THE IMPACT OF CORRUPTION ON THE EFFICIENCY OF PUBLIC SPENDING ACROSS COUNTRIES WITH DIFFERENT LEVELS OF DEMOCRACY

Abstract

Corruption, being linked to institutions of power, affects the efficiency of using public funds in a country. This happens, in particular, due to distortions in the structure of public expenditure, worsening quality and decreasing accessibility of public services, and overpricing of public services. The consequences of corruption that arise in different areas of human activity often become subject of scientific investigations performed by reputable scientists. However, the issue of the impact of corruption on public spending efficiency in the countries with different levels of democratic development has not been researched. The aim of this study is to determine the impact of corruption on the efficiency of public spending across the world (in 166 countries for the period from 2004 until 2017). The research is carried out by applying regression analysis to indicators characterizing the level of corruption and the efficiency of public spending obtained from large-scale survey data collected by major international organizations and aggregated in the World Bank’s “World Development Indicators” database. The analysis is also performed by using k-means clustering method to group countries into 4 clusters by the level of democracy and to build refined one-factor econometric models for each of them.The study revealed strong correlation relationship between corruption and public spending efficiency. It has been determined that a unit increase in corruption perceptions (a decrease in corruption) leads to a marginal increase in the efficiency of public spending by 0.931 units in the simple linear regression model and by 0.807 units in the multiple regression model. The study also showed that the impact of corruption on public spending varies depending on the level of democracy in a country. In the countries with low democracy levels, a unit decrease in corruption increases the efficiency of public spending by 0.923 units, whereas a similar decrease in corruption in the countries with high democracy levels will increase public spending efficiency only by 0.701 units. The findings of this study allow us to determine with higher accuracy the effects of corruption reduction measures on the efficiency of public spending.