Trade Restrictiveness or Trade Openness? The Effects on Corruption : A panel data study of the relation between trade restrictiveness and corruption in Europe

This thesis analyzes the relationship between trade restrictiveness and corruption levels in Europe and tests the robustness of the results using two different measures of corruption; Corruption Perceptions Index constructed by Transparency International and World Governance Indicators; Control of Corruption constructed by the World Bank. The results show that the outcome differs among the two indices and that previous results found in studies may be subject to data choice and measurement errors. A majority of previous studies have used trade openness in the form of imports share in GDP, or trade openness indices as variables that explain corruption levels. This thesis focuses on trade restrictiveness. It also investigates the differences between restrictiveness and openness in their impacts on corruption. The author of this thesis finds a weak relation between trade restrictiveness and corruption on one hand and an even weaker relation between trade openness and corruption on the other hand when controlling for other variables that may have an impact on corruption. The limited time-frame could be an explanation for this result, i.e. trade policy effects. A longer time-frame would have probably resulted in a bigger difference between variables for trade openness and trade restrictiveness. It is found that the variables showing to have the largest impact on corruption levels in Europe are those associated with historical dimensions such as whether the country has had a tradition of the church being separated from the state or whether being a previously planned economy. Most importantly, the thesis presents suggestive evidence on the fact that not all government involvement increases corruption. Rather, it is regulations that limit internal competition have a large impact on corruption levels in Europe. It has also been found that not all government involvement in the economy implies higher corruption levels. The findings outlined are in line with the common perception that corruption is highly dependent on previous values of corruption and that radical policy interventions are needed to curb corruption