Popular belief suggests that corruption and poverty are closely related to developing country. Corruption has been a constant obstacle for countries trying to bring out the political, economic and social changes desired for their development. Across different country contexts, corruption has been a cause and consequence of poverty.
Corruption on the part of governments, the private sector and citizens affects development initiatives at their very root by skewing decision-making, budgeting and implementation processes. When these actors abuse their entrusted power for private gain, corruption denies the participation of citizens and diverts public resources into private hands. The poor find themselves at the losing end of this corruption chain — without state support and the services they demand.
At the same time, corruption is a by-product of poverty. Already marginalised, the poor tend to suffer a double level of exclusion in countries where corruption characterises the rules of the game. In a corrupt environment, wealth is captured, income inequality is increased and a state’s governing capacity is reduced, particularly when it comes to attend the needs of the poor. For citizens, these outcomes create a scenario that leaves the poor trapped and development stated, often forcing the poor to rely on bribes and other illegal payments in order to access basic services. For a country, the results produce multiple and destructive forces: increased corruption, reduced sustainable growth and slower rates of poverty reduction. As the World Bank has aptly warned, corruption is ‘the greatest obstacle to reducing poverty’.
Meaning Of Poverty
Poverty can be defined as a social phenomenon in which a society is unable to fulfil even its basic necessities of life. Being poor does not only mean falling below a certain income line. Poverty is a multi-dimensional phenomenon that is characterised by a series of different factors, including access to essential services (health, education, sanitation, etc.), basic civil rights, empowerment and human development.
“The most commonly used way to measure poverty is based on incomes. A person is considered poor if his or her income falls below some minimum level necessary to meet basic needs. This means level is usually called the ‘poverty line”. What is necessary to satisfy basic needs varies across time and societies. Therefore, poverty lines vary in time and place, and each country uses lines, which are appropriate to its level of development, societal norms and values”.
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There are basically three current definitions of poverty in common usage: absolute poverty, relative poverty and social exclusion. Absolute poverty is defined as the lack of sufficient resources with which to keep body and soul together. Relative poverty defines income or resources in relation to the average. It is connected with the absence of the material; needs to participate fully in accepted daily life social exclusion is a new term.
Meaning of Corruption
Corruption in simple terms may be described as “an act of bribery”. It has also been described as “the use of public power for private profits in a way that constitutes a breach of law or a deviation from the norms of society”. In a wider sense “corruption” refers to not only all sorts of “improper or selfish exercise of power and influence attached to a public office or to the special position one occupies in public life” but also includes bribers dealings. D.H. Bailey (Doughlas and Jhonson, 1971) has explained it as misuse of authority as a result of consideration of personal gain which need not be monetary.
Nexus Between Poverty And Corruption
The year 2007 marked a milestone in the fight against poverty and corruption. It represented the midway point on the road to meeting the Millennium Development Goals (MDGs), the ambitious global pledge to end extreme poverty by 2015. It also signalled that ten years had passed since the anticorruption movement had signed the Lima Declaration, promising to address poverty as part of their efforts. However, actual accomplishments have fallen short of expected progress. In practice, donors and governments still treat poverty and corruption as separate — rather than integral — components of the same strategy.
However few studies examine or establish a direct relationship between corruption and poverty. Corruption, by itself, does not produce poverty. Rather, corruption has direct consequences on economic and governance factors, intermediaries that in turn produce poverty.
Two models emerge from the research literature. The “economic model” postulates that corruption affects poverty by first impacting economic growth factors, which, in turn, impact poverty levels. In other words, increased corruption reduces economic investment, distorts markets, hinders competition, creates inefficiencies by increasing the costs of doing business, and increases income inequalities. By undermining these key economic factors, poverty is exacerbated.
The “governance model” asserts that corruption affects poverty by first influencing governance factors, which, in turn, impact poverty levels. So, for example, corruption erodes the institutional capacity of government to deliver quality public services, diverts public investment away from major public needs into capital projects (where bribes can be sought), lowers compliance with safety and health regulations, and increases budgetary pressures on government. Through these serious challenges to governance practices and outcomes, poverty is affected.
The following review of the literature is organized in relation to these models.
The literature shows an inverse correlation between aggregate economic growth and corruption; in general, countries with higher corruption experience less economic growth. Many of the studies reviewed for this paper address the channels through which corruption affects economic growth, for instance, through impacting investment and entrepreneurship, distorting markets, and undermining productivity. Furthermore, there is empirical evidence that corruption aggravates income inequality and is associated with slower economic growth. Finally, studies present evidence that as the rate of economic growth increases, the number of people above the poverty line tends to rise as well.
