The Impact of Corruption on the Effectiveness of Cohesion Policy in New EU Member States

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The Impact of Corruption on the Effectiveness of Cohesion Policy in New EU Member States

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Title: The Impact of Corruption on the Effectiveness of Cohesion Policy in New EU Member States
Author: Izgorodin, Oleg; Wen, He
Abstract: This thesis analyses how corruption affects the impact of European Union’s Cohesion Policy payments on economic growth in 12 new EU member states. It also reviews theories of economic growth and the role of institutions in economic development, describes the corruption phenomenon and its theoretical effect on economic growth, provides main facts about the Cohesion Policy and models used for estimating its effect on economic development and provides recommendations for improving the regulations of Cohesion Policy based on the results of empirical research. Empirical research is performed by running regressions on cross-sectional and panel datasets with different estimation techniques: random effects, fixed effects and Generalized Method of Moments (GMM). The main panel dataset covers 12 countries over the period 2007-2013. The countries are new European Union members which joined in 2004 (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia) and 2007 (Bulgaria and Romania). Results of the regression analysis show that the effect of Cohesion Policy payments on GDP growth is negative in countries with high corruption levels and positive in countries with low corruption levels. We explain this finding by the fact that in high-corruption countries, Cohesion Policy funds are misappropriated and used for less efficient projects so that human capital is not used in the most welfare-improving way. Therefore, we recommend the European authorities to modify the current Cohesion Policy regulations in two main ways. Firstly, European authorities should have a more important role in monitoring and controlling the implementation of projects. This is currently done mostly on a local level and thus introduces the potential for corrupt activity. Secondly, Cohesion Policy payments should be allocated towards fighting corruption and improving local institutions in the first place: this would greatly increase the positive effect of Cohesion Policy projects on GDP growth.
URI: http://hdl.handle.net/10417/5462
Date: 2015-12-08
Pages: 134
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