CORRUPTION, GOVERNANCE AND SUSTAINABLE

DEVELOPMENT: A PANEL DATA ANALYSIS

By

Shahzad Mushtaq

Supervised by: Dr. Rana Ejaz Ali Khan

Session 2014-2017

A THESIS SUBMITTED TO THE DEPARTMENT OF

ECONOMICS IN PARTIAL FULFILMENT OF REQUIREMENT

FOR THE DEGREE OF PhD ECONOMICS

Department of Economics

The Islamia University of Bahawalpur

i

DECLARATION

I, Shahzad Mushtaq, Roll No. 09, student of PhD Economics, Session 2014-2017, Department of

economic, The Islamia university of Bahawalpur (Pakistan) solemnly affirmed that this thesis

entitled Corruption, Governance and Sustainable Development: A Panel Data Analysis done

by myself under the supervision of Dr. Rana Ejaz Ali Khan for the purpose of submitting it as the

requirement for attaining the degree of DOCTOR OF PHILOSOPHY IN ECONOMICS. I have

read it carefully and take all responsibilities for the mistake. All the sources of information are

undertaken by me.

SHAHZAD MUSHTAQ

ii

SUPERVISOR CERTIFICATE

It is hereby certified that work presented by Shahzad Mushtaq in the thesis entitled Corruption,

Governance and Sustainable Development: A Panel Data Analysis is based on the results of

research study conducted by candidate under my supervision. No portion of this work has been

formerly been offered for higher degree in this university or any other institute of learning and to

best of the author’s knowledge, no material was used in this thesis which is not his own work,

except where due acknowledgement has been made. He has fulfilled all the requirements and is

qualified to submit this thesis in partial fulfillment for the degree of Doctor of Philosophy in

Department of Economics, Faculty of Arts, The Islamia University of Bahawalpur.

Dr. Rana Ejaz Ali Khan

Supervisor

Chairman

Department of Economics

Faculty of Arts

The Islamia University of Bahawalpur.

iii

CERTIFICATIONS

I hereby undertake that this research is an original one and no part of this thesis fall under

plagiarism, if found otherwise, at any stage, I will be responsible for the consequences.

Name: Shahzad Mushtaq Signature: ________

Registration No: 10/IU.PhD/2014

Certified that the contents and form of thesis entitled Corruption, Governance and Sustainable

Development: A Panel Data Analysis is submitted by Shahzad Mushtaq has been found

satisfactory for the requirement of the degree.

Supervisor: _______________________________________________________________

Dr. Rana Ejaz Ali Khan

External Examiner: ___________________________________________________________

External Examiner: ___________________________________________________________

Chairman: _______________________________________________________________

Dean: ___________________________________________________________________

Director Advance Studies: __________________________________________________

iv

DEDICATION

I dedicate my creator and sustainer ALLAH (S.W.T.), who bestowed me his all blessing for

accomplishing this research work. Our dearest prophet Hazrat Muhammad (S.A.W.A.W.)

presented us a role model for living a good life. My parents, especially my father Mian Mushtaq

Ahmed Bhatti (Late) always encouraged me to get higher education. My beloved and sweet mother

prayers support me at every stage of life. I dedicate my dearest Son, Muhammad Uzair Shahzad

and Daughter, Romaysa Shahzad.

SHAHZAD MUSHTAQ

v

ACKNOWLEDGEMENT

By the grace of almighty Allah (S.W.T.), who always shower his blessing on me and every creature

of the world. Allah is the creator of every knowledge. His knowledge has unlimited. Being a

creature of Allah, He bestowed me power to do this prestigious work. After that, I present salaam

on our dearest prophet Hazrat Muhammad Mustafa (Sallahu-Alihe-WA-Alihe-Wasalam), who

presents a good life system for us. His teachings are very best in this life and hereafter of life. This

prestigious work has selected for the successful of this world and hereafter of this life (Qayamat).

Corruption is a big sin in the world, it snatch the rights of other deserving people. Islam and other

religions condemn this habit. It is a selfish habit. Islam gave the concept of governance. All the

prophets and Sahabah have good governance with no corruption and love with all creature of the

world. Hazrat Muhammad (Sallahu-Alihe-WA-Alihe-Wsalam) had love with plants, trees, water,

land and animals. Islamic teachings also love with all resources. Sustainable development is the

development of present and future generations. To save future creatures is the motto of sustainable

development. Don’t aggressive use any resource. Islam is the religion of moderation. Islam allows

moderation in every matters. Islamic teachings are very simple and not proudly. Any individual

wishing better life has to curb corruption and utilize all resources with moderation to save his life

from worries so that he may be successful in this world and hereafter.

I am thankful to Dr. Rana Ejaz Ali Khan (my supervisor), who always encouraged me to do better

for this research work. He is a man of qualities. His attitude was very sincere to my work. His keen

interest uplifts me for this research work. All the words of gratitude and veneration fall

vi

incapacitated to express my feelings for my supervisor. Every time, when I go for any typical

research work, my dearest Dr. Rana didn’t hesitate.

I am thankful to Dr. Ali Azam and Dr. Abid Rashid Gill, whose presented guidelines for my

research work. I am thankful to Mr. Rashid Sattar. He is my kind and heartiest teacher. His

affection to me is very great. He supported me in my thesis with positive discussion. I am thankful

to Dr. Rao Ishtiaq Ahmed, who helped me for this prestigious research work. Dear Mr. Hafeez-

Ur-Rehman helped me in every matter for attaining this degree. Dr. Tusawar Iftikhar Ahmad is a

person of love and affection. He and Dr. Imran also helped for this incredible work. I am also

thankful to my students and other non-relevant person, who helped me for accomplishing this

prestigious research work. By the help of his affection, I completed my research work. I am also

thankful to all other teachers of my department and colleagues.

SHAHZAD MUSHTAQ

vii

ABSTRACT

Sustainable development is a new and emerging concept of development. It differs from other

indices of human development that ignore environment. It has three dimensions. They are

economy, society and environment. It encompasses welfare of present generations without

compromising the ability of future generations. The foremost objective of this study was to

construct a sustainable development index by using Principal Component Analysis (PCA) method

for 58 developed and developing countries in the period of 2000-2015 and then investigated the

determinants of corruption, determinants of governance and determinants of sustainable

development. In this study, thirty nine indicators from society, economy and environmental

dimensions were selected. The index value ranges from 0 to 1, where 0 shows low sustainable

development and 1 shows high sustainable development. The data of indicators used in sustainable

development index was taken from World Development Indicators (WDI) and United Nations

Organization Statistics (UNO Stat). Corruption was measured by Corruption Perception Index

(CPI) and its data was taken from Transparency International (TI). Governance index was

measured by four indices of governance by using PCA method. They were regulatory quality,

political stability, government effectiveness and voices and accountability. The data of governance

index was taken from World Governance Indicators (WGI). The determinants of corruption were

explored against governance index, sustainable development index and other control variables.

