The Rule of Law, Corruption and Income: Evidence Using Cross-Country Panel Data

Using available data on 68 countries for 1998-2005, we explore the possibility that differences in the rule of law have led to differentials in per capita real income directly and indirectly, due to differentials in corruption. For this we classify sixty-eight countries into four groups (OECD including Korea, Asia NIEs and BRICs, Country GroupⅠ, and Country GroupⅡ) with different levels of economic development measured by per capita real income. The maximum likelihood estimators suggest that improvement in the rule of law makes a substantial contribution to per capita real income directly and indirectly, through lower corruption for all countries. More specifically, the income effect of the rule of law is greater than that of anti-corrution in OECD. In addition, the maximum likelihood estimators suggest that the rule of law can be positively affecting on anticorruption in all countries, but especially in OECD. On the other hand, the ceteris paribus total proportionate rates of change of per capita real income with respect to the rule of law indicates that the rule of law appears to be most sensitive to per capita real income in Asia NIEs and BRICs.