Professional Documents
Culture Documents
Expenditure
Abhishek Kumar
A Senior Thesis
Bates College
by
Abhishek Kumar
Lewiston, Maine
Acknowledgments iii
Introduction iv
Chapter 4. Methodolgy 19
1. Description of Data 19
2. Methodology 21
3. Descriptive Statistics 23
Chapter 6. Conclusion 31
Appendix A 35
Bibliography 37
ii
Acknowledgments
To begin,
I would like to thank my loving family,
Mother, Father and Brother –
All for giving me the spirit to successfully complete this study.
Continuing my acknowledgments –
Professor Michael Murray, my advisor,
Who,
Through both his remarkable breadth of knowledge,
And his lucid explanations,
Gave me the tools and guidance I needed for this thesis.
iii
Introduction
Corruption has existed through the ages: as long as we have a group of governing
individuals, there will be corruption to contend with. Various cultures have had to
deal with the problem of a corruptible public office, spanning from Biblical times to
modern day [1]. In feudal and medieval times, the governing body was essentially
chosen through corrupt methods such as nepotism, where rulers would pick relatives
to claim their throne after death. In modern times, however, many nations follow
democratic rule where citizens choose their government, but then the minority suffers
and opts corrupt methods to meet their goals. Corruption, as defined and accepted by
scholars throughout time, has been “the misuse of public power for private gain” [2].
While the general connotation that comes with that definition is negative, scholars
have shown both the beneficial and the detrimental side of corruption. Political
economist such as Samuel Huntington and Nathaniel Leff suggest that corruption may
be necessary in certain, overly-centralized economies to spur growth and development.
Opponents of corruption such as the economist Paulo Mauro have published numerous
articles denouncing the beneficial effects of corruption and finding robust evidence for
the negative impacts of dishonest bureaucratic practices. The pervasive arguments
for and against corruption have inspired the study conducted in this paper.
This literature begins with an overview of various forms of corruption, primarily
in the context of economic theory. It then moves on to using those definitions to con-
struct a theoretical framework for the empirical study, explaining both the proponent
and opponent arguments for corruption. With the conjectural skeleton constructed,
iv
INTRODUCTION v
the paper then uses infant mortality rates (per 1,000 live biths), an index for corrup-
tion and per capita government health expenditure to see which side of the corruption
debate has more merit. This task is carried out by answering two questions. Does
corruption increase infant mortality rates? Additionally, does corruption distort gov-
ernment health expenditure by decreasing its efficiency? By answering these two
questions, we hope to gain a deeper understanding of the two sides of the argument,
and hopefully, have results statistically significant enough to choose one argument
over the other.
CHAPTER 1
Forms of Corruption
Often in very rigid bureaucracies, much of the work, especially in the form of
passing files from one official to the other in the hierarchy of command, does not
get done unless the officer in charge has some sort of “incentive” to do so. This
“incentive” generally takes the form of a bribe that is paid to the officer in control
of signing and passing along a file to his or her superior. This practice of soliciting
bribes to carry on bureaucratic work has been becoming more common in granting
licenses, permits and patents. However, the distinction must be made that in this
interaction between the government official and the bribe payer, it is the government
official that is corrupt. Generally, the bribe giver has no intention or inclination to
commit an unlawful act, but wants to speed up the process of the movement of the
filesthus, the term “speed money”.
1.1. The Model. Let us consider a simple model provided by Bose (2003) [3]
for this type of corruption, where a bureaucratic clerk (or agent) delays the process of
passing on an official file, say, an application. There may be complete or incomplete
applications submitted to the bureaucrat. Complete applications must be forwarded
within the first time period, whereas incomplete applications must be delayed until
all the missing information is providedthey will be delayed into the next time period.
Some assumptions of the model that come to light are that there is no concrete way
of determining the reason why the agent has delayed the application. He could have
delayed the application because it was either incomplete or because he wanted to
1
1. BRIBERY (“SPEED MONEY”) 2
of US 50 on the time the bureaucrat wants to delay the application, the agent will
receive zero dollars as a bribe. The applicant is not going to pay a bribe of US 250
if he only values his time at US 50–he will be fine with a delay in his application
processing.
Since the agent has no way of discerning the cost that applicants place on their
lost time, he will behave as any non-discriminating monopolist would: he will ask
for a bribe that maximizes his revenue. Let us examine more closely the distribution
function G(c) to understand the dynamics of the bribe. The variable c in the model
is the amount that the clerk will charge as a bribe, and the distribution of c is from
0 up until the value the clerk would charge as a bribe. As such, G(c) represents the
proportion of applicants with costs less than c.
