Will Blockchain Bring an End to Corruption?: Areas of Applications and Potential Challenges

2. Research Background

There are many discussions to identify the relationship between corruption and economic growth. A growing stream of research finds that, in general, corruption is closely related to low economic growth. Mauro, P. (1995), identified the relationship between corruption and economic growth based on a cross-sectional national data for the first time. It measured the degree of corruption of a country based on political stability, legal system, judiciary, and terrorism and named it as the Bureaucratic Efficiency (BE) index. The result showed that as BE index increased, economic growth tended to increase as well. Although the causal relationship between economic growth and corruption is difficult to identify, this tendency has been observed in many other studies since this research.

The direct and indirect effect of corruption on economic growth can be summarized as below. First, as corruption increases, transaction costs and uncertainty increase. Such transaction costs include monitoring costs and enforcement costs to sustain the market. As a result, corruption reduces the domestic and foreign investment. Public spending in education, healthcare and infrastructure decreases if corruption becomes widespread in the society. From an empirical study, Mauro (1997) finds that corruption seriously affects private investment and ultimately affects growth adversely.