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Restrictive regulation is positively correlated to corruption

Dorsati Madani's picture

The World Bank’s Investment Climate Department (CIC) has reviewed the recent literature on the relationship between restrictive regulation, corruption and business environment reforms, finding that corruption is positively correlated with restrictive regulation. 

Using databases of investment climate reforms (Doing Business) and corruption (World Wide Governance Indicators) from 2005-2008, Figure 1 shows a significant and positive correlation between corruption and the number of procedures for starting a business in 183 countries. 

Corruption Procedures Starting a Business 

The number of procedures is not the only indicator of regulatory barriers that may contribute to corruption.  Figure 2A shows that for a given number of procedures, the number of days to start a business is positively correlated with corruption. Figure 2B shows that the greater the number of documents needed to import and export, the higher the corruption rank, even after accounting for the number of procedures to start a business. 

Corruption ease of trade starting a business
Analysis of the reform and corruption data from 2005-2008 show that the number of days needed to start a business, import and export have a significant positive impact on corruption.  The results are robust, even when controlling for the levels of per capital GDP.  

Preliminary estimates by CIC staff suggest that a 25 day reduction in the number of days to start a business improves the control of corruption ranking by about 1 point. If the number of days to import and export is reduced by 25, the control of corruption ranking increases by 4.4 points. 

Further analysis shows that controlling for country specific effects, changes in the level of doing business indicators are positive and significantly correlated with changes in corruption rankings within a country.

Comments

Submitted by PS on
The paper subtly slips from "correlation" in the 2nd and 3rd paragraphs to "impact" in the 4th. Are you arguing causality? Are the DB indicators a better predictor than per capita GDP? If so, please link to the paper so people can assess your argument. You have a nice, upward-sloping line in Figure 1, but without any further information we don't know the explanatory value of the data. I'm not saying that the hypothesis is wrong, but the presentation in this blog post fails Econometrics 101.

Submitted by dorsati madani on
Dear anonymous commentator, thank you for your comments and for not wanting us to fail the econometrics 101 presentation. As we had stated in the title and first few paragraphs there is a positive and strong CORRELATION between corruption and BE. So we stand corrected on paragraph 4, where the same relationship holds. The data from figure 1 comes from Kauffman indicators up to 2008 (available to the public). The figure just shows a positive correlation between corruption and restrictive regulation data. Separate from figure 1, which is descriptive, our preliminary analysis suggests that controlling for GDP per capita, the DB indicators are still positively associated with corruption. This relationship still holds if we apply country fixed effects.

Why on earth would we have to run a regression on that? Is it all not sort of self evident? I mean much restrictive regulation is designed precisely to defend existing interests, which is already a corruption in favor of the status quo? Is the breaking of these regulations any more corrupt than the regulations themselves? Also much restrictive regulation often comprises ex-ante corruption and that sometimes the regulators are even totally unaware of. For instance the current financial regulation for banks have imbedded in them the favoring of government lending and that of those that are deemed as less risky by the regulators, those with AAA ratings, when compared to bank lending to ordinary citizens, small businesses and entrepreneurs… is this not a de-facto corruption? A fait accompli corruption?

This is accurate, and it's precisely why California is facing a quickly organizing revolt. (I think I hear laughter) Restrictive regulation and corruption are about to face the Year of the Tiger --- worldwide. Thanks for the analysis.

I am fully agree with the idea of the article. We understand it in Ukraine. There is a process of changing the procedures of conformity assessment in Ukraine. The procedure of Declaration is enforced instead of the procedure of the Certification. The procedure of the Declaration is described in the special laws named Technical Regulations (TR). The TRs are based on the appropriate European Directives of new approach. So now possible corruption doings from the side of the authorities will be decreased

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