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1 Introduction
The role of institutions in economic growth is of high interest nowadays. The impact of corruption on economic growth has drawn widespread attention particularly in developing countries. A common definition of corruption is the abuse of public office for private gain (WB, 1997). Corruption defined this way captures, for example, bribery, the sale of public property by government officials, kickbacks in public procurement, and embezzlement of government funds ([43] Svensson, 2005). Accordingly, corruption retards economic growth and erodes development prospects of a country. While many studies find deleterious effects of corruption on growth, some papers remain ambiguous.
Bangladesh is an interesting case to study the interaction between corruption and growth. The country, on one hand, is noted for its high level of corruption. On the other hand, Bangladesh has been registering 5-7 percent growth in recent decades. This raises a number of questions:
Does corruption foster growth in a developing country like Bangladesh?
What is the underlying channel of the apparent positive association between corruption and growth?
The paper intends to answer these questions.
Literature on corruption and economic growth has been burgeoning in recent years. The seminal work of [41] Solow (1956) laid the modern foundation for growth literature by emphasizing the role of savings and capital formation. Since the mid-1980s, the theories of endogenous growth[1] ([27] Lucas, 1988; [38], [39] Romer, 1986, 1990) substantiated the role of education, training, and technology in enhancing growth potentials. However, the effect of institutions and corruption on economic growth did not appear in literature until the mid-1990s. The pioneering work of [28] Mauro (1995) finds that corruption lowers economic growth by lowering investments. A number of research papers on this aspect have come into being since then.
Most of these papers find that corruption is detrimental to economic growth and development. Studies that fall in this category include [1] Abed and Gupta (2002), [4] Akai et al. (2005), [5] Anoruo and Braha (2005), [6] Bigsten and Moene (1996), [7] Blackburn et al. (2006), [12] Fisman and Svensson (2007), [14] Gyimah-Brempong (2002), [15] Gyimah-Brempong and de Camacho (2006), [24] Lambsdorff (2003), [26] Li et al. (2000), [51] Mauro (1997), [29] Meon and Weill (2004), [30] Mo (2001), [32] Neeman et al. (2003), [33] Owoye and...