Panel Ordinary Least Squares (POLS) technique was used for exploring the determinants of

corruption, determinants of governance and determinants of sustainable development. Further,

removing endogeneity and heterogeneity from the model, System Generalized Method of

Moments (GMM) and difference GMM estimation technique was used. The results indicated that

sustainable development index, governance index, democratic accountability, law and order and

other control variables were significant and have negative impact on corruption. The determinants

of governance and its components were checked against corruption, sustainable development, law

and order and democratic accountability. The results indicated that corruption has negative, while

sustainable development, law and order and democratic accountability have positive impact on

governance and its components. The determinants of sustainable development were investigated

through corruption, governance, democratic accountability, law and order and other control

variables for panel of overall economies, panel of high income and panel of low income

viii

economies. The results indicated that corruption has negative impact on sustainable development,

while governance index and its components, law and order, democratic accountability and political

globalization have positive impact on sustainable development. The policy implications from

empirical findings of this study are as follows. For reducing corruption, it should improve

sustainable development, governance, democratic accountability and law and order. For improving

governance, the sustainable development, democratic accountability and law and order should be

better, corruption should be reduce for good governance. Finally, for improving sustainable

development, corruption should be reduce and governance, democratic accountability, law and

order and political globalization should be improve. The future research will be targeted to

construct a sustainable development index for all countries of the world and will analyze the impact

of corruption and governance on sustainable development.

Keywords: Corruption, Governance, Sustainable Development, Law and order, Democratic

Accountability, Political Globalization, POLS, GMM.

GEL Codes: D73, H11, O43, P480, Q56, C26

ix

TABLE OF CONTENTS

DECLARATION i

SUPERVISOR CERTIFICATE ii

CERTIFICATIONS iii

DEDICATION iv

ACKNOWLEDGEMENT v-vi

ABSTRACT vii-viii

TABLE OF CONTENTS ix-xvi

LIST OF TABLES xvii-xviii

LIST OF FIGURES xix

LIST OF ABBREVIATIONS xx-xxi

CHAPTER 1-INTRODUCTION ............................................................................................ 1-23

1.1. Corruption ................................................................................................................................ 1

1.2. Governance .............................................................................................................................. 8

1.2.1. The Elements of Good Governance .................................................................................... 10

1.3. Sustainable Development....................................................................................................... 12

1.4. The Interaction among Corruption, Governance and Sustainable Development .................. 15

1.5. Research Problem .................................................................................................................. 18

1.6. Research Questions ................................................................................................................ 19

1.7. Objectives of the Study .......................................................................................................... 20

1.8. Scope of the Study ................................................................................................................. 20

1.9. Significance of the Study ....................................................................................................... 21

1.10. Limitations of the study ....................................................................................................... 22

x

1.11. Plan of the Study .................................................................................................................. 22

CHAPTRE 2-REVIEW OF LITERATURE ....................................................................... 24-56

2.1. Sustainable Development: An Overview ............................................................................... 24

2.2. Determinants of Corruption ................................................................................................... 29

2.3. Relationship between Corruption, Economic and Social Development ................................ 32

2.4. Determinants of Governance ................................................................................................. 40

2.5. Relationship between Governance and Economic Development .......................................... 43

2.6. Relationship between Corruption, Governance and Sustainable Development .................... 51

2.7. Relationship between Globalization, Governance and Economic Development .................. 55

CHAPTER 3-THEORETICAL FRAMEWORK ............................................................... 57-74

3.1. Theories of Sustainable Development ................................................................................... 58

3.1.1. Weak Sustainability ............................................................................................................ 58

3.1.2. Strong Sustainability ........................................................................................................... 59

3.2. Measuring Sustainable Development .................................................................................... 59

3.2.1. OECD Sustainable Development Index .............................................................................. 60

3.2.2. World Resource Indicator Sustainable Development Index ............................................... 61

3.2.3. Green Net National Product ................................................................................................ 62

3.2.4. Green Human Development Index ..................................................................................... 63

3.2.5. Genuine Progress Index or Sustainable Economic Welfare ............................................... 63

3.2.6. World Bank Genuine Saving or Adjusted Net Saving........................................................ 64

3.2.7. Ecological Footprint............................................................................................................ 65

3.2.8. United Nations Sustainable Development Index ................................................................ 65

3.2.9. Sustainable Society Index ................................................................................................... 66

3.2.10. Environmental Sustainability Index .................................................................................. 66

3.2.11. Environmental Performance Index ................................................................................... 66

xi

3.3. Theories of Corruption ........................................................................................................... 67

3.3.1. Grease the Wheel Hypothesis ............................................................................................. 67

3.3.2. Sand the Wheel Hypothesis ................................................................................................ 68

3.4. Measurement of Corruption ................................................................................................... 68

3.4.1. The International Country Risk Guide ................................................................................ 68

3.4.2. Transparency International ................................................................................................. 69

3.4.3. World Governance Index .................................................................................................... 70

3.5. Measurement of Governance ................................................................................................. 70

3.5.1. World Governance Index .................................................................................................... 70

3.6. Theories of Democracy .......................................................................................................... 71

3.6.1. Growth Enhancing and Growth Retarding ......................................................................... 72

3.7. Theory of Law and Order ...................................................................................................... 72

3.8. Linkages between Socioeconomic Factors and Corruption ................................................... 73

CHAPTER 4-RESEARCH METHODOLOGY ............................................................... 75-119

4.1. Measurement of Sustainable Development Index ................................................................. 75

4.1.1. Sustainable Society Index ................................................................................................... 82

4.1.1.1. Health Index ..................................................................................................................... 83

4.1.1.2. Personal Status Index ....................................................................................................... 83

4.1.1.3. Demography Index ........................................................................................................... 85

4.1.1.4. Education Indicator .......................................................................................................... 85

4.1.2. Sustainable Economy Index ................................................................................................ 86

4.1.2.1. Technology Index ............................................................................................................ 86

4.1.2.2. Economic Integration Index ............................................................................................. 87

4.1.2.3. Financial Development Index .......................................................................................... 88

4.1.2.4. Public Debt Indicator ....................................................................................................... 88

xii

4.1.2.5. Economic Growth Indicator ............................................................................................. 88

4.1.2.6. Macroeconomic Stability Indicator.................................................................................. 89

4.1.2.7. Tourism Indicator............................................................................................................. 89

4.1.3. Sustainable Environmental Index ....................................................................................... 89

4.1.3.1. Air Index .......................................................................................................................... 90

4.1.3.2. Land Index ....................................................................................................................... 91

4.1.3.3. Water Indicator ................................................................................................................ 91

4.2. Composite Index .................................................................................................................... 92

4.2.1. PCA Method ....................................................................................................................... 94

4.3. Model Specification ............................................................................................................... 95

4.3.1. Empirical Models ................................................................................................................ 95

4.4. Variables Descriptions ........................................................................................................... 97

4.4.1. Sustainable Development.................................................................................................... 97

4.4.2. Corruption ........................................................................................................................... 98

4.4.3. Democratic Accountability ................................................................................................. 98

4.4.4. Political Globalization ...................................................................................................... 101

4.4.5. Law and Order .................................................................................................................. 102

4.4.6. Governance Index ............................................................................................................. 102

4.4.7. Government Effectiveness ................................................................................................ 103

4.4.8. Regulatory Quality ............................................................................................................ 104

4.4.9. Voices and accountability ................................................................................................. 104

4.4.10. Political Stability ............................................................................................................. 105

4.5. Data Sources ........................................................................................................................ 105

4.6. Econometric Modelling ....................................................................................................... 106

4.6.1. Endogeneity ...................................................................................................................... 108

xiii

4.6.2. Dynamic Panel Data Model .............................................................................................. 109

4.6.3. The Advantages of Dynamic Panel Data Model ............................................................... 111

4.6.4. Instrumental Variables ...................................................................................................... 111

4.6.5. GMM Estimation Technique ............................................................................................ 112

