Impact of Corruption on GDP in Pakistan

This study is conducted to scrutinize the direct influence of corruption and foreign direct investment and gross national income on GDP of Pakistan. On annual data of 2005-2015 we used least square technique. The estimation results conclude that corruption negatively affect the economic growth. However foreign direct investment and gross national income has positive and significant impacts on GDP. Furthermore, the results suggest that 1% increase in corruption it lowers the economic growth by 4.62%. Alternatively decrease in 1% of corruption it improves GDP by 4.

62%. Similarly, 1% percent increase in foreign direct investment it will increase the economic growth by 0.000128%, Moreover same for the gross national expenditure that 1% increase in the gross national expenditure it will increase the economic growth by 0.448%. Hence in Pakistan economic growth decrease because of the negative influence of corruption this is proven by this study. The estimation results are adjusted with Heteroskedasticity using 'Breusch-Pagan-Godfrey' test and model is tested for sensitivity analysis to ensure the robustness. This study possesses deep policy implication for Pakistan.

Get quality help now

Writer Lyla

Verified writer

Proficient in: Fighting Corruption

5 (876)

“ Have been using her for a while and please believe when I tell you, she never fail. Thanks Writer Lyla you are indeed awesome ”

+84 relevant experts are online

Hire writer

Corruption is considered as a Cancer for the backbone of a nation. It is considered as one of the major reasons behind the deteriorating performance of an economy. The progressive structure of a country is significantly affected and hindered due to presence of this very phenomenon. The presence of corruption has led the countries to walk on a road of inequality and disparity where the smooth healthy life is still a dream even after so many years has passed after independence. The social trust has been completely lost due to widespread phenomenon of corruption which has affected the major building blocks of a country such as Medical care, Education sector and as well as the labor.

In addition to it the very mechanism of supply and demand and behavior of consumer is disturbed significantly due to presence of this very phenomenon. (Obydenkova & Libman, 2015).

The term corruption can be defined as ill-mannered practice of gaining personal advantage at the cost of the welfare of the rest of the community. According to Transparency International (TI, 2009) corruption is the misuse of the delegated Political authority for personal interest. The existence of corruption is the biggest impediment in the long-term prosperity and GDP of a country. It not only damages the development of a country but its institutional quality very badly. When institutions are negatively performing, it has direct deteriorating consequence on the GDP of an economy. (Ugur & Dasgupta, 2011). As the very economical growth of a country depends on institutional foundation of a country so the many reasons behind economic turbulence is caused and affected negatively due to underperformance of institutions and the major reason behind it is presence of poor-governance which ultimately affects the economic activity and welfare of the country.

Pakistan has been completely engulfed by this deadly disease as in today’s era not even a single sector in Pakistan is able to escape from this deadly disease. In Pakistan corruption has not only affected the economic growth but also have given rise to income inequality and mostly It has affected the lower income groups as the proportion of income which needs to be invested in welfare projects such as Health, education has been tilted towards the benefit of higher income groups such as Defense and this is the reason that poorer person is further being more exposed to poverty than a wealthier person which in turns affects negatively the economic growth rate and the prevalence of street crimes has also increased due to presence of this very phenomenon. (Shrivastava & Ivanova, 2015).

From many years economy of Pakistan is facing a slow rate of economic growth and a very large level of instability or volatility in its growth rate. Furthermore the economy of Pakistan is flop to attain the target percent of growth which it wants to accomplish. There are diversity of causes for this reduced performance; growing corruption is the ruling factor that exaggerated the economic growth in Pakistan.

The institutional weaknesses are the main drivers of the corruption which discourages the economic growth of a country. The Past context of Pakistan Flourishes that most indicators of governance have stay unaffected and seemingly corruption is dispersing to all core levels of central, regional and local governments. Corruption perception index of Pakistan was 2.25 in 1995, and was well-thought-out as the one of most fraudulent nation of the world. Government made many efforts to eliminate the corruption from the country. In 1998, due to these efforts corruption perception index of Pakistan presented some progress, in comparison of 1997 it progress further from the 2.7 to 2.53 (international transparency report, 2007).

Now we are turning towards the further discussion on the corruption and the GDP of the country. There are numerous studies which investigates the relationship between the corruption and the economic growth. Over-all results are showing that corruption slowdown the economic growth in the long term through a wide range of channels. Lapalmbora (1994) stated that there exists a positive relationship between the corruption and the GDP. Mauro (1995) reflects that there is a negative relationship between the corruption and the economic growth. Mauro (1998) investigates that corruption decreases the expenditure on education. Mo (2000) finds the negative relationship between the effect of corruption on GDP and channels which influence the growth, the results were similar to the Mauro (1995). He finds that one percent (1%) upsurge in the level of corruption it decrease the GDP by 0.72%. Foreign direct investment (FDI) also affected by corruption and this observation scrutinized by Wei (2000). He found that corruption is like a levy which hampers the foreign direct investment

