The Impact of Corruption on Economic Growth in Lebanon Moe Farida* Agricultural and Resource Economics Faculty of Agriculture, Food and Natural Resources The University of Sydney NSW 2000 Phone: 61 2 93514684 Fax: 61 2 93514953 Email:
[email protected] Abstract This paper seeks to examine the direct and indirect effects of corruption on economic growth in Lebanon. We hypothesise that corruption reduces a country’s standard of living as measured by the real GDP per worker. We argue that corruption deters economic growth, reduces the productivity of capital and decreases the effect of government expenditure on growth. Using a neoclassical model, we find empirical support indicating that corruption increases inefficiencies and reduces economic growth. Results also suggest that corruption does not alter the effect of foreign aid on output. They imply that the marginal benefit to output of reducing corruption outweighs virtually any other policy action. That is, unless corruption is reduced in Lebanon, efforts to improve private and public investment will have a minimal impact on per capita GDP. Keywords: corruption, economic growth, investment, government expenditure, and foreign aid. * I am indebted to A/Prof Fredoun Ahmad-Esfahani for his supervision and constructive insights Preface Title of Thesis: The Impact of Corruption on Economic Growth in Lebanon Supervisor: A/Prof Fredoun Ahmadi-Esfahani Corruption is a major barrier to sound development, affecting a wide range of economies across the world. Measuring and explaining corruption is no easy task. The increased interest in such a phenomenon has produced a multitude of policy prescriptions, reform initiatives and international fora.