Given this framework, we can state that the amount of applicants willing to pay
the bribe the clerk charges will be given by 1 − G(c) because 1 represents the total
amount of applicants and G(c) represents the porportion of applicants who value
their time less than the bribe the agent is charging. Since he is charging c as his
bribe, the bureaucrat’s revenue will be c times the total amount of applicants willing
to pay that bribe, c[1 − G(c)]. To find the optimum bribe price we take the derivative
of the agent’s total revenue function with respect to c and solve for the resulting c∗ :
d
(1.1) ([1 − G(c)]) = 1 − G(c∗ ) − c∗ G′ (c∗ ).
dc
Thus, c∗ solved for above is the optimum bribe price in this case.
2. EXTORTION 4
The optimum bribe price, c∗ , is the amount the bureaucrat will charge anyone
who wants to avoid the delay. If he does not receive c∗ as a bribe, the agent will
not pass the application. As such, the amount of applicants who value their time
between 0 and c∗ will not have their application delayed. However, there will also
be applicants that place a cost on their time that is higher than the optimum bribe
price–the total range of costs are in fact given by the variable c, which ranges from
0 to some value c̄.
Putting together the pieces discussed above will allow us to harness another aspect
of the model: its ability to ascertain the amount of welfare loss “suffered by members
of society that is not compensated by corresponding gains made by others” [3]. The
applicants who value their time less than the optimum bribe are the ones who suffer
the welfare loss in terms of having their application delayed unnecessarily. Mathe-
matically, the integral of the variable c, which encapsulates all the costs placed on
time by the applicants, with respect to G(c), the amount of people who value their
time less than c∗ , will give us the welfare loss. We must take the integral from 0 to
the optimum bribe price of c∗ . Thus, the integral,
Z c∗
∗
(1.5) L(c ) = (c)dG(c),
0
represents the welfare loss suffered by the applicants who have their application de-
layed because they do not pay the bribe; they place costs less than the optimal bribe
price on their time.
2. Extortion
or property through intimidation [4]. Intimidation may come in the form of threats
to harm a person (or his family or friends) or his property, threats to reveal embar-
rassing information or threats to accuse him of a crimethe latter two generally fall
under the idea of “blackmail”.
Often times in the case of extortion, the bribe payers consider themselves as the
extortion victims. As seen in the case of bribery, the bribe payers do not want to
pay a bribe to ensure that their application is cleared; they are forced to, or extorted
into, paying a bribe to have their application signed. However, the debate between
which act of corruption, bribery or extortion, came first is often redundant. The
argument neglects the underlying fact that a corrupt act cannot occur without both
parties’ participation. The act of the bureaucrat receiving the bribe in our model
in the previous section would not have occurred if the official had not asked for the
bribe and the client had not agreed to pay the bribe: extortion and bribe paying are
not mutually exclusive.
The prime economic reason for extortion is related to the wage of the extorter.
Government officials get paid a certain salary, S, and they have costs in their own
lives, which we can call C. If these costs exceed their salary, that is C > S, they will
need some other form of income to compensate for those costs. As such, they adopt
a venal attitude and begin to extort bribes in order to make ends meet.
Surveys taken by Koshechkina and Grodeland in post-communist Ukraine provide
excellent examples of extortion occurring due to low wages [5]. It was found that of
all the people interviewed, 46 percent of them had experiences with extortion, either
being extorted or having extorted. Interestingly enough, of all the people surveyed, 13
percent mentioned that the issue was insufficient pay. A man named Khartsyzsk was
interviewed and he stated that he was extorted by a government official for bribes,
and in his interview, he stated that officials were not paid the amount they earned.
Officials work a certain amount and put in a certain amount of labor, which entitles
3. EMBEZZLEMENT 6
them to some amount of earnings, but the government has their salary set much
below that earning amount. He then goes on to state that because the government
does not pay the officials as much as they earn, “people stoop to bribes”.
Continuing with the example of post-communist Ukraine, an excellent observation
of extortion is seen with police officials. Around 1989, police did not have a legitimate
salary; they had micro-salaries. These salaries were evidently not enough to make
ends meet. As such, there were numerous cases of police officials arbitrarily asking
citizens for bribes. Examples include police officials framing citizens to solicit bribes
or simply threatening to physically abuse them if they did not pay a bribe. Of course
this type of behavior went unchecked, as the legal framework in post-communist
Ukraine was weak.
Extortion is a terrible problem afflicting the economy. Repeated extortion creates
strong barriers to entry in an economy. Extortion creates transaction price inflation,
which makes it difficult for many individuals to invest in an economy [6]. If an
investment is worth price P , but the official in charge of approving application for that
investment extorts an additional price ǫ from the investor, the investment becomes
more costly at the price of
(1.6) P + ǫ = Pb ,
where Pb is the price of the investment with the extorted bribe factored in. If this
new price of the investment is higher than the amount that the investor is willing or
able to pay, P ∗ , that is Pb > P ∗ , then he will not invest.
