ABSTRACT: The COVID-19 pandemic triggered unprecedented economic disruption, prompting governments to expand public spending to mitigate losses. However, in contexts of high corruption, these resources risk diversion, reducing their intended impact. This study analysed the impacts of corruption on public spending in times of economic crisis, such as the COVID-19 pandemic. An endogenous growth model was developed, incorporating public spending's role in infrastructure and corruption's predatory effects. The model predicts an inverted U-shaped relationship between spending and firm growth, with corruption lowering the curve's peak. Empirical analysis used World Bank Enterprise Surveys and macroeconomic indicators for over 35,000 firms in multiple countries during the pandemic. Variables included firm-level government support, credit access, tax exemptions, remote work adoption, and macro indicators like corruption control and government effectiveness. Estimation employed OLS, IV, and GMM to address endogeneity, with robustness checks validating instruments. Results capture the interaction between governance quality, spending efficiency, and corruption. Theoretical and empirical results confirm a non-linear, inverted U-shaped link between public spending and firm sales growth during COVID-19. Moderate spending initially boosts productivity and sales via better infrastructure; beyond an optimal point, expected future taxation dampens investment and growth. Corruption reduces this optimal point, flattening the curve and lowering spending efficiency. Economies with stronger governance and less corruption benefit more from public investment, particularly under pandemic restrictions. Firm-level results show that government support, remote work, and permanent hiring positively affect sales. Meanwhile, new credit access, tax exemptions, and wage subsidies often correlate negatively. Public health spending is positive for growth, but total health spending, due to private concentration, shows negative associations. Governance quality significantly amplifies public spending's effectiveness. Findings highlight the need for anti-corruption measures to maximize the impact of public spending, especially during crises. Efficient governance enhances infrastructure gains, fosters firm resilience, and sustains growth under fiscal constraints. Policymakers should optimize spending levels, avoiding excessive taxation risks, while prioritizing transparent allocation and effective delivery. Strengthening institutional quality can mitigate corruption's negative effects, ensuring that scarce resources, particularly during emergencies, are directed toward productive uses that bolster firm performance and economic recovery. Institutional reforms thus complement fiscal strategies for sustainable post-crisis development.
Rocha et al. (Thu,) studied this question.