Inequality, Corruption and Development

Jong-sung YouAustralian National University

Eunro LeeCharles Darwin University

MotivationPrevious studies:• Inequality Growth (-)• Corruption (institutional quality) Growth (-)

My own study:• InequalityCorruption (+)

Taken together,• InequalityCorruption (+) Growth (-)

(institutional quality)No previous study tested this hypothesis.

Literature Review

Inequality Growth (-): Growing consensus (including researchers at World Bank, IMF and OECD)-Robustness, still being debated:-Corruption, or instituonal quality as a causal mechanism (Easterly 2007): Not adequately tested.

Inequality Corruption (+): You (2015)-causal mechanism: elite capture, clientelism-cross-national evidence-comparative historical evidence: KOR, TWN & PHL

Causality from Inequality to Corruption

Source: You (2015) Democracy, Inequality and Corruption: Korea, Taiwan and the Philippines Compared. Cambridge University Press.

Corruption (institutional quality) Growth

A number of studies (Mauro 1995; Knack & Keefer 1995; Keefer & Knack 1997; Kaufmann and Kraay 2002; ----)- Robustness? (Svensson 2005; Glaeser and Saks 2006; Kurtz &

Schrank 2006)

Doubts on instruments:• Ethnolingusitic fractionalization, Legal origin: Weak identification at

the first stage (Shaw et al. 2011)• Predicted trade share (Shaw et al.): Valid?

Inadequate longitudinal data:• Mauro (1995): BI (1980-83) Growth (1960-85)• Knack & Keefer (1995): BERI (1972), ICRG (1982) Growth (1974-89)

Research strategies

• Cross-National Longitudinal Study:Inequality (1960) → Corruption (1980)→ Growth (1980-2010)

Instruments for inequality: Mature cohort size (You & Khagram 2005)

• Comparative Historical Study (You 2015)– East Asia: South Korea, Taiwan, and the

Philippines

OLS & IV regressions of corruption

Income Gini: Solt (2014), Standardized World Income Inequality DatabaseLand Gini: Deininger and Olinto (2000), Frankema (2009)Family Farms: Vanhanen (2003)ln Bribe (2004-10):TI’s Global Barometer SurveysControls: ln GDPpc (1960), Polity (1960s), Ethnolinguistic fractionalization

OLS & IV regressions of institutional quality

Dependent variables: ICRG QoG (1984-85), Evans & Rauch’s Meritocratic Bureaucracy (1970-90), QoG Survey’s Professional Bureaucracy (2010)Controls: ln GDPpc (1960), Polity (1960s), Ethnolinguistic fractionalization

OLS regressions of growth on corruption and bureaucratic quality

CPI 1980-85 ER Meritocratic

Corruption/Bureaucracy 0.34432 0.35810 3.84687 4.50250

(t-stat) 2.87 2.78 2.64 3.7

ln GDPpc 1980 -1.66871 -1.67179 -0.99021 -0.83551

(t-stat) -3.77 -3.65 -2.42 -2.18

Schooling 1980s 0.07178 0.14928 0.19486 0.18232

(t-stat) 0.61 1.31 1.49 1.47

Fractionalization -2.34307 -2.92683 -3.11232 -3.65347

(t-stat) -2.36 -2.73 -2.26 -2.7

Polity 1980s -0.02432 -0.02823 -0.01387 -0.00733

(t-stat) -0.5 -0.57 -0.32 -0.18

Income Gini 1980s -4.72281 -0.378682

(t-stat) -2.66 -0.13

N 49 49 30 32

R-squared 0.4968 0.4535 0.5175 0.5719

ER Meritocratic

(Dependent variable=Average annual GDP per capita growth between 1980 and 2010)

Mediation Structural Equation Modeling of corruption explaining the

impact of inequality on growth

Mediation Estimates of Corruption (1980s) Explaining Inequality(1960s)’s

Impact on Growth(1980 -2010)

Comparative historical evidence:Korea, Taiwan, and the Philippines (You 2015)

• Most similar cases: Initially, similarly poor, corrupt & unequal– Inequality: PHL>>KOR>TWN (since 1950s/60s)– Corruption: PHL>>KOR>TWN (since 1960s/80s)

