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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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