4.6.6. Assumptions of GMM ...................................................................................................... 114

4.6.7. First Difference GMM Estimation Technique .................................................................. 114

4.6.8. System GMM Estimation Technique................................................................................ 116

4.7. Robustness Checks............................................................................................................... 118

4.7.1. Over-Identification Restriction ......................................................................................... 118

4.7.2. Autocorrelation ................................................................................................................. 118

CHAPTER 5-CONSTRUCTION OF SUSTAINABLE DEVELOPMENT INDEX ... 120-149

5.1. Correlation and PCA Results ............................................................................................... 121

5.1.1 Correlation and PCA Analysis of Sustainable Society Index and Its Sub-Dimensions

indicators ..................................................................................................................................... 122

5.1.1.1 Correlation and PCA analysis of Health Index ............................................................... 122

5.1.1.2 Correlation and PCA analysis of Personal Status Index ................................................. 123

5.1.1.3. Correlation and PCA Analysis of Demographic Index.................................................. 126

5.1.1.4. Correlation and PCA Analysis of Education ................................................................. 127

5.1.1.5. Correlation and PCA Analysis of Sustainable Society Indices ..................................... 127

5.1.2. Correlation and PCA Analysis of Sustainable Economy Index and Its Sub-Dimensions

Indicators..................................................................................................................................... 128

5.1.2.1. Correlation and PCA Analysis of Technology Index .................................................... 129

5.1.2.2. Correlation and PCA Analysis of Economic Integration Index ..................................... 129

5.1.2.3. Correlation and PCA Analysis of Financial Development Index .................................. 130

5.1.2.4. Correlation and PCA Analysis of Public Debt Indicator ............................................... 131

5.1.2.5. Correlation and PCA Analysis of Economic Growth Indicator ..................................... 131

xiv

5.1.2.6. Correlation and PCA Analysis of Macroeconomic Stability Indicator ......................... 132

5.1.2.7. Correlation and PCA Analysis of Tourism Indicator .................................................... 132

5.1.2.8. Correlation and PCA Analysis of Sustainable Economic Indices ................................. 132

5.1.3. Correlation and PCA Analysis of Sustainable Environmental Index and Its Sub-Dimensions

Indicators..................................................................................................................................... 134

5.1.3.1. Correlation and PCA Analysis of Air Index .................................................................. 134

5.1.3.2. Correlation and PCA Analysis of Land Index ............................................................... 135

5.1.3.3. Correlation and PCA Analysis of Water Indicator ........................................................ 136

5.1.3.3. Correlation and PCA Analysis of Sustainable Environmental Indices .......................... 136

5.1.4. Correlation and PCA Results Sustainable Development Sub-Dimensions ...................... 137

5.2. Results of Sensitivity Analysis ............................................................................................ 138

5.3. Comparisons of Countries by Rank in Different Time Slots ............................................... 141

5.4. Comparative Analysis of Sustainable Development Index and Its Dimensions by Countries

..................................................................................................................................................... 144

CHAPTER 6-DETERMINANTS OF CORRUPTION .................................................. 150-169

6.1. Summary Statistics............................................................................................................... 151

6.2. Pooled OLS Results ............................................................................................................. 153

6.2.1. Sustainable Development and Corruption ........................................................................ 153

6.2.2. Democratic Accountability and Corruption ...................................................................... 157

6.2.3. Law and Order and Corruption ......................................................................................... 157

6.2.4. Government Effectiveness and Corruption ....................................................................... 158

6.2.5. Voices and Accountability and Corruption....................................................................... 159

6.2.6. Regulatory Quality and Corruption .................................................................................. 160

6.2.7. Political Stability and Corruption ..................................................................................... 161

6.2.8. Governance and Corruption .............................................................................................. 161

6.3. Panel Stationarity Test ......................................................................................................... 162

xv

6.4. Results of System GMM Estimation ................................................................................... 163

6.3.1. Lags of Dependent Variable ............................................................................................. 164

6.3.2. System GMM Estimation Results of Sustainable Development and Corruption ............. 165

6.3.3. System GMM Estimation Results of Democratic Accountability and Corruption ........... 166

6.3.4. System GMM Estimation Results of Law and Order and Corruption .............................. 167

6.3.5. System GMM Estimation Results of Government Effectiveness and Corruption ........... 167

6.3.6. System GMM Estimation Results of Voices and Accountability and Corruption ........... 167

6.3.7. System GMM Estimation Results of Regulatory Quality and Corruption ....................... 168

6.3.8. System GMM Estimation Results of Political Stability and Corruption .......................... 168

6.3.9. System GMM Estimation Results of Governance and Corruption ................................... 168

CHAPTER 7-DETERMINANTS OF GOVERNANCE ................................................ 170-185

7.1. Pooled OLS Estimation for Analyzing the Determinants of Governance ........................... 172

7.1.1. Sustainable Development and Governance ...................................................................... 172

7.1.2. Corruption and Governance .............................................................................................. 174

7.1.3. Democratic accountability and Governance ..................................................................... 175

7.1.4. Law and Order and Governance ....................................................................................... 177

7.2. Results of System GMM Estimation Technique ................................................................. 179

7.2.1. System GMM Estimation Results of Sustainable Development and Governance ........... 180

7.2.2. System GMM Estimation Results of Corruption and Governance ................................... 181

7.2.3. System GMM Estimation Results of Democratic Accountability and Governance ......... 184

7.2.4. System GMM Estimation Results of Law and Order and Governance ............................ 185

CHAPTER 8-DETERMINANTS OF SUSTAINABLE DEVELOPMENT ................. 186-211

8.1. Summary Statistics............................................................................................................... 187

8.2. Results of Correlation Coefficient ....................................................................................... 191

8.3. POLS Estimation for Analyzing the Determinants of Sustainable Development ............... 192

xvi

8.3.1. Corruption and Sustainable Development ........................................................................ 193

8.3.2. Democratic accountability and Sustainable Development ............................................... 193

8.3.3. Political Globalization and Sustainable Development ...................................................... 194

8.3.4. Law and Order and Sustainable Development.................................................................. 195

8.3.5. Governance and Sustainable Development ...................................................................... 196

8.4. Results of Panel Stationary Test .......................................................................................... 197

8.5. Results of First Difference GMM Estimation Technique .................................................... 199

8.5.1. Lag of Dependent Variable ............................................................................................... 200

8.5.2. Corruption and Sustainable Development ........................................................................ 201

8.5.3. Democratic Accountability and Sustainable Development .............................................. 204

8.5.4. Political Globalization and Sustainable Development ...................................................... 207

8.5.5. Law and Order and Sustainable Development.................................................................. 208

8.5.6. Governance and Sustainable Development ...................................................................... 209

CHAPTER 9-CONCLUSIONS AND POLICY RECOMMNEDATIONS……………212-222

9.1. Conclusions .......................................................................................................................... 212

9.2. Policy Recommendations ..................................................................................................... 215

9.2.1. Strategies for Fighting Corruption .................................................................................... 215

9.2.2. Strategies for Governance ................................................................................................. 218

9.2.3. Strategies for Sustainable Development ........................................................................... 219

9.3. Future Research Direction ................................................................................................... 222

APPENDIX A ............................................................................................................................ 223

APPENDIX B ............................................................................................................................ 231

REFERENCES ................................................................................................................... 232-268

xvii

LIST OF TABLES

Table 1.1: Historical Overview of Sustainable Development ...................................................... 13