3. Embezzlement
directed to bureaucrats pockets rather than its intended purpose, the efficiency of
the government with respect to spending decreases. At first glance, the most obvious
problem that comes to mind is that output will decrease as G decreases in
(1.7) Y = C + G + I + Xm ,
3.1. The Model. An effective model for embezzlement would be one that pro-
vides us with a value of the goods embezzled by a bureaucrat, which is also the amount
lost from government spending, G. Blackburn, Bose and Haque (2004) provide an
account of such a model [7]. For simplification, we assume that the bureaucrat (or
agent) in question places no value on risk–he is risk-neutral–and as such has no fear
3. EMBEZZLEMENT 8
of punishment. The model is based off the idea that the bureaucrat in charge of
government spending on some project receives a certain amount of funds from the
government to make the said expenditures. However, because he is risk-neutral, he
chooses to embezzle a percentage of the funds he received for his private use.
The government gives him funds to spend on the good it wants the bureaucrat to
purchase. Now, if he were to blatantly take a fraction of the funds, he would not be
able to purchase the good he was asked to acquire and the authorities would catch
on fairly quickly. But he is clever and he uses the loophole that he is the only one
in charge of the said project and as such he is the only one who has full knowledge
of the good that is to be bought. He uses his unique knowledge to buy the good
his government has asked him to obtain, but at a much lower quality than what his
superiors had in mind. Because he is the only one that has knowledge of the exact
specifics of the product, the government will have a difficult time ascertaining whether
the good purchased meets their expectations of quality. Purchasing a product of lower
quality allows the bureaucrat to officially claim that he followed orders and purchased
the good he was asked to buy, but it allows him to save some money from what he
was given: he then puts this “saved” money in his pocket for his personal use.
The government gives asks the bureaucrat to purchase x amount of public goods
and gives him mθ per unit of the good to do so. The government expects the good to
be purchased at high quality, and a high quality good is expressed by the θ subscript
in mθ . If the agent was not corrupt, he would purchase the x amount of goods at mθ
and write that down in his account books. However, because he is corrupt, he decides
to deceive the government by purchasing the asked x amount of the good, but at a
lower-quality. Obtaining the good at a lower quality allows him to save money and
spend a lesser amount of mφ per unit, where the subscript φ denotes a low quality
good. So, while the cost of obtaining the good at high quality would have been xmθ ,
the total cost of purchasing the lower quality good is only xmφ .
3. EMBEZZLEMENT 9
To avoid prosecution the bureaucrat will claim that he spent xmθ , while truly
spending only xmφ . Such a scheme allows the bureaucrat to embezzle the difference
between the two amounts,
As such, the official has the opportunity to embezzle mE of the government funds for
his private use.
Thus far, we have modeled the gain the bureaucrat makes with his embezzlement
and the amount of money the government has lost (this value is equivalent to the
amount the official embezzled, mE ), but have yet to model the total life-time gains
bureaucrat makes with his corrupt practices. Any government official receives a salary
for the work he does; this salary we will denote as wt . For the sake of simplicity, we
will assume that the bureaucrat works when he is young and consumes only when he
is old, allowing for no consumption between working and retirement. So, if he is not
consuming until he retires, he saves his entire income and his savings acrue interest
at the interest rate of r. As such, he will have a lifetime wealth of wL ,
(1.10) wL = wt + rwt
(1.11) wL = (1 + r)wt .
(1.12) w L ∗ = wL + m E
4. Nepotism
Nepotism is the idea of according favors to relatives and friends in “the disburse-
ment of public resources, whether jobs, importing licenses or public housing, is usually
thought to contravene one of the basic principles of modern public administration:
the application of universalistic and objective criteria in decision making.” [1]. In the
direct context of political corruption, however, practicing nepotism is entails giving
positions within the government to relatives and friends. For instance, if the ruling
authority of a country (i.e. president, king, sheik and etc.) assign, say, their child to
be their successor instead of holding just elections for the position, it would constitute
nepotism.
There have been numerous examples of nepotism throughout history. The origin
of nepotism arises from the practices of this form of corruption in mediaeval and early
modern Europe. The institution of papacy, for instance, exhibited numerous exam-
ples of nepotism. The actions of Pope Sixtus IV essentially gave birth to the term,
who granted pardons for crimes and official positions to his nipoti (or nephews) [1].
This form of nepotism under Sixtus IV created much uncertainty and suspicion within
the administration and threatened to destroy the papacy. Moreover, it created ri-
valries within the papacy, where various figures attempted to replace existing nipoti
with their own. Nepotism then continued on through history-rulers such as the Czars
of Russia practiced nepotism, for example, by building their cabinets such that it was
primarily composed of relatives and the Czars’ successors generally tended to be their
sons. As such, nepotism has had a long history, continuing to this day.
