Unproductive Education in a Model of Corruption and Growth

This paper presents a dynamic general equilibrium analysis of education, public sector corruption and economic growth. In an economy with government intervention along with physical and human capital accumulation, state-appointed bureaucrats are responsible for procuring public goods, which contribute to productive efficiency. Corruption arises because of an opportunity for bureaucrats to embezzle public funds. Education has two opposing effects, a positive productivity enhancing effectand a negative corruption efficiency of bureaucrats. If the latter dominates the former, the incentive for bureaucrats to acquire education rises. The net effect may result in an insignificant (or even negative) effect of human capital on growth. Our results are straightforward. First, corruption and development are determined jointly in a relationship that is two-way causal: bureaucratic malfeasance both influences and is influenced by economic activity and human capital accumulation. Second, thistwo-way causality gives rise to threshold effects and multiple development regimes with very different equilibrium properties: in low stages of development there is a unique equilibrium with high corruption where higher human capital cannot get the economy out of poverty trap, in high stages of development there is a unique equilibrium with low corruption where human capital can exert its influence, and in intermediate stages of development there are both types of equilibrium. Third,transition between regimes may or may not be feasible and it is possible for a development trap to occur.