How does corruption hurt growth? Evidences about the effects of corruption on factors productivity and per capita income * Marcos Fernandes Gonçalves da Silva, Fernando Garcia, Andrea Camara Bandeira ** Abstract Corruption is a phenomenon that plagues many countries and, mostly, walks hand in hand with in- efficient institutional structures, which reduce the effectiveness of public and private investment. In countries with widespread corruption, for each monetary unit invested, a sizable share is wasted, imply- ing less investment. Corruption can also be a burden on a nation’s wealth and economic growth, by driving away new investment and creating uncertainties regarding private and social rights. Thus, cor- ruption can affect not only factors productivity, but also their accumulation, with detrimental conse- quences on a society’s social development. This article aims to analyze and measure the influence of corruption on a country’s wealth. It is im- plicitly admitted that the degree of institutional development has an adverse effect on the productivity of production factors, which implies in reduced per capita income. It is assumed that the level of wealth and economic growth depends on domestic savings, foster technological progress and a proper educational system. Corruption, within this framework, is not unlike an additional cost, which stifles the “effective- ness” of the investment. This article first discusses the key theories evaluating corruption’s economic consequences. Later, it analyzes the relation between institutional development, factor productivity and per capita income, based on the neoclassical approach to economic growth. Finally, it brings some em- pirical evidence regarding the effects of corruption on factor productivity, in a sample of 81 countries studied in 1998. The chief conclusion is that corruption negatively affects the wealth of a nation by re- ducing capital productivity, or its effectiveness. Key words: Corruption, economic growth, factor productivity, Institutional Economics, capital accumulation. JEL Classification: A19, O40, Z00. * This article was prepared based on research financed by EAESP/FGV-SP’s NPP. ** Marcos F.G. da Silva and Fernando Garcia are associate professors at EAESP/FGV and Andrea C. Bandeira has a Master’s Degree in Economics by EAESP/FGV and is currently in the Ph.D. program at IPE/USP. Mailing address: Av. 9 de Julho, 2029, 11o. andar, São Paulo, Brasil, CEP:01313-900. E-mails: mdasilva@fgvsp.br , fgarcia@fgvsp.br e camara@gvmail.br .