (1997), analyses number of causes and consequences of public corruption. it has presented evidence that corruption may have considerable adverse effects on economic growth, by using the indicators like private investment composition of public expenditure. This study also presents evidence of a negative and significant relationship between corruption and government expenditure on education. Another research, Nasir (2011), discusses that Corruption misallocates talent and
resources, and distorts technology choices. State taxes, poverty and inequality are the most highlighted variables in the study. It also shows the negative relationship between corruption and state taxes. Whereas, poverty and inequality have a positive relationship with corruption. It also discusses that corruption impacts decisions to start new businesses in the economy. However, Alexeev (2008), presents a different point of you. This research presents the benefits of Corruption. While discussing the benefits, variables like excessive regulations, tax revenue, and efficient outcomes have been used. This study uses Arellano-Bond estimators to show positive relation between corruption and growth in a linear way. Moreover, this study uses the coase theorem to prove that corruption would result in in socially efficient outcome. Jane (2001), uses income from corruption, legitimate income, strength of political institutions, moral and political values of society and probability of being caught as main variables to calculate the net utilty of corruption. The main models used in this research are the agency model of corruption and resourse allocation model. This research presents that all the above listed variables have negative relation with corruption other than legitimate income or fair wages.

When it comes to Pakistan, A study, Siddique (2010), gives a detailed statistics over corruption in Pakistan using Corruption Perception Index (CPI) that shows Pakistan that pakistan has slipped 8 ranks and comes down from 42nd position in 2009 to 34th position in the most corrupt countries list. According to this study, bad governance is the main reason for the enhancement of corruption in the economy which has brought down the economic growth. Moreover, this study suggests that serious political consensus is required to overcome the corruption.

This Research will try to make the economic analysis of corruption in Pakistan by highlighting the main areas like, Economic causes of corruption, Rent-seeking in the public offices Pakistan , including Judiciary, Corruption as an economic behavior in Pakistani Citizens and Corruption in different economic activities, e.g. public procurement, defense procurement. But, its main focus will remain on the Impact of corruption on economic growth in Pakistan.

Objectives:
Run Regression Analysis between corruption Index and Economic Growth Indicator Interpret the results for policy recommendations on reducing the Corruption

Hypothesis:
H0: There is a Positive Impact of Corruption on the economic growth of Pakistan H1: There is a Negative Impact of Corruption on the Economic Growth of Pakistan H2: There is no clear relationship between Corruption and Economic growth in Pakistan

Data Source:
Data for GDP has been taken from the authentic website, Trading Economics Pakistan. The data for Pakistans GDP growth is of last 10 years and is written in terms of Percentages taken as an index. Data for Corruption in Pakistan is taken from the authentic website of transparency International. The data for Corruption in Pakistan is written in terms of Corruption Perception index which is also called corruption index.

CPI Corruption Perception IndexReverse 7.5 7.9 7.9 7.8 7.6 7.5 7.6 7.7 7.5 8

GDP 4.73 7.48 8.96 5.82 5.54 4.99 0.36 2.58 3.66 4.36

Methodology:
This study is going to use Ordinary least square method to find out the relationship between corruption and economic growth. The indicator used in this study for the economic growth of Pakistan is the GDP growth index and the Indicator used for corruption is the corruption perception index. Dependent Variable: GDP Independent Variable: CPI

GDP = 0 + 1 CPI + e
Model: Least square Software to be used in this research is Eviews

Dependent Variable: GDP Method: Least Squares Date: 08/05/13 Time: 09:18 Sample: 1 10 Included observations: 10 Variable C CPI R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient -41.15950 5.975000 0.218732 0.121074 2.258455 40.80496 -21.22048 2.239767 0.172871 Std. Error 30.74995 3.992423 t-Statistic -1.338523 1.496585 Prob. 0.2175 0.1729 4.848000 2.408991 4.644096 4.704613 4.577709 1.225129

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

R Square is .21 that means 21% of the variation in the dependent variable is explained by CPI. The T-stat is less than 2 for CPi that means the variable Is insignificant. Also, the F-stat is 2.2, that is statistically significant but not very promising because its not substantially more than 2. Durbin-Watson Test suggests that value is substantially less than 2 and there is evidence of positive serial correlation. In the light of these interpretation, this research accepts H2.