Table 1.2: Top 10 Corruption Free Countries with Governance Scores....................................... 17

Table 1.3: Top 10 Corrupt Countries with Governance Score ..................................................... 17

Table 4.1: Sustainable Development Dimensions, Its Sub-Dimensions and Indicators ............... 71

Table 4.2: Definitions and Sources of Variables .......................................................................... 99

Table 5.1: Correlation among Health Indicators ......................................................................... 122

Table 5.2: Extraction Sum of Square Loadings for Health Index............................................... 123

Table 5.3: Correlation among Personal Status Indicators ........................................................... 124

Table 5.4: Rotated Sum of Square Loadings for Personal Status Index ..................................... 125

Table 5.5: Correlation among Demography Indicators .............................................................. 126

Table 5.6: Rotated Sum of Square Loadings for Democracy Index ........................................... 126

Table 5.7: Correlation among Sustainable Society Sub-Indices ................................................. 127

Table 5.8: Extraction Sum of Square Loadings for Sustainable Society Index .......................... 128

Table 5.9: Correlation among Technology Indicators ................................................................ 129

Table 5.10: Extraction Sum of Square Loadings for Technology Index .................................... 129

Table 5.11: Correlation among Economic Integration Indicators .............................................. 130

Table 5.12: Rotated Sum of Square Loadings for Economic Integration Index ......................... 130

Table 5.13: Correlation between Financial Development Indicators ......................................... 131

Table 5.14: Extraction Sum of Square Loadings for Financial Development Index .................. 131

Table 5.15: Correlation among Sustainable Economic Development Indicators ....................... 132

Table 5.16: Rotated Sum of Square Loadings for Sustainable Economic Development Index . 133

Table 5.17: Correlation among Air Indicators ............................................................................ 134

Table 5.18: Extraction Sum of Square Loadings for Air Index .................................................. 135

Table 5.19: Correlation of Land Indicators................................................................................. 135

Table 5.20: Rotated Sum of Square Loadings for Land Index ................................................... 136

Table 5.21: Correlation of Environmental Sustainable Indicators.............................................. 136

Table 5.22: Extraction Sum of Square Loadings for Environmental Sustainability Index ........ 137

Table 5.23: Correlation of Sustainable Development Sub-Indices ............................................. 137

xviii

Table 5.24: Extraction Sum of Square Loadings for Sustainable Development Index .............. 138

Table 5.25: Robustness Check of Sustainable Development Index ........................................... 139

Table 5.26: Rank of Countries by Sustainable Development Index Score for Year 2000, 2015 and

Average of 2000-2015 ................................................................................................................ 141

Table 6.1: Summary Statistics .................................................................................................... 152

Table 6.2: Pooled OLS Results for Determinants of Corruption ................................................ 156

Table 6.3: Panel Unit Root Test .................................................................................................. 162

Table 6.4: System GMM Estimation Results for Determinants of Corruption .......................... 165

Table 7.1: POLS Results of Determinants of Governance ......................................................... 177 Table 7.2: System GMM Estimation of Determinants of Governance ....................................... 183

Table 8.1: Summary Statistics…………………………………………………………………..190

Table 8.2: Correlation among Variables for Three Samples Countries. ..................................... 192

Table 8.3: POLS Results of Determinants of Sustainable Development.................................... 195

Table 8.4: Panel Unit Root Test .................................................................................................. 197

Table 8.5: Difference GMM Estimates for Corruption and Governance Effect on Sustainable

Development in Different Groups of Countries .......................................................................... 206

Table A.1: Score of Sustainable Development Index…………………………………….... …..223

Table A.2: Ranking Order of Sustainable Development Index .................................................. 224

Table A.3: Score of Sustainable Economic Index ...................................................................... 226

Table A.4: Score of Sustainable Society Index .......................................................................... 228

Table A.5: Score of Sustainable Environmental Index ............................................................... 230

Table B.1: Sample of Selected Countries ................................................................................... 231

xix

LIST OF FIGURES

Figure 1.1: Average CPI Score for Different Regions .................................................................... 6

Figure 1.2: Average CPI by Income Level (2000-2015) ................................................................ 7

Figure 4.1: Sustainable Development Dimensions ....................................................................... 76

Figure 4.2: Sustainable Development Index Diagram .................................................................. 78

Figure 4.3: Process for Constructing Sustainable Development Index ........................................ 93

Figure 5.1: Trend of Sustainable Development Index Score by Country for the Year 2000-2015

..................................................................................................................................................... 145

xx

LIST OF ABBREVIATIONS

CBD Convention on Biological Diversity

CC Control of Corruption

CPI Corruption Perception Index

CO2 Carbon Di Oxide Gas

CSI City Summit in Istanbul

EU European Union

GCI Government Competitiveness Index

GHG Green House Gases

GMM Generalized Method of Moments

GNI Gross National Income

ICPDC International Conference on Population and Development in Cairo

ICRG International Country Risk Guide

IPCC International Panel of Climate Changes

IUCN International Union of Conservation Nature

MDG Millennium Development Goals

MENA Middle East North Africa

NO2 Nitrogen Di Oxide Gas

OCF Our Common Future

OECD Organization of Economic Cooperation and Development

OLS Ordinary Least Square

2SLS Two Stage Least Squares

PCA Principal Component Analysis

POLS Panel Ordinary Least Squares

PLS Partial Least Squares

PRS Political Risk Services

QOG Quality of Governance

xxi

SDI Sustainable Development Index

SO2 Sulphur Di Oxide Gas

TI Transparency International

UN United Nations

UNCHE United Nations Conference on the Human Environment

UNCSD UN Conference for Sustainable Development

UNDP UN Development Programme

UNEP UN Environment Programme

UNFCCC UN Framework Convention on Climate Change

UNICRI UN International Crime and Justice Research Institute

UNMSNY UN Millennium Summit in New York

WBES World Business Environment Survey

WCS World Conservation Strategy

WSSDS World Summit on Social Development on Copenhagen

WDI World Development Indicators

WGI World Governance Indicators

WWF World Wide Foundation

1

CHAPTER 1

INTRODUCTION

In this era, sustainable development is new and emerging concept of development in the world. It

includes sustainable economic development, sustainable society development and sustainable

environmental development for the present and future generations. Corruption is an important

issue. It hinders sustainable development. The role of governance cannot be ignore for reducing

corruption and improving sustainable development.

1.1. Corruption

Corruption is most commonly defined as the misuse or the abuse of public office for private gain

(World Bank, 1997; UNDP, 1999). The corruption is entrusted power of public office used for

personal gain in a manner that contravenes the rules of game (Jain, 2001). It is misuse of public

resources for personal interest. Transparency International (2005) defined corruption as, it is the

abuse of entrusted power for private gain and applying to both the public and private sectors. The

World Bank (2012) claimed that corruption is one of the single largest obstacle to economic and

social development. Corruption is an act of moral decay and dishonesty with the soul of human

society. It favors ineligible elements. Corruption leads to illegal benefits and accumulation of

undocumented wealth. Leff (1964) was the first economist who defined that corruption is a curse

for economy and society. It is an extra legal institutions that is used by individual or group to gain

influence over the action of bureaucracy (Leff, 1964). Nye (1967) defined corruption as “the

behavior that deviates from the formal duties of a public role because of private regarding wealth

or status gains”. Furthermore, Huntington (1968) defined the role of politics and wealth as “where

political opportunities are scarce, corruption occurs as people use wealth to buy power, and where

2

economic opportunities are few, corruption occurs when political power is used to pursue wealth”.

