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The impact of corruption on EU financial aid in European Neighbourhood countries

Magdalena Lyubenova won the Transparency International competition for the best anti-corruption thesis at the College of Europe for her study of the impact of corruption on the European Neighbourhood Policy. Below, she describes her findings.

This empirical study delves into the role of institutions and the impact of corruption on financial assistance and economic growth, have produces some innovative results for the wider anti-corruption field. Not only does corruption represent a barrier for development in the European Neighbourhood Policy (ENP) countries, but it also influences the returns from the EU financial assistance.

While mainstream literature is generally in agreement on the significance of corruption on economic growth, there are various interpretations of what the net effect is. In this novel piece, countries with high levels of corruption are found to make less use of the European financial assistance. Moreover, the empirical results demonstrate a negative coefficient for EU financial aid. This is possibly related to the fact that, the poorer the country and the greater the conflict it is involved in, the greater the dimension of the European financial assistance. Additionally, the paper includes comparative tests between two different measures of corruption (Corruption Perception Index and World Bank Control of Corruption Index).

Studies tend to agree that financial aid spurs economic growth and has significant effect only in countries with good macroeconomic policies and relatively low levels of corruption. However, while the majority of scholars investigate either corruption or financial aid independently, only few of them focus on their overall net effect on economic growth.

The results of this research illustrate that, first, the corruption coefficient is significant and positive: meaning that countries with low corruption levels tend to foster rapid economic growth. Secondly, the financial assistance allocated to the southern and eastern European neighbours is highly significant but it has negative effect on the economic activities in almost every partnership state.

There are two potential explanations for these results. On the one hand, the funds could be invested in projects without significant returns on economic growth and hence in projects that are less welfare-improving. Alternatively, it is also possible that the financial support suffered from mismanagement and provided gains only to public authorities and not to real projects. Corruption is a fundamental aspect of the countries’ profiles in the Neighbourhood and, indeed, poor quality of governance could explain misappropriation of the European funds.

Finally, the analysis includes a precise estimated effect of corruption and financial assistance in the ENP countries based on the regression coefficients. The results indicate that progress in curbing corruption could amplify positive economic outcomes for these economies. While 1 unit of corruption level does not affect the returns from financial assistance, 10 units lower corruption does result in positive outcome.

To summarize, this paper establishes that the European funds have negative impact on the economic activities in the majority of Neighbourhood countries. This indicates that unless corruption is accounted for and reduced, financial assistance seems to weaken governments’ accountability in the region.

In the final analysis, it is perhaps necessary to treat these results with a degree of caution, as it may well be that some of the funds were invested in projects lacking significant, long-term impacts on economic growth, and which cannot be accounted for in this study.

The full-length paper can be accessed here.

Author : Magdalena Lyubenova

15 Aug 2016

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