How Government Corruption Impacts the Real Economy

Abstract

This paper investigates the impact of corruption on economic performance, focusing on the “grease the wheels” and “sand the wheels” hypotheses. The “grease the wheels” hypothesis suggests that corruption might enhance efficiency by bypassing red tape, while the “sand the wheels” hypothesis argues that corruption increases transaction costs and disrupts economic growth. Analysing data from studies conducted on both advanced and developing economies, we find corruption “sands the wheels” of advanced economies while it “greases the wheels” of developing economies. However, by analysing growth modes such as the Solow-Swan model as well as the Endogenous growth model to understand the effect of corruption on a larger scale, it was found that corruption on a higher level in a country’s government is more likely to hinder economic growth. The findings underscore the need for context-specific anti-corruption strategies.