Krueger (1974) highlighted rent seeking1 behavior of people in the economy. Rose-Ackerman

(1978) highlighted market based corruption in the economy. He further elaborated political

corruption exists in voting procedure for election. Klitgaard (1988) presented an analytical

perspective of corrupt practices focused on three propositions.

First, corruption is a multidimensional phenomenon that can take place in public and

private organizations.

Second, corruption is an act of a group of people whose ethical standard does not fit in the

moral standard set by society.

The third assumption refers to the fact that people are free for earning according to their

standard and mind sets.

Shleifer and Vishny (1993) differentiated corruption in two ways, i.e. political corruption and

bureaucratic corruption. Khan (1996) defined corruption as an act which deviates from the formal

rules of conduct, governing the actions of someone in a position of public authority because of

private motives such as wealth and power or status. Corruption is an invisible transaction between

private and public-sector agents through which incentives are illegitimately converted into private

benefit.

Different views were presented regarding corruption. A plethora of studies have conducted on

corruption. Almost all researchers, academies, national and international agencies and formal and

informal organizations condemned corruption.

1 Rent seeker acts as a corrupt person. Rent seeker find illegal benefit from government and private institutions. Rent

seeker abruptly accomplishes a specific task.

3

Most of the international organizations stressed to eradicate corruption. In 1997, IMF suspended

US $220 million debt of Nigeria due to non-existence of anticorruption strategies. According to

World Bank (2004), world total income was US $30 trillion, out of which US $1 trillion is paid

for bribes each year, and if countries can control corruption, they can improve governance, the rule

of law and could increase per capita income. In African Union countries, 25 percent of GDP was

the share of corruption (Elbahnasawy and Revier, 2012). Kaufmann (1999a) stated that corruption

is not only developing countries phenomena, it becomes global issue. World Bank, International

Monetary Fund (IMF), United National Development Programme (UNDP), Organization of

Economic Cooperation and Development (OECD) and United Nations Organization (UNO)

stressed to reduce corruption for their member countries.

The corruption has multidimensional effects. It affects economy, society and environment. At the

economy side, corruption impedes public and private investment. People are reluctant for investing

in projects due to corruption. Low investment leads to low income and saving. It boosts inflation

and unemployment. Several researchers (Mauro, 1995; Gupta et al., 1998; Al-Marhubi, 2000; Mo,

2001; Braun and de Tella, 2004; Apergis et al., 2010; Igwike et al., 2012; Akca et al., 2012;

Mathew et al., 2013; Ghazi, 2014 and Shera et al., 2014) have explored the impact of corruption

on economic development in different regions or countries. They have presented different views

about the impact of corruption on economic development.

Corruption has deleterious effect on society. It creates income inequality among people (Aman

and Ahmad, 2016). Income inequality creates different living standards for people. Rich becomes

richer and poor becomes poorer. The vulnerable effect of corruption on poverty explored by

various studies (Cole, 2007; Apergis et al., 2010; Ata and Arvas, 2011; Bamidele, 2013;

Absalyamova et al., 2016). Several anomalies have occurred in education, health, security and

4

defense sector. Some researchers (Azfar and Gurgur, 2008; Mostert et al., 2015) have found

adverse effects of corruption on people health.

In literature, there are two corruption theories. These theories are classified for the effect of

corruption on economic growth. These classification are, grease the wheel hypothesis (efficiency

enhancing theory) and sand the wheel hypothesis (efficiency reducing theory). The grease the

wheel theory argued that corruption stimulates investment through illegal money. Due to corrupt

practices, a common man increases his wealth and want to invest for profit. More investment leads

to more output and increased economic growth. Leff (1964), Nye (1967), Huntington (1968) and

Freidrich (1972) advocated that corruption flourish economic growth.

On the other hand, sand the wheel hypothesis known as efficiency reducing theory. This theory

shows that inefficiency of public institutional quality (Governance) purses corruption. Sand the

wheel hypothesis ceases economic development process. When institutional quality is weak and

have no proper implementation of rules and regulations, then public officials demand bribery for

legal work. In the literature, Mc-Mullan (1961), Myrdal (1968), Krueger (1974), Shleifer and

Vishny (1993), Mauro (1995), Barreto (1996), Tanzi (1997) and Tanzi and Davoodi (1997)

advocated that corruption impedes investment and economic growth.

Environment is the common concern of whole world. CO2, GHG and other gases emission

deteriorate environmental quality and deplete ozone layer. Global temperature is rising. Climate

variations are changing seasons. Natural resources are depleting due to aggressive usage. Good

government has sets of policies to reduce emission for these harmful gases and controlling

environmental changes but due to corruption, environmental funds cannot proper applied for

environmental development and proper policies cannot be implemented. Negative impacts of

corruption on environment and natural resources have been proved by many studies (Sachs and

5

Warner, 1997; Pellegrini and Gerlagh, 2006; Cole, 2007; Wilson and Damania, 2005; Aidt, 2010;

Busse and Gronning, 2013; Ewharieme and Cocodia, 2011; Zhan, 2011; Lameira et al., 2013).

Corruption leads to decrease the efficiency of employer, delaying welfare projects and causes

misallocation of resources (Leff, 1964). It partially loses the strength of rule of law. Political

instability is an adverse form of corruption. It produces weak democratic and administrative

system in the economy. Ehrlich and Lui (1999) and Drury et al. (2006) argued that corruption has

adverse effect on efficiency of employees.

Corruption has several components. They are fraud, embezzlement, extortion, bribery, nepotism,

abuse of power, white-collar crime, theft, and money laundering, illegal contributions, receiving

an unlawful gratuity, conflicts of interest, insider trading, favoritism and intimidation.

The measurement of corruption is not easy task. Several government and non-governmental

organizations have been measured corruption through questionnaire. They surveys country to

country and percept, what is the status of corruption in respective country. Recently, Panama

Leaks2 and Paradise leaks3 declared the corruption of world leaders through off-shore companies.

Corruption Perception Index (CPI)4 is very prominent index published by Transparency

International. The World Bank has also presented a corruption index named as control of

corruption5.

2 Panama Leak is presently published report from “Mossack Fonseka” of Panama. The Panama papers expressed world leader’s corruption absorbed in Off-Shore companies. It uncovers the corruption in several stakeholders and

political leaders.

3 The Paradise Leak is the huge records of financial documents that probes top to end of the world offshore financial

companies. It exposed of how politicians, multinationals, celebrities and high-net-worth individuals use complex

structures to protect their cash from higher taxes.

4 It measured corruption of 180 countries by utilizing different sources. CPI is published annually. Its score ranges

from 0-100, where 0 represents most corrupt and 100 represents most corruption free country. 5 Its ranges from -2.5 to +2.5, where -2.5 represents corrupt country, while +2.5 represent free corrupt country.

6

The CPI (2017) report showed that New Zeeland was most corruption free country in the world,

while Somalia was the most corrupt country in the world. South Asia (SA) and Sub Saharan

African (SSA) countries also corrupt countries of the world. European Union (EU) and Asia

Pacific countries indicated low corrupt countries in the world.

The world is divided into different regions. The average of 58 countries CPI (2000-2015) was

selected from the different regions of the world countries6. Figure 1.1 shows the average CPI score

of different regions. SSA region countries are most corrupt countries in the world. The average

CPI score (2000-2015) of SSA countries is 81. South Asian countries score is 72. It means that SA

countries are second most corrupt countries in the world. In the average of CPI (2000-2015) data,

USA is least corrupt county of the world.

