Corruption and economic growth: the case of Portugal

In the 2017 Special Eurobarometer on Corruption, 92% of Portuguese respondents stated that corruption is a widespread problem in their country (EU average: 68%) and 70% of businesses agreed that the only way to succeed is to have political connections. At the economic level, and since the beginning of the 21st century, economic growth has been dismal, resulting in a divergence from the average per capita income in the EU. Whether corruption is a threat or an opportunity to economic growth remains however an open question. For instance, corruption discourages investment, which in turn saps growth, by increasing the uncertainty of the expected returns. However, in more bureaucratic and inefficient economies, corruption can help to implement some investment projects in a faster way.

In this paper, we analyse the relationship between corruption and economic growth in Portugal in recent decades (1980-2018) based on the estimation of an econometric model that relates the Corruption Perceptions Index published by Transparency International to the capital stock, total factor productivity, and hours worked, the determinants of output at the national economy level. The findings from our preferred model indicate that if the level of corruption in Portugal decreased to the level of corruption in Germany, the long-term benefit would be an increase of 1.7 percentage points in the level of output. While this is a sizable effect, this result implies that the failure of the standards of living to converge to those of the richest countries in the EU is probably not due (for the most part) to corruption in the Portuguese economy. Other factors such as the efficiency of the judicial system and the depth of the financial system deserve further investigation.

Click here to go to the paper by Pedro Bação, Inês Gaspar, and Marta Simões.