4. NEPOTISM 11
While nepotism is one of the longest lasting forms of corruption, it can be the
most dangerous as well. The issues of legality and the correlation with development
illustrate the damaging effects of nepotism [1]. The problem with legality and nepo-
tism is that under law the practice of nepotism is seldom illegal, even in modern
industrial countries. Generally, the powers that be are exempt from any sort of legal
action if they accord favors to relatives; only the public servants are subject to any
sort of censure. Furthermore, the detrimental effects of nepotism become evident
when it is observed that public offices practicing nepotism usually belong to the un-
derdeveloped nations (UDCs) of the world. For example, the developing country of
Nicaragua practiced nepotism for nearly a century with the Somoza political dynasty.
Beginning with Anastasio Somoza Garcia, he selected his successor as his eldest son,
Luis Somoza Debayle, and Debayle selected his successor as his second son, Anas-
tasio Somoza Debayle. While on the surface nepotism may seem not as harmful as
other forms of corruption, the lack of legal action against this corruption and the
correlation between it and development clearly exposes nepotism’s negative effects.
CHAPTER 2
”In terms of economic growth, the only thing worse than a society with a rigid,
over-centralized, dishonest bureaucracy is one with a rigid, over-centralized, honest
bureaucracy.” – Samuel P. Huntington
The opening quote by Huntington (1968) [8] captures the mindset of most pro-
corruption activists. The claim they bring to the table is that often countries with
rampant corruption come with the caveat of having an overly rigid bureaucratic
system. Such governmental systems make for inefficient bureaucratic processes, as
red tape impedes the process of various applications for, say, licenses, permits and
et cetera. Nathanial H. Leff (1964) [9] brings to light the very valid point that in
many corrupt countries, governments have other priorities such as military spending
besides devoting time and effort to granting permits and licenses. Governments are
often indifferent to desires of entrepreneurs wanting to carry out economic activities,
or in the case of very leftist nations, governments may actually be hostile towards
the pursuits of private entrepreneurs. Similarly, bureaucracies with inefficient offices
and slow-moving file queues may also impede the positive economic intentions of
entrepreneurs. In such situations, corrupting government officials via graft or bribery
is often beneficial to efficiency within the economy. Hence, corruption is often seen a
much needed “grease” for squeaking the wheels of rigid administrations.
Pranab Bardhan (1997) [10] discusses through a different approach the notion that
corruption, especially in the form of bribery, promotes efficiency. Using the concept
of the Coasean bargaining process, Bardhan claims that bribery reaches allocative
12
1. CORRUPTION AND EFFICIENCY 13
efficiency in the sense that only the lowest-cost firm is awarded permits and licenses.
As discussed in the previous chapter, the bureaucrat sets an optimal bribe price that
he will charge, and as such, there will be a number of applicants who will not pay
that amount and a number that will. Extended this idea further, if in the bribery
game private firms are competing for a license, the bureaucrat, wanting to maximize
his revenue, will only approve the application of the firm offering the highest bribe.
In most cases, the firm that is able to pay the highest bribe is the lowest-cost firm.
Hence, through this view, bribery would ensure that economic activity within the
country is generally carried out by the most efficient, lowest-cost firms.
Aside from the positive impression of corruption that it promotes efficiency, there
exists much literature on the negative effects corruption has on efficiency. Gunnar
Myrdal (1968) [11] found evidence in India that instead of bribes and “speed money”
improving efficiency, they actually create an inefficient bureaucratic system. Because
the government official in charge is looking to maximize his revenue, he will wait
and hold up the queue either until his optimal bribe price is met or until one of
the competitive applicants out-competes the other and offers the highest bribe price.
Hence, instead of speeding up the bureaucratic system, bribes often slow them down
given the monopolistic nature of the official.
In continuation with the counter arguments to bribery, the Coasean bargaining
process is also challenged by literature. While the license, permit or contract may
be awarded to the lowest-cost firm through the Coasean bargaining process, the lack
of legal enforcement of the contract creates further inefficiency. Boycko, Schleifer
and Vishny (1995) [12] bring to light a very important point: permits and licenses
granted or contracts established through corrupt means are not enforceable in courts.
In other words, if a government agent were to collect the bribe from an applicant,
there is no guarantee that he will provide the exact service or good in exchange, or
even provide it at all, since the applicant cannot go to court and say he paid a bribe
2. CORRUPTION AND GOVERNMENT SPENDING 14
in order to complete the exchange. As such, even though the contract may be offered
to the lowest-cost firm through the Coasean bribery game, there is no guarantee that
the lowest-cost firm will actually see that contract officially implemented or license
granted.
The bureaucrat will put down in his account books the amount he received from
the consumer minus the bribe amount. So, while we see the expected level of govern-
ment expenditure on that good, we see a much lower level of output than expected.
