Impact of inter-country corruption differences on wages and economic growth

Abstract Theoretically and numerically, this paper attempts to examine the macroeconomic effects of corruption by using the two-country directed technical change model. At a single-country level, an increase in corruption levels in one country leads to an intra-country decrease in the demand for labor and wages and a permanent slowdown of technological-knowledge progress and economic growth. At the inter-country level, a country-specific increase in corruption enlarges inter-country wage and technological-knowledge gaps. Overall, higher corruption levels in one country are detrimental to global economic growth. Through calibration, it is shown that when the differences between the corruption of non-corrupt and corrupt countries increase: (1) economic growth is mainly stimulated in the corrupt countries India, Mexico, and Brazil; (2) the lowest wage inequality compared to non-corrupt countries is observed in the corrupt countries Greece, Portugal, and Spain.