Figure 1.1: Average CPI Score for Different Regions

6 For ease of interpretation, an inverse of CPI was taken. Now CPI score range lies from 0-100, where 0 shows most

corruption free country and 100 shows most corrupt country.

0

10

20

30

40

50

60

70

80

90

SA USA SSA ECA EAP LAC MENA

AVERAGE CPI by Region (2000-2015)

7

Latin American countries are third most corrupt countries with 62 score. Middle East and North

Africa (MENA) countries are fourth most corrupt with 50 score, while EAP and ECA countries

are fifth and sixth most corrupt countries with score 48 and 47 respectively. Most of the population

living in SSA and SA countries (77%)7, where corruption is very high and remaining population

(23%) lives in other regions, where corruption is very low.

Per capita income affects corruption. Figure 1.2 shows the corruption score based on per capita

income countries. For this, World Bank (2016)8 categorized all countries at GNI per capita income

level into four groups.

Figure 1.2: Average CPI by Income Level (2000-2015)

7 According to Wikipedia report of 2016. 8 World Bank (2016) has classified world economies based on GNI per capita in four categories. The per capita income

is in the form of US$. First category is considered to be high income countries. The per capita income for this category

is fixed at >US$12476. Upper middle income countries are considered to be second category. Its value lies between

the ranges of US$4036-US$12475. Third category lies between the ranges of US$1026-US$4035. Third category is

said to be lower middle income countries. The last category is said to be low income countries. Its range has

8

They are high income, upper middle income, lower middle income and low income countries. The

corruption score of average (2000-2015) for high income countries (HIC), upper middle income

(UMI), lower middle income (LMI) and low income (LI) countries are shown in Figure 1.2. It

shows that low income countries are most corrupt countries in the world, while high income

countries are most corruption free countries in the world. Lower middle income countries are most

corrupt countries as compared to Upper middle income countries.

1.2. Governance

The concept of governance is very chronic. Human wants to govern for human beings. Majority

of the wars were fought for sake of governance. Governance is the name of abiding rule of laws

without discriminating poor, rich, women and men. Governance work is to provide relief to the

people.

It has several definitions. Kaufmann et al. (1999b) defined governance as, “the traditions and

institutions by which authority in a country is exercised. They include:

The process by which government is selected, monitored and replaced.

The capacity of the government to effectively formulate and implement sound policies.

The respect of citizens and the state for the institutions that govern economic and social

interactions among them.

According to Hirst and Thompson (1996), governance is the act or manner of governing of

exercising control or authority over the actions of subject, a system of regulations. Fitzgerald et al.

(1997) amplified this definition by describing governance as “working and listening to citizens in

order to manage the public’s resources and responds to the needs and expectations of citizens as

individuals, interest groups and society as a whole”. World Bank (1992a) has explained

9

governance functions as, political accountability, freedom of association, just and fair judicial

system, bureaucratic accountability, right to information, efficient public sector management and

interaction between governance and society. Furthermore, World Bank (1992b) stated that

governance can be understood in terms of three major categories: First is the form of political

authority that exists in a country (parliamentary or presidential, civilian or military and autocratic

or democratic). Second is the mean through which authority is exercised in the management of

economic and social resources. Third is the ability of governments to deliver government functions

effectively, efficiently and equitably through the design, formulation and implementation of sound

policies. The role of government is to reducing corruption and boosting economic development.

According to the World Development Report (2002), governance is seen as the art of providing

effective institutions. Based on this definition, a country is well governed, if it operates within the

framework of strong institutions. Strong institutions are defined as those institutions that promote

strength and impartiality of rule of law, ensure political freedom and civil liberty, protect human

and property rights and the sanctity of contracts, foster the effective operation of the public service,

and facilitate the development and effective functioning of market institutions. The quality of

governance, therefore, is a function of the quality of this enabling institutional environment and

the extent to which the rules and regulations imposed by these institutions are respected by the

authorities and citizens of the state.

Governance includes active cooperation and engagement in policy processes among all

stakeholders including citizens. A governance is said to be good governance, if there exists people

elected democracy and political stability, government acts as rule and regulation and not for self-

power generation. Good governance is generally characterized by accessibility, accountability,

predictability and transparency, while many factors play an important role in development. Good

10

governance is now recognized as playing an essential role in the advancement of sustainable

development (Guney, 2017). Good governance promotes accountability, transparency, efficiency,

and rule of law in public and private institutions at all levels (North, 1990). In addition, it allows

for sound and efficient management of human, natural, economic, and financial resources for

equitable sustainable development. Moreover, under good governance, there are clear decision-

making procedures at the level of public authorities, civil society participation in decision-making

processes, and the ability to enforce rights and obligations through legal mechanisms. Furthermore,

deficiency in the rule of law encourages high rates of corruption with further devastating

consequences on the confidence of economic actors. This in turn, slows economic growth and

consequently deprives the governments of resources to invest in education, social safety nets and

sound environmental management, all of which are critical for sustainable development.

1.2.1. The Elements of Good Governance

UNDP, World Bank and other multilateral organizations have explained the elements of good

governance and their relations to development. UNDP (1997) highlighted the following as core

characteristics of good governance.

1. Participation: In the process of governance formation, participation of public is the basic

principle. Governance is the elective body of representatives or selected people from society. Male

and female participation in governance is prerequisite. Minorities and majorities in the government

also included at equal participation system.

2. Rule of Law: Good governance demands strength of rule of law. Abiding rule of law is common

concern for the governmental body. Elected government abides by rule of law. Any government

11

official or committee member should sustained in rule of law. Strong institutions increase the

strength of rule of law and reduce corruption.

3. Transparency: Good governance requires a specific framework of transparency in the

governmental body. Transparency requires to uncover all information for people. Governmental

body should be honest for country benefits at all grounds.

4. Responsiveness: Elected representatives of government should be responsible for solution of

every issue of the people. Responsiveness entails the quick action of government towards people

current issues. People should elect such person who represent their issues at governmental level

and suggest solution.

5. Consensus Orientation: Consensus is the first step of governance. The parliament is an

aggregate of opposition party and ruling party. The governmental body should respect the opinion

of opposition parties and form such policies which are fair and best for country integrity, and

development.

6. Equity: Equity is the basic principle of any government and society. Equity entails the equal

opportunities for the government structure. No inequality (gender, religious, color, income) should

occur among selected members in the parliament. All representatives have right to speak in

assembly for any issue in his tertiary. Good governance provides equality on the parliament floor.

The government should deal with equality to every residents of the country. All people should be

equal for implementing rules and regulations prescribed by the country.

7. Effectiveness and Efficiency: Good governance has power to effectiveness of better policies

for people welfare. The government has approach to do a task with efficiency. For example,

government development and non-development projects are delayed due to financial and other

officially arrangements. Efficient government works with efficiency for every project.

12

8. Accountability: Good governance has the characteristics of accountable government. An

accountable government properly maintains accountancy and publishes it for the people. It has the

property of right to information for every person.

9. Strategic Vision: The last characteristic of good governance is strategic vision. The leader of

the country should be visionary person. He has broad mind for his country welfare. Foreign policy

should be the first priority of government. Proper decisions should take for the country’s welfare.

