The effect of fiscal transparency on corruption: A panel cross‐country analysis
| Published date | 01 March 2020 |
| Author | Can Chen,Milena I. Neshkova |
| Date | 01 March 2020 |
| DOI | http://doi.org/10.1111/padm.12620 |
ORIGINAL ARTICLE
The effect of fiscal transparency on corruption:
A panel cross-country analysis
Can Chen|Milena I. Neshkova
Department of Public Policy and
Administration, Florida International
University, Miami, FL, USA
Correspondence
Milena I. Neshkova, Department of Public
Policy and Administration, Florida
International University, 11200 SW 8th
Street, PCA 350B, Miami, FL 33199, USA.
Email: mneshkov@fiu.edu
Funding information
National Research Foundation of Korea,
Grant/Award Number: NRF-
2017S1A3A2065838
Abstract
Both academicians and practitioners have advocated for
increased fiscal transparency in government as a means of
promoting budget discipline, improving functioning of the
public sector, fostering greater accountability, and fighting
the global menace of corruption. Despite worldwide calls
for greater disclosure, empirical analyses of whether and
how fiscal transparency actually affects governance out-
comes are still limited. This study draws on public choice
and principal–agent theories to demonstrate how public
disclosure of budgetary information helps deter govern-
ment corruption. The data from 95 countries over the
period 2006–14 provide evidence that more fiscally trans-
parent countries are perceived as less corrupt. We also find
that fiscal transparency matters most at the final stages of
the budget process when information disclosure reflects
actual government spending. Data also confirm that a Citi-
zens Budget can serve as a strong anti-corruption tool.
1|INTRODUCTION
Transparency is widely recognized as a pillar of good governance (e.g., Piotrowski and Van Ryzin 2007; Kosack and
Fung 2014; Neshkova and Rosenbaum 2015). Access to information about government activities and resultant out-
comes is critical for ensuring democratic accountability (e.g., Heald 2003; Alt et al. 2006). As a term, transparency in
government refers to ‘openness of the governance system through clear processes and procedures and easy access
to public information for citizens’(Kim et al. 2005, p. 649). Transparency has many facets, and fiscal transparency is
a particularly crucial aspect of democratic governance due to the central role of budgets in government operations.
Kopits and Craig (1998, p. 1) define fiscal transparency as ‘openness toward the public at large about government
structure and functions, fiscal policy intentions, public sector accounts, and budget projections’. When budgets and
Received:8January2018 Revised:13May2019 Accepted:21June2019
DOI: 10.1111/padm.12620
226 © 2019 John Wiley & Sons LtdPublic Administration. 2020;98:226–243.wileyonlinelibrary.com/journal/padm
other fiscal documents are transparent and accessible, citizens and legislators can better monitor how their govern-
ment raises revenues, allocates scarce resources, and manages public finances.
Since the 1990s, international organizations, including the International Monetary Fund (IMF), the Organization
for Economic Co-operation and Development (OECD) and the World Bank, have advocated for increased fiscal
transparency as a means of promoting fiscal discipline, improving the functioning of the public sector, fostering
greater accountability, and combating the global menace of corruption (Persson et al. 2013). The Open Government
Partnership (OGP) and Global Initiative for Fiscal Transparency (GIFT), both created in 2011, are among the most
recent global efforts to make governments more open, accountable, and responsive to citizens.
A number of countries have been successful in reducing perceived government corruption as a result of improve-
ment in fiscal transparency. For example, one of the former Soviet republics—corruption-ridden Kyrgyzstan—scored
as low as 8 on the Open Budget Index (OBI) in 2008, when it first participated in the Open Budget Survey. Since
then, the country has raised its OBI score to 54 in 2015 due to a strong political commitment to fight corruption and
promote budget transparency. The efforts contributed to a decrease in Kyrgyzstan's corruption levels. The country's
Corruption Perception Index (CPI), showing government cleanliness, increased from 22 in 2006 to 28 in 2016. Simi-
larly, Georgia, another former Soviet republic, has considerably increased its OBI score—from 34 in 2006 to 66 in
2016. Scholars associate this significant improvement in countries' budget transparency with extensive reforms of
public financial management after the Rose Revolution in 2003 (International Budget Partnership 2018). Moreover,
Georgia's CPI has risen from 28 in 2006 to 55 in 2016, indicating a substantial reduction in the country's perceived
government corruption.
Despite the worldwide calls for government transparency, empirical analyses of whether and how fiscal transpar-
ency actually affects governance and policy outcomes remain scarce. We also know little about the relative impor-
tance of fiscal disclosure across different stages of the budget process, which makes it difficult for practitioners to
prioritize their fiscal transparency efforts. The present study attempts to advance our understanding of these issues
by empirically examining the effect of fiscal transparency on governance. Specifically, we investigate whether greater
fiscal transparency contributes to increased perception of cleaner government, and aim to determine at which stage
of the budget process transparency matters most.
Our theoretical framework draws on two main theories—public choice theory and principal–agent theory—that
inform our hypotheses regarding the effects of fiscal transparency on government corruption. We empirically test
the hypotheses against panel data from 95 countries from 2006 to 2014. To operationalize fiscal transparency, we
employ the Open Budget Index, which was recently developed by the International Budget Partnership (IBP). The
index offers an independent, reliable and consistent measure of country-level fiscal transparency (De Renzio and
Masud 2011; Wehner and De Renzio 2013). To address the potential endogeneity bias between fiscal transparency
and corruption in the regression analysis, we use a dynamic panel GMM estimation. The results provide strong evi-
dence that greater overall fiscal transparency is associated with less perceived government corruption in a country.
Moreover, the effect of transparency varies at different stages of the budget process. The results show that
increased transparency at the budget formulation stage (executive's budget proposal), the end stage of budget exe-
cution (year-end reports) and the audit stage (audit report) have the most significant effect on reducing perceived
corruption. In contrast, enhanced transparency in the budget approval (enacted budget) and the early and middle
stages of budget execution (in-year reports and mid-year review) is not significantly associated with more ethical
government. Also, countries that use Citizens Budgets to communicate fiscal information to the public in non-
technical language exhibit lower levels of perceived government corruption.
The article proceeds as follows. The next two sections review the current knowledge on the effect of fiscal trans-
parency on government corruption and establish the theoretical framework of our study. We then present the data
and develop models to test the explanatory power of our theoretical propositions. Next, we report the empirical
results of the models and conclude by discussing policy implications of our findings.
CHEN AND NESHKOVA227
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