Effects Of Corruption And Income Inequality

1114 Words 5 Pages
SEMINAR PAPER-2

1) INTRODUCTION:

Corruption is not a new phenomenon in India and has been prevalent since time immemorial. However, in recent times it’s in the public eye due to its cancerous spread across the length and breadth of the nation. Both the public and the private sectors are infected with corruption, making it an eminent threat to the prosperity of the nation (Bardhan, 1997), as it hampers economic growth, results in political instability, social capital and legitimacy, increases income inequality and has a tremendous adverse effect on the well-being of the poor (Kéita, 2010). This critical review examines three articles on the issue of corruption and income inequality. Where the Charron, Heston and Kumar articles focus on corruption
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Unlike the Heston and Kumar article, this article focuses solely on corruption and income inequality. The authors are keen to do this research, as no research in this domain was attempted before. They focus on various channels (education, GSP/capita, income) through which corruption may affect income inequality. They undertake an empirical research where the Gini coefficient is a dependent variable and channels of corruption act as the independent variables. They include the dummy variables as well (expenditure, net income and spending unit). They estimate this model using the OLS in a cross section of countries over 1980-97 (Gupta, Davoodi and Terme, 2002). Furthermore, they use instrumental variable technique to address the endogeneity of the corruption variable. They also run the income inequality regression using one or two tail test. The findings are a) the independent variables account for 73% of the cross country variation in income inequality, b) inequality is higher when the Gini coefficient is based on income, and c) higher corruption is associated with higher income inequality. This finding is significant when the “one or two tail” test runs at the 1% significance level (Gupta, Davoodi and Terme, …show more content…
However, the approach taken and the depth of study by each article is different. Heston and Kumar’s (2008), article gives a broader context of corruption and deals with too many domains at one time. Though they manage to put forward some striking flaws in the Indian institutional setup, they neither provide any solution to the issues nor do they open new avenues for research. Last but not least, the authors indulge in cherry-picking, thus presenting a bias view. Moreover the evidence is anecdotal. On the other hand, Charron’s (2008) article is confined to the core issue. The evidence put forward is robust and surprising. Surprising, in the sense that the evidence found no significant relationship between corruption and income inequality. However, Gupta, Davoodi and Terme (2002) find a significant relationship between corruption and income inequality by undertaking an IV approach and by conducting a “one or two tail” test in addition to the OLS method. This implies that Charron limits himself as he draws his conclusion based on just the OLS method. Also, his study involves only 20 out of 29 states (currently), which could limit its applicability and perhaps reduces the credibility of his work. This is where Gupta, Davoodi and Terme’s article scores over the others. Charron, Heston and Kumar’s articles also rely on the surveys which consist of a miniscule

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