Political institutions and the control of corruption: a cross-country evidence
| Date | 10 July 2020 |
| DOI | https://doi.org/10.1108/JFC-05-2020-0094 |
| Pages | 26-48 |
| Published date | 10 July 2020 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Siew Pyng Christine Chong,Chwee Ming Tee,Seow Voon Cheng |
Political institutions
and the control of corruption:
a cross-country evidence
Siew Pyng Christine Chong,Chwee Ming Tee and Seow Voon Cheng
Faculty of Accounting, Finance and Business,
Tunku Abdul Rahman University College, Kuala Lumpur, Malaysia
Abstract
Purpose –The purpose of this paperis to examine the significantassociation between political institutions
and the control of corruption.
Design/methodology/approach –This study uses ordinary least squares model to examine the
following: qualityof political institutions; the association between the strengthof democratic institutions and
control of corruption; the association between government effectiveness and control of corruption; and the
associationbetween legal institutions and control of corruption.
Findings –The result shows thatthere is positive association between democratic institutions,government
bureaucracyand rule of law with the control of corruption. From the politicalperspective, stronger democratic
institutions are found to be associated with higher ability to control corruption in a country. When viewed
from country’s economic and social well-being perspective, highly effective government bureaucracy is
positively associatedwith ability to control corruption. Finally,rule of law is also associated with the control
of corruption.
Originality/value –This study points toward clear priorities for reform as stronger democratic
institutions, efficient government bureaucracy and adherence to the rule of law improve the control of
corruption. The resultsshow that stronger democratic institutions,highly effective government bureaucracy
and rule of law are associated with highercontrol of corruption. This supports the theory that quality political
institutions reduce corruption in the long-run. In addition,this study shows that press freedom, regulatory
quality and political stability further enhance the capacity of such institutions to combat corruption.
Conversely,crony capitalism systems undermine this positiveassociation.
Keywords Democratic institutions, Government bureaucracy, Rule of law, Corruption,
Crony capitalism, Political institutions
Paper type Research paper
1. Introduction
Corrupt governance is an ongoing and complex challenge for the International Monetary
Fund (IMF), World Bank,international financial institutions, foreign investors,private firms
and non-governmental organizations such as Transparency International. Prior evidence
overwhelmingly shows that corruption is adversely linked to economic performance. For
instance, corruption is found to increase the misallocation of economic resources (Shleifer
and Vishny, 1993), reduce economic growth (Mo, 2001), discourage either domestic or
foreign investments (Wei, 2000),hamper productivity (Lambsdorff, 2003) and widen income
inequality (Transparency International, 2017). Additionally, corrupt governments weaken
democratic institutions and deprive its citizens of basic human rights (Rock, 2009). While
prior literature has extensively discussed the causes and consequences of corruption (Jain,
2001), Rose-Ackerman (1999) notes that most studies do not provide much guidance on
formulating policies to combat the menace of corruption. In recent findings by
JFC
28,1
26
Journalof Financial Crime
Vol.28 No. 1, 2021
pp. 26-48
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-05-2020-0094
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
Vadlamannati and Cooray (2017), the implementation of Freedom of Information (FOI)
legislation in various countries leads to a reduction in corrupt practices, because it
emboldens their citizens, particularly whistleblowers, to report theseacts to either the press
or law enforcementauthorities.
Motivated by gaps in the literature and recent evidence, we conduct a cross-country
study to investigate the association between the quality of political and government
institutions and corruption control. We choose quality of political and government
institutions for two reasons. First,seminal findings by La Porta et al. (1999) suggest that the
quality of government and political institutions are positively associated with government
efficiency and growth. Intuitively, this implies that control of corruption is determined by
the quality of government and political institutions. Second, the implementation of FOI has
been documented to increase detection of corrupt acts, thus driving down corruption rate.
However, Vadlamannati and Cooray (2017) approach is focused on the effects of FOI on
corruption perceptions. This study differs by selecting proxies that broadly cover a wider
spectrum of political and government institutions. Because of data availability from the
World Bank’s (2002–2017) Worldwide Governance Indicators’databases, we construct a
recent and comprehensive data set which covers nearly every country. In this study, the
quality of political and government institutions is proxied by the strength of democratic
institutions (VOICE), government effectiveness (GOV_E) and legal institutions (LAW).
Specifically, the researchobjectives are to examine the following:
the association between the strength of democratic institutions (VOICE) and control
of corruption (CORRUPTION);
the association between government effectiveness (GOV_E) and control of
corruption (CORRUPTION); and
the association between legal institutions (LEGAL) and control of corruption
(CORRUPTION).
The main findings and contribution to the literature are discussed as follows. We find all
proxies of quality government and political institutions (VOICE, GOV_E and LEGAL) are
significant and positively associatedwith control of corruption. The two-stage least squares
test corroborates the main findings, thus mitigating concerns of endogeneity. Further, we
split the full sample into four quartiles and find the results to be consistent with a full
sample. Therefore, the findings would be useful, particularly to countries in the process of
reforming their political institutionsto fight corruption [1]. Moreover, the IMF, World Bank,
Transparency International and foreign investors can aggressively lobby for governments
to improve their democratic institutions, promote efficient governance and institute rule of
law to tackle the root causesof corruption.
In our subsequent additional test of the main findings, several interesting interactions
results are documented. First, we show that freedom of press (PRESS) strengthens the
association between quality governments and political institutions with control of
corruption. This finding extends Vadlamannati and Cooray’s (2017) suggestion that the
implementation of press freedom (PRESS) should accompany FOI in detecting fraud and
corruption. Second, our findings suggest that cronyism (CRONY) in the economy reduces
the effectiveness of political institutions in combating corruption. On the other hand,
regulatory quality (REG_Q) and political stability (POLITICAL) significantly enhance the
government and politicalinstitutions’ability to control corruption.
The rest of the paper is organized as follows. Section 2 reviews the literature and
develops testable hypotheses. Section 3 describes the data, sample of study and research
Control of
corruption
27
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