Localization and corruption: Panacea or Pandora's box?

An extensive literature on the relationship between decentralization (or localization) and corruption has developed in recent years. While some authors argue that there is a positive relationship between decentralization and corruption, others claim that decentralization in fact leads to a reduction in the level of corruption. This important policy question has not yet been laid to rest since previous empirical work simply uses eclectic regressions and lacks a conceptual framework to discover the root causes of corruption. Gurgur and Shah attempt to fill this void by presenting a framework in identifying the drivers of corruption both conceptually and empirically to isolate the role of centralized decisionmaking on corruption. The following results emerge: * For a sample of 30 countries (developing and industrial), corruption is caused by a lack of service orientation in the public sector, weak democratic institutions, economic isolation (closed economy), colonial past, internal bureaucratic controls, and centralized decisionmaking. * Decentralization is found to have a negative impact on corruption, with the effect being stronger in unitary than in federal countries. This paper--a product of the Poverty Reduction and Economic Management Division, World Bank Institute--is part of a larger effort in the institute to exchange ideas on the reform of public sector governance.