Corruption and Democracy - An empirical investigation using panel data

Abstract: The assumption of positive effects of democratic reform has come to underlie much of the West’s policy recommendations for developing countries. However, following democratization, many countries have experienced upsurges in corruption levels, undermining the democratic process. This thesis explores the possibility of a nonlinear link between democracy and corruption. If democratization and reductions in corruption levels are in fact incompatible at early stages of political liberalization, policy needs to be adjusted to take this into consideration. Based on cross-section and panel data, regression analysis is performed with perceived levels of corruption as the dependent variable. For robustness testing, separate measures of democracy and corruption are used. The results mostly support the theory of a nonlinear relationship between democracy and corruption. The findings also indicate that higher levels of income and economic freedom correspond to lower perceived levels of corruption, while ethno-linguistic fractionalization and unemployment increases levels of perceived corruption.