Several profit and non-profit organizations (World Bank, ICRG, QOG, TI and Heritage

Foundation) published annual performance of governance for world countries. World Bank

publishes World Governance Index (WGI). It has different indicators, such as, government

effectiveness, rule of law, voices and accountability, control of corruption, regulatory quality and

political stability.

1.3. Sustainable Development

In the twentieth century, economists stressed on economic growth determinants. They are

technological innovations, financial capital, human capital and physical capital. Based on growth

theories9, several economies have achieved the targets of high growth but it resulted in social

unrests and environmental issues. Further, Limits to Growth theory10 has been presented. It was

first theory about environment. It emphasized exponential increase in economic growth and

population growth with finite or limited resources in the world.

Brundtland (1987) presented the idea of sustainable development. The basic definition of

sustainable development is “Sustainable development is the development that meets the needs of

9 They are, Classical, Neo Classical and Endogenous growth theory. 10 Limits to growth theory were presented in 1972 by Donella Meadows, Dennis Meadows, Jorgen Randers and

William Behrens.

13

present generations without compromising the ability of future generation to meet their own

needs”.

Sustainable development has three dimensions as, economy, society and environment. Sustainable

development is the name of balancing financial resources, human capital and natural capital

(Elkington, 1998; Basiago, 1999). Its main concern is to save everything for future generation. The

natural resources are replenish-able. They are renewable and non-renewable. Sustainable

development urges to use renewable resources and save non-renewable resources.

Some historical events have been presented by different organizations for explaining the

importance of sustainable development. Table 1.1 shows the history of sustainable development.

Table 1.1: Historical Overview of Sustainable Development

Year Programme Explanation Status

1972 1st UNCHE United Nations Conference on

Human and Environment

United Nations Environmental Programme

(UNEP) was created. Environment was

linked with other sectors.

1980 WCS World Conservation Strategy The concept of sustainable development was

created for the first time.

1987 Our Common

Future

Brundtland Report Sustainable development linked with other

sectors, such as environment, economy and

society.

1988 IPCC International Panel of Climate

Changes

First time IPCC was founded for informing

threats of global warming.

1992 Earth Summit

I

United Nations Conference on

Environment and Development in Rio

De-Janeiro (Brazil)

The 173 head of states sanctioned “Agenda

21 action program” creation of United

Nations Framework Convention on Climate

Changes (UNFCC), Convention on

Biological Diversity (CBD) and United

Nations Commission on Sustainable

Development (UNCSD).

1994 ICPD International Conference on

Population and Development in Cairo

Universal access to family planning and

population welfare till 2015.

1995 WSSD World Summit for Social

Development in Copenhagen

The 128 head of states sanctioned three

social development programme as, poverty,

unemployment and social disintegration.

1996 CSI City Summit in Istanbul Committed two goals as shelter for all and

sustainable human settlement regarding

environment, human rights and social

development.

1997 1WWFM

Earth Summit

II

1st World Water Forum in Marrakech Water issues and importance of water was

discussed.

14

2000 UNMSNY UN Millennium Summit in New York MDG’s targets was set for 2015

2002 Earth Summit

III

World Summit on Sustainable

Development in Johannesburg

Participatory development with social and

civil authorities.

2005 KP Kyoto Protocol Endorsed 55 countries to curtail global GHG

emission.

2010 COCBD Conference on Convention on

Biodiversity

Created Intergovernmental Platform on

Biodiversity and Ecosystem Services

(IPBES).

2012 RIO+20

Summit

UNCSD

UN Conference on Sustainable

Development

Sanctioned two themes, as green economy

and institutional framework for sustainable

development. Sources: Created by Author

Sustainable development is not a development of one country, town or village. It is the

development of all world countries. It urges to sustained economy, social and environmental

sustainability in present and future. Economic indicators include inflation, unemployment, debt

burden, fiscal deficit, investment, saving, export/import and exchange rate. Countries are facing

high debt burden due to mismanagement and deteriorate economic indicators. The sustained

economic growth demands balancing economic indicators. Social sustainability entails healthy

life, quality education, crimes free society, terrorism free society, equal opportunities in every

sector, full employment for male and female, provision of basic needs (pure water, improved

sanitation, fresh foods and shelter), better infrastructure facilities and better transportation

facilities. Environment includes land, air, marine biodiversity and wildlife. Environmental

degradation is the common problems of all countries. It causes food insecurity, health, social and

economic issues. Environmental sustainability includes low depletion of natural resources, low

emission of CO2, low desertification of land, control water lodging, and non-salinity of water, high

forest ratio, preserving biodiversity and wildlife, better ecosystem, better marine system and proper

waste management techniques.

The day by day climate changes deteriorates environmental quality. Land erosion, land

degradation, harsh weather and plant diseases are caused by climate changes. Land degradation

barrens land and spoil land quality. Due to this, land fertility is becoming low and creates the issue

15

of food insufficiency. The food insufficiency creates famine. It deteriorates the quality of

sustainable development. The change in climate also changes wildlife living pattern. The wildlife

migrates from one place to other place due to climate changes. Climate changes create climatic

diseases and spread into different areas of the world. It causes threats for human life. Finally,

climate changes altering sustainable development.

Global warming is the common issue of the world. Its threats emerged due to increase in CO2,

GHG and other gases emission. Our environment is becoming warm. Consequently, ozone layer

is going to deplete. The sunlight effects directly on earth and increases heat. The warm temperature

is melting seas ice and glaciers. It increases seas areas. It is estimated that 0.13 inches global sea

level increasing due to global warming (National Geographic Channel, 2018). Scientists claim that

gradual rising of sea level may engulf land areas.

Garbage and industrial waste (industrial fume and industrial water pollution) also deteriorates

environmental quality. It destroys air quality. Most of the fatal diseases produce by garbage and

industrial waste.

1.4. The Interaction among Corruption, Governance and Sustainable

Development

The impact of corruption is very wide on economic development in the world. In the last century,

the interest of researchers increased to find out the impact of corruption on economic development.

Corruption stifled investment, economic development and create social distress. Economists

established the relationship between corruption and economic growth11. They claimed that

corruption is consequences of weak administration of government and its institutional quality.

11 Mauro (1995) was the first to create a relationship between corruption and economic growth.

16

Corruption and governance have bidirectional relationship. Leff (1964) and Huntington (1968)

argued that corruption is an obstacle for human development. It is widely recognized that

corruption is like a cancer which put pressure on economies and pushed them into heavy debt and

deteriorate economic structures.

A number of the studies were conducted to check the impact of corruption on economic growth

and social issues. A few studies were conducted on corruption and sustainable development.

Majority of researchers claimed that corruption impede sustainable development (Mauro, 1995;

Treisman, 2000; Akca et al., 2006).

Corruption is caused by weak governance. The association between corruption and governance is

negative. Corruption is measured by CPI12, while governance is measured by WGI13 indicators. It

is evidenced that corrupt countries have bad governance (Weak governance) score, while

corruption free countries have good governance score. The Table 1.2 shows first ten most

corruption free countries of the world with their governance score. In Table 1.2, Norway is less

corrupt country due to high governance score. Denmark and New Zeeland are first country, where

corruption is very low with high governance score. Singapore has corruption score 84 with 1.59

score of governance. It clearly shows that good governacne reduces corruption. UAE has

corruption score 70 with 0.66 governance score.

12 CPI corruption data releases by Transparency International. It score ranges lies between 0-100. Where 0 shows most

corrupt country and 100 shows most corruption free country.

