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Abstract
Given that inflation has always been known as an economic problem that that imposes many costs on society,
recognizing the most effective factors on it is very important. The aim of this study is to examine the effect
of administrative corruption on inflation rate in the countries of the Middle East and North Africa during
2003-2010. For this purpose, corruption perception Index has been used to measure administrative
corruption in these countries. In this study, the effect of Corruption Perception Index on inflation rate has
been determined using the approach of panel data along with other control variables such as equity growth
rate, economic openness, per capita income, and final consumption expenditure. The results imply that the
corruption perception index, degrees of economic openness, and per capita income variables ha ve a negative
significant effect on inflation rate. Furthermore, equity growth rate and final consumption expenditure
variables have positive effects on inflation rate. Thus, the most important recommendation of this study is
that economic experts of these countries reduce administrative corruption with the use of appropriate policies
and reduce inflation rate through increasing the production rate, per capita income, and economic growth
reinforcement.
1. Introduction
From the objectives of macroeconomic policies points, Economists focus on issues such as full employment, stability of the ge neral price level
(inflation control), equitable distribution of income and continuous economic growth. Due to the corrosive effects of inflation, inflation rate control
is considered as one of the objectives of macroeconomic policy has always been of interest to economists. The increasing unce rtainty and volatility
of macro economy, long-term capital investment reduction and other factors such as administrative corruption are the harmful effects of inflation.
the study of the relationship between administrative corruption and macroeconomic variables such as investment, economic growth and savings
are the subjects that have been considered in recent studies such as Swaleheen (2008) and Arslan and Saolam study (2009) for developed and
developing countries[1,2]. As the examination of administrative corruption on inflation rate has not been considered recently, practical examining
between these two variables can be a new study in this field. There are several reasons that show administrative corruption and inflaton rate are
associated with each other. Optimal taxation theory is one of the most important reasons that assert government tends to increase inflation rate
through seignorage. On the other hand, the costs of tax collection and tax evasion will cause governments to focus on inflation tax as a revenue
source. In addition, administrative corruption can lead to capital flight and impact on tax revenues of government. Considering this, inflation rate
and administrative corruption theoretically can have direct relationship with each other. This study tries to explore the relationship be tween
administrative corruption and inflation rate experimentally for the group of countries in the Middle East and North Africa with the use of panel
data technic for 2003-2020. For this purpose, the main question of this study is that how is the impact of corruption perceptions index on the
inflation rate in the MENA region countries (including Algeria, Bahrain, Egypt, Iran, Jordan, Kuwait, Lebanon, Morocco, Oman, Syria, Saudi
Arabia, and Tanzania). Hence, according to this aim, the article is organized as follows.
The second section presents an overview of the theoretical foundations and empirical researches are reviewed in Part 3. The fourth section presents
the methodology and the research model estimation. Empirical analyzes are studied in section five. Finally, Section 6 contains the conclusion and
recommendations for policy-making.
477
Estimating the impact of corruption perception index on inflation rate Case study: MENA Region Countries
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.
Some researchers believe that Administrative Corruption is a tool for deviating people from duties and actions that come from their formal duties,
which are related to the political and economic issues [21]. Administrative corruption is based on cultural, economic, and social roots. It can be
said that the general culture, values, and norms governing people's opinions and beliefs play a key role in this area. The major sources of economic
corruption are economic instability, unbridled inflation, stagnation, declining incomes and purchasing power, lack of economic and social justice,
improper distribution of facilities in the community and so on.
2.2 inflation theories
There are different theories about inflation as the effective factors on inflation have been divided to four groups: monetary theories, the theory of
demand pressure, cost pressure and structural inflation theories. Advocates of monetary theory believe that inflation is the result of high growth
rate of supplement of money and continuous supply of money leads to inflation. Demands' pressure propends also believe that the main cause of
inflation is the excess demand that is affecting on production at full employment condition. Theory of cost pressure assets that inflation is the
result of imbalances of supply-side economy. As workers and industrialists trying to raise wages and prices of other factors of production in
order to increase their share of national income. This can lead to wage- price spiral and make inflationary pressures. Structural theory believes
that non-harmonic structures of economy are the main roots of inflation and elasticity of supply-side major parts of the economy is the main
factor of inflation.
2.3 The impact of corruption on inflation
The theory of optimal taxation policy is one of the important theories of macroeconomic literature that examines the theoretical relationship
between inflation and administrative corruption. According to this theory, the government would try to equal final cost of inflation tax with the
marginal cost of tax production in order to minimize disruptions in their tax system. Therefore, the government implements Seigniorage policy as
a means for financing and budget deficit compensation. So when government spending is hugely increases, government spending financed is not
possible by tax revenues, and this would result in budget deficit increase. On the other hand, tax capacity is low in many of counties especially
developing countries. Thus, seigniorage policy and inflationary tax, which are the results of administrative corruption, are common ways of
financing of government expenditure. Therefore, As long as corruption and rent-seeking increase in government spending, rent motivation rises.