Brempong (2001) by using panel statistics from African states he investigates the effect of corruption on GDP and he finds the negative relationship between them that a one unit upsurge in corruption it reduces GDP by 0.75 and 0.9 proportion points per year correspondingly. The result proposes that corruption harms affects poor more than the rich in African countries. Ebben (2011) study also shows that there is negative relationship or effect on the GDP. Igwike et al (2012) study the relationship between the corruption and the GDP with the help of some empirical tests. The pooled data is set for some variables. They establish that corruption has negative influence on the GDP. Therefore this study is also an effort to know the impact of corruption on the GDP of Pakistan through regression analysis by least square method. The following parts comprise of data and methodology, model specification and regression results and finally conclusion and policy implications. Foreign direct investment (FDI) also affected by corruption and this observation scrutinized by Wei (2000). He found that corruption is like a levy which hampers the foreign direct investment. GDP in affected by the corruption it is broadly believed nowadays. The corruption results comprises of low labor productivity, reduced investment these are the results of lower growth. Those nations which have high corruption junctures have poorer financial performance. According to study done by the (Soomro, 1999). He inspect that here opposing association is present between the corruption and the nations GDP. (Obayelu, 2007) he further added that on human development corruption has unpleasant outcome

The main objective of the research is to determine the effect of corruption on GDP in Pakistan. For this, I collected data yearly from world development index (WDI) from the period of 2005 to 2015. The variables used understudy are economic growth (EG) as an explained variable, while the main independent variable corruption whereas foreign direction investment government expenditure are used as control variables.

The below table which mention the precise but more detailed key literature on corruption and the economic growth and it contains study design, methodology and observed results. To scrutinize the effect of corruption on GDP of Pakistan, to inspect the effect of corruption, foreign direct investment along with gross national expenditure on economic growth of Pakistan. Therefore, I apply multiple simple regression model and least square technique. Assessments and outputs are cited both in dependent variable and residual terms. In the last to check the validity stability of model sensitivity analysis test is conducted.

To inspect the effect of corruption on GDP of Pakistan I have applied multiple simple regression models. Where EG represents economic growth used as dependent variable; Corrupt shows corruption used as independent variable; FDI and GE are control variables; β_o represents intercept and β_1 , β_2 and β_3 show slope coefficients and μ_t represents error term. To examine empirically that how impact of corruption affects economic growth of Pakistan so these four variables are put in the log linear equation model

Correlation convey us that how robust or not that much strong relationship lies between the explanatory variable and explained variable.so here in table 3. The corruption and economic growth are 95% positively correlated. Whereas FDI and corruption both are independent variable and they are 9.8% are positively correlated. Here is the problem of Multicollinearity between the GNE and Corruption because they are perfectly correlated with each other with 97% of correlation. And the correlation between the GNE and the FDI is 2.422%.

To determine the impact of corruption on economic growth of Pakistan we estimate the model by using least square technique. The below table-4 describes the regression outcomes and found that between the corruption and the economic growth there is a negative relationship, However the impact of gross national expenditure has positive impact on economic growth. And the effect of foreign direct investment has also positive impact on the GDP. It specifies that corruption is a main factor hindering the economic growth. The table 4 results entails that 1% increase in corruption it lowers the economic growth by 4.62%. Alternatively decrease in 1% of corruption it improves GDP by 4.62%. Similarly, 1% percent increase in foreign direct investment it will increase the economic growth by 0.000128%, Moreover same for the gross national expenditure that 1% increase in the gross national expenditure it will increase the economic growth by 0.448%.

The probability shows that corruption and foreign direct investment results are insignificant while the gross national expenditure results are significant at 5% level. In Pakistan problem of corruption has very serious impact on economic growth. If Government just focuses on the reduction of the corruption then countries GDP can significantly improve. The 95% value of Adjusted R-squared indicates that difference in economic growth which is dependent variable is explained by the variation in the corruption which is the independent variable. F-value is 73.42, which is greater than the critical value it signifying an overall good significant level of estimated model. Here the 1.42 is value of Durbin Watson test shows that there is no such autocorrelation exist in the model as its value is lower than 2.

This study is conducted to scrutinize the direct influence of corruption and foreign direct investment and gross national income on economic growth of Pakistan. On annual data between” 2005-2015 we used least square technique. The estimation results conclude that corruption negatively affect the economic growth. However foreign direct investment and gross national income has positive and significant impacts on GDP. Furthermore, the results suggest that 1% increase in corruption it lowers the economic growth by 4.62%. Alternatively decrease in 1% of corruption it improves GDP by 4.62%. Similarly, 1% percent increase in foreign direct investment it will increase the economic growth by 0.000128%, Moreover same for the gross national expenditure that 1% increase in the gross national expenditure it will increase the economic growth by 0.448%. This study ratifies that there is a negative influence of corruption on GDP in Pakistan. For the government and policymakers the presence of corruption is a big problem. Just economy losses are not occurred by the presence of the corruption but it also creates a problem of ineffectiveness for policy makers.