Low levels of necessity public goods such as hospital buildings or books for school
children will undoubtedly result in lower development indices for those sectors. For
example, Crockroft (1998) [14] finds that large irregular payments in terms of bribes
asked by school administrators for entrance and passing examination has a strong cor-
relation with low enrollment rates. Thus, corruption, especially via bribery, tends to
lower output of much needed public goods, thereby adversely affecting development
indicators.
Moving on to the second approach to the allocation of government expenditure
in relation to corruption, we discuss the idea of embezzlement. As shown earlier in
Chapter 1, in the case of embezzlement, the official in charge steals a portion of the
funds allocated to him by the government, but writes down in his accounts that he
used the complete amount for its intended purposes. In the process, he provides a
good of much lower quality. In such a situation, the output of that type of good is
not affected, however the overall quality being put into the sector for which the good
is intended declines. This situation poses a threat to the overall development of the
nation via two channels.
If, for example, good quality, durable medical equipment is replaced with cheaper,
fast-depreciating substitutes, the quality of healthcare in the country will be deeply
affected. In such a situation, mortality rates may rise, as the healthcare provisions
are not up to par and are unable to handle the medical demands of that country.
Secondly, because he will be selling the public good at a lower price, he will be
increasing demand for that product. As such, the government will be pumping more
funds into that good, but receiving very little benefit. Gupta, Davoodi and Tiongson
2. CORRUPTION AND GOVERNMENT SPENDING 16
(2008) [15] mention that the treasury will see very large revenue losses in the long-
run, and will be forced to curtail supply of that needed public good. Such a case will
once again adversely affect development indicators.
Despite the vast amount of literature outlining the negative effects of corruption
on government spending, there still exists one author, Nathanial Leff, who attempts
to present corruption in a positive light when considering government expenditure.
Leff (1964) approaches corruption and government spending through the behavioral
aspect of corruption-inflicted economies. Leff claims that a discussion of the effects of
corruption on government spending is only valid if the primary goal of the government
is economic development [9].
The previous section, Corruption and Efficiency, mentions that many of the
underdeveloped nations also tend to be very overly-centralized bureaucracies – it is
these over-centralized nations that tend to have a highly income elastic demand for
development. Such governments may instead choose to spend on lavish satisfaction
of high-ranked government officials, building up military defense or funding programs
to keep the population from revolting. Because it is generally the underdeveloped
nations that have high levels of corruption, there may be discrepancies in empirical
results showing low government expenditure on development projects. The low figures
may not be occurring due to corruption, but simply due to the propensity of the
government to not prioritize development as their primary goal.
CHAPTER 3
Scope of Study
17
3. SCOPE OF STUDY 18
Given these results, we can proceed safely with our analysis knowing that corruption
does in fact have an inverse relationship with government spending, especially in
health care.
Moving on to literature that has discussed specifically effects of corruption on
the efficiency of health care expenditure, we look to Gupta, Davoodi and Tiongson
(2008) [15]. The study conducts a cross-sectional analysis of 128 countries using also
the International Country Risk Guide’s corruption index. The index, however, is
rescaled for the article: it ranges from 0 to 10, with 0 being the least corrupt and 10
the most corrupt. The paper finds to a 1 percent statistically significant level that
a unit increase in the corruption index is associated with a large 37 percent increase
in infant mortality rates (per 1,000 live births). As such, the large magnitude of the
change in mortality rates suggests that corruption has a terribly adverse affect on the
efficiency of health expenditure.
In this study, we would like to continue in the spirit of the previous literature
mentioned in this chapter. However, the analysis done in this paper will set itself
apart from others in the same area by taking the empirical study a step further.
We will not only attempt to decipher the relationship between corruption and the
efficiency of health expenditure, but also determine the effects of the interaction
between corruption and health expenditure on infant mortality rates. Moreover, we
will also try to understand the changes in the marginal effect on infant mortality
rates due to corruption with respect to changes in health expenditure. As such, this
paper will quantify how the health care efficiency changes directly with corruption
and public spending, as well as the added benefits or costs of changing health care
expenditure at different levels of corruption.
CHAPTER 4
Methodolgy
1. Description of Data
The dependent variable we will be using is the Infant Mortality Rate (per 1,000 live
births). The two independent variables will be corruption, given by the Corruption
Perceptions Index (CPI), and Per Capita Government Health Expenditure. The three
variables make for a good choice because they allow us to understand not only the
direct effects of corruption and health expenditure on the health care system, but
they also allow us to observe the efficiency of the government in terms of expenditure
on health.
from the following sources: ADB (Asian Development Bank), AFDB (African De-
velopment Bank), BTI (Bertelsmann Transformation Index), CPIA (Country POlicy
and Institutional Assesment by the World Bank), EIU (Economist Intelligence Unit),
FH (Freedom House Nations in Transit), GI (Global Insight), IMD (International In-
stitute for Management Development), MIG(Merchent International Group), PERC
(Political and Economic Risk Consultancy, Hong Kong) and WEF (World Economic
Forum) [18].