Because rent seeking become a profitable phenomenon for rent seekers and this will enhance through the budget deficit intensification, money
increase and high inflation rate. Therefore, raising government spending and inflationary tax are some of the direct effects of administrative
corruption on inflation rate. In addition to the direct effect of corruption on inflation, another channel in which administrative corruption affects
the rate of inflation indirectly is GDP growth decline through increasing administrative corruption and economic rent seeking. On the other hand,
the inflationary effects of money supplement growth is more when GDP growth rate is low, which leads to administrative corruption increase.
Thus, administrative corruption is not a political or natural phenomenon and conditions or other factors could influence on it [17, P5].
Given the mentioned subjects, we can claim that administrative corruption motive in government spending exist in developing countries, which
will increase during purchase from private section and implementing economic plants. Under these conditions, rent-seeking activity has become a
lucrative activity in economy and administrative corruption motivation will be existed in governmental activities. Consequently, simultaneously
with increase in government spending and budget deficits, money supplement will increase and hyperinflation will occur in economy. In addition
to optimal tax theory, which examines the relationship between corruption and inflation through its impact on the growth of money supply and the
seignorage, some economists believe that slight lack of independence or autonomy of the central bank is also likely to cause corruption and increase
the money supplement and inflation. Alesina and Summers (1993) and Fisher et al (2002) discuses that central bank independenc e reduction could
lead to inflation and corruption increase [10].
Economy openness is another non-monetary affecting variable on inflation rate. Economy openness increase can help to reduce inflation rate
through increase in imported and capital goods by domestic producers. Thus, if the price of capital and imported goods is lower than intermediate
domestic goods, increase in importing these goods can lead to transmission of the aggregate supply curve to the right and decrease in the genera l
rice level and inflation rate. Moreover, economy openness increase can happen through competition degree increase in domestic tradable goods
production. So, in the absence of tariff barriers and other trade restrictions for importing tradable goods, the imports of these goods increase and
competitiveness in production of domestic tradable goods will enhance. Hence, domestic producers will have to increase the quality of goods and
services or decrease production costs in order to maintain their goods' competitiveness and thereby it helps to reduce the ge neral price level and
inflation rate [17].
According to the subjects mentioned in the theoretical background, it can be stated that in addition to the monetary and non-monetary variables
such as liquidity growth rate, openness of the economy, GDP and spending, the administrative corruption variable as a structural variable impact
on inflation rate and it is necessary to consider this in clarifying econometric models.
Mohammadzaman Mohammadishirkolaei *
478
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.
Vindelyn and Hillman (2007) studied the relationship between competition policy, inflation, and corruption. He used regression analysis to
examine the relationship between these variables among the 23 African countries. The results show that although there is a relationship between
corruption and inflation, the relationship between competitive policies and inflation is not significant[24].
Rahmani and Yousefi (2008) evaluated the relationship between administrative corruption, monetary policy, and inflation rate in 97 developing
and developed countries during the 2003-2005 years. They found that there was a significant and positive relationship between administrative
corruption and inflation rate and this relationship is significant after entering money supplement growth rate.
Ghosh and Neanidis (2010) examined the relationship between corruption in public finance administration system and inflation, growth and tax.
They have indicated that corruption in public finance may occur in three forms: first, the reduction in tax revenues collected from households,
Second inflationary increase in government payments and third, reduction of productivity and efficiency of public spending. They found that
increasing corruption in each of these three manner results in inflation increase and growth decrease.
Gulzar et al (2011) evaluate the correlation between Corruption Perception Index and Inflation rate in India and Pakistan during the 1995-2009.
The experimental results of this study indicate that the correlation between corruption perception index and the inflation rate in Pakistan is weak,
while this relationship is strong in India. In other words, there is a positive correlation between the Corruption Perception Index and inflation rate
in India[18].
Damir and Praksa (2011) have used panel data approach to examine the impact of the administrative corruption perception index on inflation in
10 selected countries of EU during 1995-2008.they concluded that administrative corruption has a positive effect on inflation rate.
Dewan (2011) examines the relationship between administrative corruption and inflation in Bangladesh during the 1995-2009 with the use of panel
data technic. He concluded that the corruption perception index had a positive impact on the inflation rate, but this effect was not statistically
significance[13].
3.2 internal studies
there are not any direct study about the effect of administrative corruption on inflation rate in the studies that were conducted in Iran. most of the
studies have been examined the effect of administrative corruption on economic growth, investment and human development such as Jafari
Samimi (1380), Danaee Fard (1384), Samety and colleagues (1385), Ali Zadeh Sani and Faani (1386), Sabahi and Malek Alsadaty (1388) and
Taghavi and colleagues (1390). In these studies, various econometric techniques have been used to assess the impact of administrative corruption
on economic development, information technology, and investment and different results have been obtained for the selected countries.
