Corruption and the size of government: causality tests for OECD and Latin American countries

Abstract

The purpose of this article is to examine the causality between government size and corruption, and to verify if there is a different pattern of causality between developed Organization for Economic Co-operation and Development (OECD) countries (excluding Mexico) and developing countries (Latin American countries) during the period 1996 to 2003. Applying Granger and Huang's (1997 Granger, C. W. J. and Huang, L. Evaluation of panel data models: some suggestions from time series. Economics Working Paper Series 97-10. 1997. Department of Economics, University of Califórnia San Diego [Google Scholar]) methodology we find evidence that size of government Granger causes corruption in both samples. Since a larger government involvement in private markets today will be followed in future by a higher level of corruption a policy advice would be to enhance governance. The promotion of good governance helps to combat corruption given that it complements efforts to reduce corruption more directly, and it is strongly recommended by the International Monetary Fund, other multilateral institutions, and all worried with the negative impacts of corruption on economic activity.