The CPI ranges from 1 to 10, with 1 being the most corrupt and 10 being the
cleanest (or most honest). Additionally, the CPI also assigns rankings of corruption
to every country, with 1 being the least corrupt and the highest ranking being the
most corrupt. For instance, in the 2008 ranked countries from 1 to 180, where 180 was
the most corrupt country. Table 4.1 looks at the year 2005 in the 2008 Corruption
Perceptions Index and it shows Denmark ranked as the least corrupt at 1 and Somalia
ranked as the most corrupt at 180.
giving us the amount the government spends on health care per person in the coun-
try. Government health expenditure consists of recurrent and capital spending from
government (both central and loca) budgets, external borrowings and grants (which
includes donations from international agencies and non-governmental organizations.
Additionally, this statistic includes social (or compulsory) health insurance funds [19].
1.3. Infant Mortality Rate. Lastly, the dependent variable of our model is
the Infant Mortality Rate (per 1,000 live births). The data for this variable are quite
credible, as they are an amalgamation of estimates from three well-known organiza-
tions: the World Health Organization (WHO), UNICEF and the World Bank. They
are based primarily on household surveys, census data and vital registration [20].
The calculation for these data are carried out by dividing the number of infants dy-
ing before reaching one year of age by the number of 1,000 live births in a given
year. The mortality rate can range from 100 percent to 0 percent, implying that 100
percent means all infants per 1,000 births has died and 0 percent suggesting that no
infant out of 1,000 births has died.
2. Methodology
The effectiveness of our variables depends heavily upon how they are set up in our
model. Our aim is to understand both the effects of corruption and health expenditure
on infant mortality, as well as the effects of corruption through health expenditure
on infant moratilty to capture government efficiency. We have three hypotheses for
our analysis:
(1) An decrease in corruption (an increase in the CPI) will cause infant mortality
rates to decline.
2. METHODOLOGY 22
(2) An increase in per capita health expenditure will cause mortality rates to
decline.
(3) An increase in government efficiency will lead to lower mortality rates.
where MOR is the Infant Mortality Rate (per 1,000 live births), HEXP is the Per
Capita Government Health Expenditure and CPI is the Corruption Perceptions In-
dex.
The β1 (CPI) and β2 (HEXP) terms allow us to capture the direct effects of corrup-
tion and health expenditure on infant mortailty. According to our three hypothesis,
an increase in both CPI and HEXP should have a negative effect on MOR. The
β3 [(CPI)(HEXP)] term, however, allows us to see how corruption works through
health expenditure. The β3 [(CPI)(HEXP)] term captures government efficiency in
the sense that it helps us quantify the marginal effect on MOR from adding either
one unit of CPI or HEXP. If the coefficient of this term is estimated as a positive
value, then it means that marginal effect on MOR from adding either one unit of
CPI or HEXP is increased by the other. For example, if the term is positive, then
the marginal effect on infant mortality rates by adding, say, another unit of health
expenditure is increased as corruption decreases (or as CPI increases). As such, this
term will allow us to permeate through the fog of corruption and see whether health
expenditures are being efficiently put to use.
Given the model in Equation (4.2), we can translate our three hypotheses into
terms of a regression analysis by saying that we would like to reject the following null
hypotheses (We are unaware of the effects of the interaction term, and it is the effect
we are looking for in the thesis; thus, we will not create a null hypothesis for that
term):
3. DESCRIPTIVE STATISTICS 23
(1) H0 : β0 = 0
(2) H1 : β1 ≥ 0
(3) H2 : β2 ≥ 0
To test our hypotheses, the data that we will be using will be in panel format.
We will take a total of 60 countries from the 180 countries assessed in the Corruption
Perceptions Index of 2008. The aim is to get a full range of CPI values, from low
(more corrupt) to high (very honest). In the spirit of that goal, we will take 20
countries that fit the more corrupt criterion and 20 of the ones that are the most
honest, and lastly, take 20 from the middle that have CPI values between 4 and
6. The panel data will be constructed such that each country is assesed from 2001
to 2005. In other words, the panel data will have a range of five years (from 2001
to 2005) with 60 cross-sections (for an excerpt of the data please see Table 6.1 in
Appendix A).
3. Descriptive Statistics
One of the prime issues that could create bias in our regression analysis is the
presence of multicollinearity between our two independent variables. To check for
3. DESCRIPTIVE STATISTICS 24
We then regress this equation and find the value of R2 and substitute it into
1
(4.4) VIF(βˆ1 ) =
1 − R2
to calculate the VIF factor for βˆ1 [21]. If the value of the VIF is greater than 5, then
we have to be concerned about multicollinearity.