Given the findings of external and internal studies, we can state that most studies examined the impact of administrative corruption on investment
and economic growth and most of the internal studies examined the effect of administrative corruption on inflation rate. Therefore, this study is
important because it examines this issue empirically in the Middle East and North Africa for the first time.
(1)
In model (1), LINFit is the logarithm of inflation rate (growth rate of consumer's goods and services price index), CPIit is Corruption Perception
Index as n alternative variable for measuring administrative corruption, LG is logarithm of government spending and LGDPP indicates the
logarithm of GDP. This model is specified to the following model according to the theoretical principles and variables of economy openness, total
consumption expenditures, and equity growth rate as effective monetary and non-monetary variables on inflation rate in MENA region countries.
(2)
In above model, LOPEN is the logarithm of economy openness that is defined as ratio of trade to GDP. GM2 represents equity growth rate that is
considered as ratio of liquidity growth rate to GDP.
It is worth noting that there are some alternative variables to measure administration corruption such as administrative corruption control index
and index of the International Country Risk Guidance. In this study, the Corruption Perception Index has been used as an alte rnative variable to
measure administrative corruption in the countries of the Middle East and North Africa. This index has been publishing each year since 1995 by
Transparency international organization. It is between 0-10. With approaching to 10 values, the amount of administrative corruption has been
reduced and with approaching to zero this amount will be increase. It is essential to mention that administrative corruption variables and index are
intrinsic variables that are extracted from international organizations' examinations like World Bank. The reason for using c orruption perception
index in this study is its ability to represent comprehensive information about different kinds of administrative corruption such as bribery and
embezzlement by public servants. Moreover, international organization of Transparency publishes information about corruption perception index
of countries through examining other international organizations' forms and uses statistical data of three prestigious international organizations in
order to reduce the possible changes of score for each country and reach calculation that is more accurate. The data that is used for the Corruption
Perception Index is derived from Transparency International Organization's Statistics and other variables information is obta ined from World
Bank's CD (2011). This study has been carried out for MENA region and North African countries during 2003-2010.
479
Estimating the impact of corruption perception index on inflation rate Case study: MENA Region Countries
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.
Table 1. The results of significance of stable effects in contrary to aggregated method of least squares
F(12,26)
2 (12)
(P-Value)
9/13
74/47
0/000
Then, in order to select the appropriate method of estimation between fixed and random effects methods Hausman test statistic should be used.
Hausman test statistic results show that random effects method is more appropriate than fixed effects method. The results are displayed in table 2.
Table 2. The results of Hausman test
value
5/34
Degree of freedom
p-value
0/43
As the Hausman test results indicate, the most appropriate method for estimating the model with panel data is random effects method. The res ults
of model estimation with random effect method are represented in Table 3.
coefficients
T statistic value
p-value
31/34
4/33
0/03
CPI
LGDPP
-3/32
-0/31
-3/55
-5/43
0/000
0/000
LOPEN
-0/005
-3/35
0/053
0/34
4/14
0/003
GM2
R 0.96
2
The results of Table 3 indicate that the estimated model have relatively high fitness and basic criteria for acceptance of regression such as adjusted
coefficient of determination, the expected sign of coefficients and significance of all regression coefficients indicating the suitability of estimated
regression. As it can be seen, the results indicate that the increase or decrease in administrative corruption perception Index has a negative and
significant impact on inflation rate. In other words, for every unit decrease in administrative corruption, the average inflation rate will decrease
about 4/28. On the other hand, inflation rate elasticity to per capita income variable is equal to -0.17, which shows that each 1% increase in per
capita income result in 0.17 % reduction in inflation rate. The results show degree of economy openness and liquidity growth rate have a negative
and significant impact on the inflation rate where the effect of economy openness is minimal (-0.005). In other words, by increasing the ratio of
trade to GDP, inflation rate will decrease and with the increase in liquidity growth rate inflation rate will increase about 0.23 percentages. According
to the results of this study, it can be stated that inflation rate could be decrease through increasing production level and per capita income in the
countries of the Middle East and North Africa. On the other hand, improving the administrative corruption index inflation rate will decrease
significantly in these countries. Moreover, with the increase in ratio of trade to manufacturing, consumer goods and services price index variability
will be reduce and with the increase in growth rate of money supply, inflation rate will enhance significantly. In order to investigate the robustness
of the results of model estimation final consumption expenditures variable, which is defined as the sum of public and private consumption spending,
has been added to the main model instead of economy openness variable. In this case, the Hausman test results indica te the suitability of the
random effect method. These results are shown in table 4.
Table 4. The results of model estimation using random effect method
Random Effect
Explanatory variables
intercept
C
CPI
LGDPP
LFC
GM2
and
Coefficient
T test statistic
p-value
1/14
3/25
0/00003
-3/33
-0/55
0/33
0/35
-4/31
-3/33
3/15
5/34
0/00034
0/054
0/0053
0/003
Mohammadzaman Mohammadishirkolaei *
480
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.
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