Analyzing the Economic Costs of Corruption Using a Basic Keynesian Framework: Part 1

Abstract

This study attempts to analyze the impact of corruption on the economy by adopting the Keynesian Framework. Current studies show that corruption has adverse effects on GDP, GDP growth rate, and investment, among others.  Such studies, however, used the “economic cost-corruption perception index” model. An alternative model is to adopt a Keynesian framework incorporating corruption as a factor in the model.  Utilizing the concepts of investment and government multipliers, the comparative analysis between the “with”-and“without” corruption is used in analyzing the economic cost of corruption. The results show that government multiplier is less than the investment multiplier when there is corruption. Based on the theses/arguments, this study concludes that (a) when there is corruption, the impact of government expenditure on the economy is less than the impact of investment expenditure on the economy, (b) the Keynesian model can enhance the explanatory power of the existing “economic cost-corruption perception index” model of analyzing the economic cost of corruption, and (c) the results of integrating corruption into the Keynesian model reveal that GDP and GDP growth rate are overestimated for countries with a certain proportion of government expenditure that go to corruption.