Title

Why are corrupt countries less successful in consolidating their budgets?

Source of Publication

Journal of Public Economics

Abstract

Following the financial crisis, many countries introduced fiscal stimulus packages making budget consolidations in the future rather challenging. Using a data set for 28 OECD countries spanning the period 1978-2007, we contribute to the literature on success probabilities of consolidation attempts by exploring the impact of corruption, and in particular the interplay of corruption and the choice of the policy instrument. We find that corruption significantly reduces the success rate. When controlling for the change in government expenditures, however, the impact of corruption is insignificant or at least becomes less pronounced. We therefore relate the choice of the fiscal instrument to corruption and find that corrupt countries rely significantly less on expenditure cuts during periods of consolidation attempts. We conclude that international organizations should be careful in observing what corrupt countries do when trying to consolidate their budgets. © 2011 Elsevier B.V.

Document Type

Article

First Page

521

Last Page

530

Publication Date

8-1-2011

DOI

10.1016/j.jpubeco.2011.01.007

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