13 WGI constructed by World Bank. Its index ranges from -2.5 to +2.5, where -2.5 represents worst performance of

indicator, while +2.5 represents best performance of indicators.

17

Table 1.2: Top 10 Corruption Free Countries with Governance Scores

Country CPI Score 2015 Governance (Average of WGI

Indicators Excluding Corruption)

Score 2015

Norway 88 1.7143

Australia 79 1.5977

New Zeeland 91 1.7765

Denmark 91 1.8343

Finland 85 1.7663

Singapore 84 1.5963

UK 81 1.4662

Hong Kong 75 1.5263

USA 76 1.2954

UAE 70 0.6643

Source: Corruption and governance data are taken from TI and WGI. Governance data is

the average of five governance indicator.

Now we see the association between corruption and governance for top 10 corrupt countries of the

world in Table 1.3. It shows a clear picture of most corrupt countries of the world. The CPI score

shows that Somalia is the most corrupt country in the world (score 9) with extremely worst

governance score (-2.1). South Sudan is second corrupt country with low governance score (-1.89).

yemen corruption score is 16 with (-1.59) governance score. North Korea corruption score is 17

indicating tenth corrupt country with governance score (-1.7).

Table 1.3: Top 10 Corrupt Countries with Governance Score

Country CPI Score 2015 Governance (Average of WGI

Indicators Excluding Corruption)

Score 2015

Somalia 9 -2.1432

South Sudan 12 -1.8933

Syria 14 -1.8462

Afghanistan 15 -1.4762

Yemen 16 -1.6162

Sudan 16 -1.5962

18

Libya 17 -1.7742

Guinea Bissau 17 -1.0552

Equilateral Guinea 17 -1.3667

North Korea 17 -1.7322

Source: Corruption and governance data are taken from TI and WGI. Governance data is the average of five governance indicators.

1.5. Research Problem

Sustainable development wants the sustenance of everything in the world. It has one agenda for

all countries of the world. The main theme of sustainable development is sustained economy,

sustained society and sustained environment. It emphases balance utilization of all resources.

Human plays the central role for sustainable development. Poverty, gender and income inequality,

poor health facilities, low literacy rate and crimes reducing sustainable social development. High

inflation, unemployment rate, trade and budget deficit and foreign debt also reduce sustainable

economic development. Natural resources are deplete-able. Human can regulate these natural

resources. Aggressive usage of natural resources leads to achieve high economic development for

present and future generations but nothing left for environmental development for present and

future generation. The emission of CO2 and other gases thicken ozone layer and degrade

environmental quality. The warmer temperature rising seas level and devastate our economy and

society. The industrial fume, water and air pollution create health hazards, which increasing death

toll of people. The climate changes deteriorate our atmosphere and causes diseases. The garbage

wastes spoil our air and produce fatal diseases. The rapid growth of world population reducing

natural resources and deteriorate environmental quality. Guney (2017) empirically advocated that

high population growth utilizing more resources and degrade environmental quality. Each country

is striving for achieving targets of sustainable development for Vision 2030 but facing too much

hindrances. Corruption and governance are some of them. Corruption reduces economic

19

efficiency, social retardants and environmental quality and ultimately sustainable development.

Aidt (2010) and Venard (2013) investigated that corruption deteriorate sustainable development.

Governance formulates policies for achieving targets of sustainable development and implements

them in right direction, while corruption is the hurdles to achieving targets of relevant policies. It

is corruption which hinders sustainable development policies and engulfs sustainable development

funds in developing countries. All the social evils, economic deteriorations and environmental

hazardous are cause of rampant corruption and bad governance. Aidt (2010) and Venard (2013)

investigated that corruption has negative impact on sustainable development. Governance is

vulnerable by high corruption. Olson et al. (2000) stated that good governance improves economic

growth. Good governance reduces corruption and improves sustainable development (Kemp and

Parto, 2005; Meadowcroft, 2007; Guney, 2017). These highlighted issues attract policies

formulation for improving them.

1.6. Research Questions

Sustainable development has broad scope. The focus of this study is to construct a sustainable

development index for selected countries and then estimate the determinants of corruption,

determinants of governance and determinants of sustainable development. There are empirical

question regarding this study.

What are the important indicators from economy, society and environmental dimension

used for constructing sustainable development index?

What variables can be used to determine corruption for selected countries?

What variables can be used to determine governance and its components for selected

countries?

20

What variables can be used to determine sustainable development for selected countries?

To what extent, the identified variables will affect corruption, governance and its

components and sustainable development?

What actions can be recommended for reducing corruption, improving governance and

improving sustainable development?

To answer these question, we will conduct an empirical study for selected countries.

1.7. Objectives of the Study

The main objectives of the study are as:

To construct a sustainable development index for selected countries.

To investigate the determinants of corruption for selected countries.

To investigate the determinants of governance for selected countries.

To investigate the determinants of sustainable development for sample of overall countries,

sample of high income and low income countries.

1.8. Scope of the Study

Sustainable development is concerned with sustenance in every sector of life, while economic

development concern only economy related indicators. Sustainable development encompasses

everything in the world. It has very broad scope. Environment is very important for society and

economy. Environmental issues are common issues for all countries. We can create boundaries on

land but cannot create boundaries on environment. Environment affects both economic as well as

social sector. The assessment of sustainable development is necessary element. The scope of this

study is concerned to assess the condition of sustainable development for achieving the target of

21

Vision 2030. Corruption is an evil of the society. It deteriorates economy. It weakened government

efficiency and its institutional quality. Overall, it worsened sustainable development. Governance

plays vital role for economic, social and environmental development and finally sustainable

development. Countries have different types of governance14. Each governance types have its own

system. Democratic accountability and law and order strengthened governance and reduce

corruption. The scope of this study is concerned to construct a sustainable development index for

selected countries and investigate the determinants of corruption, determinants of governance and

determinants of sustainable development.

1.9. Significance of the Study

Assessing sustainable development and determining significant determinants of corruption,

governance and sustainable development for selected countries will aid in informing policymakers

on effective policies, given these determinants, which can be implemented to pursue a

development pathway that is both progressive and sustainable. Economic, social and

environmental pressures need to constantly be reviewed against sustainability for the countries to

enjoy prosperity that is distributed equally in a preserved environment. The need to mainstream

the agenda of sustainable development is more important. However, in this study, it evaluate

accurate identification for determinants of corruption, governance and sustainable development,

empirically evaluated to produce valid and reliable findings that will inform policies makers for

best policies to reducing corruption, strengthening governance and improving sustainable

development.

14 These are democratic governance, non-democratic governance, presidential government and autocratic governance

22

1.10. Limitations of the study

There are no appropriate measures for sustainable development in the literature as it is a concept

and theory for development. Hence, it is measured by the indicators, which are taken from social,

environmental and economic dimensions. Various indices can be used to proxy sustainability,

however, these indices have various measurements and estimation techniques. The non-

availability of the data is the major issue for assessment of sustainable development. The data of

corruption is based on perception of people toward corruption. The study confined to estimate

sustainable development index, exploring determinants of corruption, determinants of governance

and determinants of sustainable development for selected countries in specific time period.

1.11. Plan of the Study

The study consists of nine chapters. Chapter 1 portrays a clear picture of issues and introduction

of the current study. It includes the basic definition of corruption, governance and sustainable

development and interactions among them. Chapter 2 consists of previous literature about

construction of sustainable development index, further literature presented for determinants of

corruption, governance and sustainable development. In addition, literature on relatio