Abstract

This study aims to investigate the relationship between corruption and growth in the context of the Arab world. By controlling the different variables that affect growth, the study tries to focus on how corruption could have affected growth and in which way. The literature leans towards corruption having a negative impact on growth and development, however such view is not pervasive as there are some arguments emphasizing that there might be positive implications for corruption. Moreover, there are some other variables including type of political regime, degree of development, poverty levels, etc that shape the relationship between corruption and growth. The interaction between those variables and corruption produces different impacts on growth. Qualitative analysis shows that among Arab countries there is certainly a negative relationship between the gross domestic product (GDP) per capita and high level of corruption. However, there is no exact relationship between the type of political regime and corruption. Additionally, the study estimated a panel data random effects model to evaluate the impact of corruption on economic growth in 15 Arab countries during the period (1998 to 2009). The study results support the negative direct impact of corruption on growth in this sample of Arab countries, which confirms “sanding the wheels” hypothesis, yet this impact highly depends on other variables, and namely the governance structure. A good governance structure shows that corruption has a determinal impact on growth. When the governance structure is very poor the impact of corruption on growth tends to be lower or most probably positive, that goes along with “greasing the wheels” hypothesis. Thus, it is necessary to improve the governance quality in Arab countries hand in hand with controlling corruption, in order to achieve better growth performance.

Key words: Corruption, economic growth, democracy, governance, Arab countries.