Table 4.2 contains the VIF factor for βˆ1 , as well as basic descriptive statistics
for our two independendent variables. We see that our VIF value is a low number
of 1.15, leaving us free of multicollinearity issues and allowing us to proceed safely
with our regression analysis. Table 4.2 also shows that we have achieved our goal of
obtaining a large range of CPI values, specifically from very corrupt value of 2.4 to
an extremely honest number of 9.9.
With the threat of multicollinearity nullified, we may now move onto describing
our dependent variable, infant mortality rate per 1,000 live births (MOR). We present
the descriptive statistics of MOR in Table 4.3. The key statistics that jump out for
Table 4.3. Mean, Standard Deviation, and Sample Size for MOR
MOR are that there is a large difference between the minimum value (2.20) and the
maximum value (120.60) with a fairly large standard deviation of 18.70.
CHAPTER 5
Empirical Analysis
Begining our empirical analysis, we will attempt to gain a visual relation between
our dendent variable, MOR, and the two explanatory variables, CPI and HEXP. Our
hypotheses were that as CPI increases, MOR should decrease, and similarly, HEXP
and MOR should have an inverse relationship. We will visually test these hypotheses
by constructing scatter plots for both MOR versus CPI and MOR versus HEXP.
Let us first look at the scatter plot of MOR versus CPI given in Figure 5.1, which
also contains the best-fit (regression) line. While there seem to be many outliers at
140
120
100
80
MOR
60
40
20
0
2 3 4 5 6 7 8 9 10
CPI
Figure 5.1. CPI vs. Infant Mortality Rate (per 1,000 live births).
the lower values of CPI, a relation between MOR and CPI can be drawn. As the
regression line shows, an increase in honesty within the country, or an increase in CPI,
26
1. VISUAL ANALYSIS AND CORRELATION 27
140
120
100
80
MOR
60
40
20
0
0 1,000 2,000 3,000 4,000 5,000 6,000
HEXP
in the lower values of the CPI. This pattern seems to suggest that corruption has
a varied range of effects on infant mortality rate, but the regression line seems to
suggest otherwise. The trend the best-fit line depicts is that CPI and MOR rate have
an inverse relationship such that as CPI increases, MOR declines. Hence, this trend
implies that as corruption decreases, infant mortality rates also tend to decrease.
As a preliminary test of our hypotheses (2) and (3), and as a confirmation of
our extrapolation of the scatter plots, we look at the correlation between MOR and
CPI and the correlation between MOR and HEXP. Looking first at Table 5.1, we see
2. REGRESSION ANALYSIS 28
that our intuition is confirmed because CPI and MOR have a negative correlation
of -0.52, suggesting that as CPI increases, MOR decreases. Similarly, Table 5.2
Table 5.1. Correlation between MOR and CPI
CPI MOR
CPI 1.00 -0.52
MOR -0.52 1.00
shows a negative correlation between HEXP and MOR, implying that as HEXP
increases, MOR decreases. So far, our hypotheses are being confirmed–a decrease
Table 5.2. Correlation between MOR and HEXP
HEXP MOR
HEXP 1.00 -0.39
MOR -0.39 1.00
in corruption has a negative effect on infant mortality rates and an increase in per
capita government health expenditures also decreases mortality rates.
2. Regression Analysis
While we have somewhat of a confirmation of our hypotheses (2) and (3), we still
lack numerical proof that our visual analyses are correct. Moreover, we still have to
reject our other two null hypotheses: H0 : β0 = 0 and H3 : β3 ≤ 0. To reject all
the null hypotheses that we set forth in Chapter 3, we must test our model given in
Equation (4.2). For our best estimate, we will run an ordilary least squares (OLS)
regression to estimate Equation (4.2) to get the fitted line,
where βˆ1 represents the amount by which MOR changes with each unit change in
CPI, βˆ2 quantifies the amount by which MOR changes with each unit change in
HEXP, and lastly, βˆ3 captures the amount by which MOR changes with each unit
change in the interaction variable, [(CPI)(HEXP)].
2. REGRESSION ANALYSIS 29
Looking at the regression results presented in Table 5.3, the first thing we see
is that all our results are statistically significant, as for all variables ρ < 0.05. The
Table 5.3. Regression Results for Model 1
Conclusion
The aim of this paper was two-fold: (a) to confirm the hypothesis decreasing
corruption and increasing health expenditure have an inverse relationship with infant
mortality rates, and (b) to understand how corruption affects the efficiency of health
expenditure spending. We have found statistically significant results that allow us to
tackle both of our goals.