Korea Taiwan PhilippinesGDP per capita 1953 (2005 constant PPP $) 1,586 1,243 1,730Primary enrollment 1950 (%) 83 79 91Secondary enrollment 1950 (%) 16 11 27Tertiary enrollment 1950 (per 10,000 population) 18 9 88Urban population 1950s (%) 18 - 15Non-agricultural population 1950s (%) 30 - 29Population 1950 (thousand) 20,846 7,981 21,131

Land reform, industrial policy and state autonomy/capture

13

The Critical Role of Land Reform

• Success & failure of land reform: Determined by external factors (Threats from communist neighbors, US policy)

• High inequality in PHL: • Low inequality in KOR, TWN: gradual development of programmatic

politics, meritocratic bureaucracy, and state autonomy

Consequences of land reformThe Trends of Land Gini

• Land reform → Low inequality → Expansion of education → Meritocratic bureaucracy; Separation of political and economic elites

• No land reform → High inequality → Landed elite diversified into commerce, industry, finance, and politics → Clientelism & capture

Trends of CCI, 1996-2011

Real GDP per capita of KOR, TWN & PHL, 1953-2007

0

5000

10000

15000

20000

25000

30000

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Korea

Taiwan

Philippines

Summary• Cross-national longitudinal evidence:Inequality of income & land (1960)Corruption (1980 and later)Growth (1980-2010)

• Comparative historical evidence:Land reform InequalityCorruptionDevelopment

• Vicious cycle can be broken: KOR, TWNBut, increasing inequality (esp. in KOR), a great concern.

19

The relationship between inequality and corruption, by regime types

TGO

GEO

IRNMOZMRT

CUB

GINMMRIRQ

LBRCIV

MAR

MYS

TJK AZE

BIH

KHM KGZBLR

LSO

PAK

BFA

JOR

LAOTKM

SGP

UZB

GMBRUS

SOM

DJI LBN

TUN

GAB

TCD

SWZDZA

CMR

CHN

ZWEHTI

EGYKAZ UGA

RWA

BWA

COG

NAM

ETH VNM

SYC

TZAGUY

ZAF

YEMBDINPL

SDN

ZMB MWI

SVK

TWN

PNG

LUX

BRA

MUS

USAJPN

MLIPHL

CAN

GRC

NLD

ROM TTO

ISL

FRA

MLT

THA

HND

POL

COL

PRT

SUR

ITA

FIN

DEU

BRBSVN

MKD

CAF

SLVIND

ISR

TUR

NER

NZL

KENNIC

GTM

LTU

LKA

AUS

KOR

ESTCYP

AUT

CHE

CHLESP

PRYBOLMDG

BGD

CZE

PER

BEN

BEL

BGR

VEN

DNK

GHA

ECU

MEXDOM

NOR

NGA

URY

ARMJAMMDA

PAN

GBR

HUN

SENALBUKR

SLE

ARG

HRV

SWE

YUG

GNB

CRILVA

MNGIDN

IRL

05

10

.2 .4 .6 .8 .2 .4 .6 .8

0. Dictatorship 1. Democracy

CPI Fitted values

Gini

Graphs by Democracy

Inequality & corruption, by duration of electoral democracy

IRQ

CUB

AFGGNQ MMRSYR

SAUCPV

BFAKWT

BHR

SDNPAKLBRSWZCHNBDI

JOR OMN

RWABIHTUN

LBY

BTNQAT

COG

ARE

ERIMAR

LVAGAB

AZE

POLTZA

FJIGMBDZA PHLETHMNGMOZNPLRUS

HUN

MWINGA MRTCAF

THA SURGTM

SVK

BOL

CHL

UGAIRN ZMBHRV

YUGCMR

GHACZE

CIVLSO

TGOROMJAM

IDNALBHTIKEN

ARMNAM

BGD KGZSLEBENBGR

TWN

MKDUKR

LTUSVN

MDA

BRB

TURSLV

URY

ARGBLZ

MDG

PRT

DOM

ESP

PERCOL PAN

SGP

ZWETTOECU

KOR

BHS

PRYPNG

MLT

GRC

CYP

SAMMUS

HNDBRA EGY

MYS

SENNIC

BWA

MEXZAF

FIN

ITA

NLDIRL

LKA

FRAAUT

AUSNZL

VEN

ISR

ISL

CRI

DNK

IND

LUXNORGBRCANBEL

SWE

USA JPN

05

100

510

30 40 50 60 30 40 50 60

0 1

2 3

CPI Fitted values

Estimated household income inequality

Graphs by Duration_Electoral_Democracy