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27 Cato J. 343 (2007)
Economic Freedom, Corruption, and Growth

handle is hein.journals/catoj27 and id is 349 raw text is: ECONoMIC FREEDOM, CORRUPTION, AND GROWTH Mushfiq us Swaleheen and Dean Stansel This article adds to the empirical literature on the relationship between corruption and economic growth by incorporating the im- pact of economic freedom. We utilize an econometric model with two improvements on the previous literature: (1) our model accounts for the fact that economic growth, corruption, and investment are jointly determined, and (2) we include economic freedom explicitly as an explanatory variable. Using a panel of 60 countries, we find that for countries with low economic freedom (where individuals have limited economic choices), corruption reduces economic growth. However, in countries with high economic freedom, corruption is found to increase economic growth. Our results contradict the generally ac- cepted view that corruption lowers the rate of growth. We use Os- terfeld's (1992) distinction between expansive and restrictive corrup- tion to explain our results. According to Osterfeld, corruption expands output if more bribes help the economy move toward greater free exchange. Thus, in economies where economic freedom is high, if bribing makes public officials less diligent in enforcing restrictions on firms' activities, output will increase. However, corruption will restrict output when bribes reduce competition and increase market rigidi- ties. This outcome is more likely in countries where economic free- dom is low due to widespread state ownership of assets (e.g., in China), monopolies and high tariff barriers granted to businesses owned by ruling elites and their cronies (e.g., the Philippines under Marcos and Indonesia under Suharto), and state-run marketing boards that are often the sole purchasers of agricultural products Cato journal, Vol. 27, No. 3 (Fall 2007). Copyright @ Cato Institute. All rights reserved. Mushfiq us Swaleheen and Dean Stansel are Assistant Professors of Economics in the Lutgert College of Business at Florida Gulf Coast University. They are grateful to Paul Pecorino, James Ligon, Steve Gohman, Daniel Cropper, Robert Lawson, Myra McCrickard, and Ben Powell for useful comments and suggestions. 343

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