In the pursuit of observing a decrease in mortality rates with a decrease in corrup-
tion and an increase in health expenditure, the regression results of Model 2 in Table
5.3 answer our questions. We find that a one unit change in CPI, a one unit decrease
in corruption, decreases mortality rates by 5.81 units. Moreover, we find that a unit
change in per capita government health expenditure lowers infant mortality rate by
0.016 units. As such, these results confirm our hypothesis that corruption and health
expenditure are negatively correlated with infant mortality rates.
In the spirit of understanding how corruption affects government efficiency, we
ran two regressions, results of which appear in Tables 5.3 and 5.4. Looking at the
regression results in Table 5.3 for Model 1, we see that β̂3 has a positive value of 0.002.
This suggests that the marginal effect of an extra unit of per capita health expenditure
on infant mortality rates is increased by 0.002 units as corruption decreases by one
unit. This result implies that at higher levels of corruption health expenditure is quite
inefficient because it takes a decrease in corruption to increase the marginal effects of
increasing health expenditure. Such a result may be found because in more corrupt
countries, dishonesty in the form of bribery and embezzlement distort government
spending. As discussed in Chapters 1 and 2, moneys are diverted from their intended
31
6. CONCLUSION 32
destination (i.e. extra hospital beds, better medical equipment and better medical
infrastructure) to the pockets of corrupt bureaucrats.
The regression results of Model 2, on the other hand, tell a similar but a more
in-depth story. Right away, we still see the same negative correlation between a
decrease in corruption and an increase in health expenditure with infant mortality
rates. Moreover, the positive coefficient of CP I × HEXP still exists, implying the
same results as discussed in the above paragraph. From the new terms we added,
CP I 2 seems have a positive coefficient. This is interesting because CP I 2 turns our
model into a quadratic function, and combined with the negative coefficient of CP I,
it suggests that the beneficial effects of decreasing corruption are marginally dimin-
ishing. In other words, decreasing corruption is a very strong factor in highly corrupt
countries in the quest for decreasing infant mortality rates, but decreasing corruption
beyond a certain point (in much lesser corrupt countries) has very little effect if none
at all.
The last term, however, in Model 2 gives us a true insight into the efficiency of
health care expenditure with respect to corruption. To gain a complete understanding
of what β̂5 is telling us, let us take its derivative with respect to HEXP :
d(M ˆOR)
(6.1) = −0.033 + 0.01(CP I) − 0.00073(CP I)2 .
d(HEXP )
The plot of this derivative is given in Figure 6.1 with values of CP I ranging from
our minimum and highest CP I value. The plot offers a great visual look at what
is happening in our regression. The marginal effect of increasing per capita health
expenditure on infant mortality rates is initially increasing with diminishing marginal
returns as corruption decreases. However, the marginal effect eventually levels off,
and then, the marginal effect actually begins to decrease – that is, we begin to see
negative effects on infant mortality rate by increasing health expenditure by one unit.
Before we begin to explain this phenomenon, let us calculate the exact value where
6. CONCLUSION 33
dMOR
dHEXP
CPI
4 6 8 10
-0.005
-0.010
-0.015
the marginal returns are zero and begin declining. We do this by taking another
derivative – the derivative of Equation (6.1) with respect to CP I – setting it equal
to zero and solving for CP I:
d
(6.2) (−0.033 + 0.01CP I − 0.00073CP I 2 ) = 0.01 − 0.00146CP I
dCP I
(6.3) CP I = 6.85.
Our calculation tells us that the increasing diminishing marginal returns level off at
a CPI value of about 6.85. After this value, the marginal effects become negative.
An explanation of this leveling off and negative change in marginal effects goes
hand-in-hand with the explanation of why β̂4 has a positive value. The positive value
of β̂4 suggests that there are initially increasing diminishing returns, but the negative
value of β̂5 hints that at some value of CPI, these marginal returns become negative.
A statistical explanation for that could be cleaning up corruption only increasing
health care expenditure when the countries are considerably corrupt - it is only in
highly corrupt countries where we see a strong negative correlation between the CPI
and HEXP in Figures 5.1 and 5.2. The data begin to lose correlation at higher values
of the CPI, and such we see erratic results. After all, in the regression results of
Model 2 in Table 5.4, it was β̂5 that was the least statistically significant.
6. CONCLUSION 34
Table 6.1. Excerpt of Full Data Set Used (using 2008 updated figures)
35
Figure 6.2. Dot Plot of CPI vs. Infant Mortality Rate (per 1,000 live births).
100
120
140
20
40
60
80
0
1 - 01
2 - 02
3 - 03
4 - 05
6 - 01
8 - 01
9 - 02
11 - 01
12 - 02
14 - 03
APPENDIX A
15 - 04
16 - 05
MOR
18 - 01
19 - 04
21 - 01
24 - 01
CPI
26 - 01
28 - 01
30 - 05
32 - 01
34 - 05
36 - 01
40 - 01
46 - 01
49 - 01
55 - 01
36
Bibliography
37
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