Perils of development funding? The tale of EU Funds and grand corruption in Central and Eastern Europe

Abstract

Given the unprecedented scale of intergovernmental development funding and the importance of institutional quality for human wellbeing, it is imperative to precisely understand the impact of development funds on corruption. In Europe, EU Funds provide a boost to public spending in recipient member states while introducing additional corruption controls. We investigate whether EU Funds increase high-level corruption in the Czech Republic and Hungary in 2009-2012. We analyse newly collected data from over 100,000 public procurement contracts to develop objective corruption risk indicators and link them to agency-level data of the public sector. Propensity score matching estimations suggest that EU funds increase corruption risks by up to 34%. The negative effects are largely attributable to overly formalistic compliance and EU Funds overriding domestic accountability mechanisms in public organisations entirely dependent on external funds. The policy implications are profound: governments should reduce barriers to market entry by lowering red tape and they should prevent excessive concentration of funds.