With log:
Dependent Variable: LNGDP Method: Least Squares Date: 08/05/13 Time: 11:49 Sample: 1 10 Included observations: 10 Variable C LNCPI R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient -23.04868 11.95631 0.104118 -0.007868 0.907924 6.594604 -12.10772 0.929744 0.363167 Std. Error 25.30908 12.39983 t-Statistic -0.910688 0.964232 Prob. 0.3891 0.3632 1.353573 0.904373 2.821544 2.882061 2.755157 1.829211

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

With log, the auto correlation from the regression is corrected, Now the value is pretty close to 2. Hence, there is no auto or serial correlation. On other hand, F-stat has decreased maturely, which proves that model has become more insignificant on the cost of reducing the auto correlation. The value of R square is abnormally high and the alarming situation has aroused with the adjusted R squared. The better side of the story is that through Log regression there is around 11 percent change in GDP if one percent increase is done in the CPI.

Hetroscendasticity Test:
Heteroskedasticity Test: White F-statistic Obs*R-squared Scaled explained SS 0.276433 0.731994 0.281487 Prob. F(2,7) Prob. Chi-Square(2) Prob. Chi-Square(2) 0.7664 0.6935 0.8687

Test Equation: Dependent Variable: RESID^2 Method: Least Squares Date: 08/05/13 Time: 09:39 Sample: 1 10 Included observations: 10 White Heteroskedasticity-Consistent Standard Errors & Covariance Variable C CPI CPI^2 R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood F-statistic Prob(F-statistic) Coefficient -2434.004 626.9018 -40.27274 0.073199 -0.191601 5.147037 185.4440 -28.79022 0.276433 0.766394 Std. Error 3469.657 900.2060 58.33934 t-Statistic -0.701511 0.696398 -0.690319 Prob. 0.5056 0.5086 0.5122 4.080496 4.715111 6.358045 6.448820 6.258464 2.210617

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Hannan-Quinn criter. Durbin-Watson stat

Conclusion:
The results in the above regression analysis shows that corruption only covers around 27% of the change in the GDP growth of Pakistan. However, it is easier to say that Corruption has around share in the growth of GDP of Pakistan. Corruption can be held account accountable for the 1 fourth chunk of GDP change in Pakistan. Also, The model shows us that the index that the paper has used in the calculation in nearly significant. The argument can be made that it may not have the rightful place to be in list of accountable determinants for the change in the GDP of Pakistan. But, the thing that creates a point of worry, Pakistan is being forced more and more deeper in the wrath of corruption. The data starts from 2003 and it is clearly seen that once the corruption is in the society it is very hard to kick it out of the society. Infect at time it is seen that when the GDP grows and there is more circulation of Money in the economy

that corruption is infact increased or remains the same E.g 2003-2009(proved by the sign of the coefficient of CPI. Only in the case of 2012 did this happen that upon the reduction in growth rate of GDP of Pakistan, the Corruption increase by 4 pips. Before 2012 the corruption index was showing somewhat serial correlation between the variables. But, in 2012 it reversed that is also the reason why the indicator seemed to be insignificant and did not pass the t-test.

Policy Recommendations:
The 27% percent share in the change of GDP of Pakistan is enough to work on the policy makings and reduce this shadow of disastrous devil from Pakistans society. Setup Anti corruption department other than NAB Give infrastructure and subsidies to Organization like USAID corruption body so that these organizations can flourish and control the corruption the economy. Law and order should be maintained It should be understood that it takes a generation to take the evil of corruption out of our society so the short term goals should be decided to evade and avoid corruption Most of the corruption is done at the small scale level and when the person is habitual of such behavior then this corruption tends to happen on the large scale as well. So Country should take stapes to avoid the small scale corruption. Special lectures and seminars should be setup in the schools and colleges to take the corruption element out of the teenagers as long terms goals.