Institutions, Corruption and Economic Development: PLS-SEM Analysis

Abstract

This study inspects the moderating effect of corruption in connection concerning economic development and institutional quality. It’s commonly acknowledged that institutional quality is a key factor in determining long-term prosperity, which includes governance aspects including regulatory quality, rule of law, and government efficacy. Corruption, measured using the Corruption Perceptions Index (CPI), is hypothesized to alter this relationship by either weakening or amplifying the effect of institutions on development outcomes. The study utilizes cross-country data for 130 countries from 2014, 2017, 2020, and 2023, distributed into high and low institutional quality clusters. Partial Least Squares Structural Equation Modeling is utilized to test the hypotheses and evaluate the interaction effects. In both governance systems, all results show that institutional quality significantly and favorably influences economic development. The moderation analysis confirms that corruption significantly conditions the institutional quality–development relationship: Corruption reductions bolster the beneficial effects of governance on development in nations with high institutional quality, but the moderating effect is even more noticeable in those with low institutional quality. These findings offer strong empirical backing for the "sand the wheels" theory, which contends that corruption compromises development outcomes and institutional efficacy. This research contributes to institutional economics by highlighting the interactive dynamics between governance and corruption. It offers practical implications for policymakers, emphasising the need for integrated governance reforms and anti-corruption strategies to achieve sustainable development goals.