Corruption Impedes Economic Growth
The relationship between corruption and economic growth is complex. Economic theory supports the notion that corruption hinders economic growth in the following ways:
• Corruption discourages foreign and domestic investment: rent taking increases costs and creates uncertainty, reducing incentives to both foreign and domestic investors.
• Corruption taxes entrepreneurship: entrepreneurs and innovators require licenses and permits and paying bribes for these goods cuts into profit margins.
• Corruption lowers the quality of public infrastructure: public resources are diverted to private uses, standards are waived; funds for operations and maintenance are diverted in favor of more rent seeking activity.
• Corruption decreases tax revenue: firms and activities are driven into the informal or gray sector by excessive rent taking and taxes are reduced in exchange for payoffs to tax officials.
• Corruption diverts talent into rent seeking: officials who otherwise would be engaged in productive activity become pre-occupied with rent taking, in which increasing returns encourage more rent taking.
• Corruption distorts the composition of public expenditure: rent seekers will pursue those projects for which rent seeking is easiest and best disguised, diverting funding from other sectors such as education and health.
These theoretical propositions are supported by a number of empirical studies. They demonstrate that high levels of corruption are associated with low levels of investment and low levels of aggregate economic growth.
For example, the results of several World Bank corruption surveys illustrate this inverse relationship between corruption and economic growth.
Corruption Exacerbates Income Inequality
• Gupta et al. (1998) conducted cross-national regression analysis of up to 56 countries to examine the ways that corruption could negatively impact income distribution and poverty.
The study looked at the following relationships:
• Growth: Income inequality has been shown to be harmful to growth, so if corruption increases income inequality, it will also reduce growth and thereby exacerbate poverty.
• Bias in tax systems: Evasion, poor administration, and exemptions favoring the well connected can reduce the tax base and progressivity of the tax system, increasing income inequality.
• Poor targeting of social programs: Extending benefits to well-to-do income groups or siphoning from poverty alleviation programs will diminish their impact on poverty and inequality (and will tend to act as a regressive tax on the poor, enhancing income inequality).
Reduced Economic Growth Rates Increase Poverty
There is evidence that the absence of economic growth (or negative growth) increases poverty. Quibria’s study (2002) suggests that the burden of rapid economic retrenchment, such as seen recently in Thailand and Indonesia, hurts the poor most heavily. Similarly, in the transition countries of the former Soviet Union (FSU), the changeover to a market system was associated with a sharp initial drop in output and significantly higher levels of poverty. The expansion of poverty was initiated by the collapse of GDP, which fell by 50 percent in the FSU countries and 15 percent in Central and Eastern Europe. Poverty was found to be highly correlated with administrative corruption and corruption was empirically associated with lower economic growth rates (World Bank, 2000a).
The governance model postulates that increased corruption reduces governance capacity, which, in turn, increases poverty conditions. Kaufmann et al. (1999) define governance as, “the traditions and institutions by which authority in a country is exercised. This includes (1) the process by which governments are selected, monitored and replaced, (2) the capacity of the government to effectively formulate and implement sound policies, and (3) the respect of citizens and the state for the institutions that govern economic and social interactions among them.”
Corruption disrupts governance practices, destabilizes governance institutions, reduces the provision of services by government, reduces respect for the rule of law, and reduces public trust in government and its institutions. Impaired governance, in turn, reduces social capital and public trust in governance institutions; this reduces the public funds available to support effective economic growth programs and reduces the capability of government to help its citizens and the poor, in particular.
Corruption Degrades Governance
Corruption impacts the quality of government services and infrastructure and that through these channels it has an impact on the poor. This is particularly the case in the health and education sectors. Enhanced education and healthcare services and population longevity are usually associated with higher economic growth. But under conditions of extensive corruption, when public services, such as health and basic education expenditures that especially benefit the poor, are given lower priority in favor of capital intensive programs that offer more opportunities for high-level rent taking, lower income groups lose services on which they depend. As government revenues decline through leakage brought on by corruption, public funds for poverty programs and programs to stimulate growth also become more scarce.
Gupta et al. (1998) also found that corruption can lead to reduced social spending on health and education. Countries with higher corruption tend to have lower levels of social spending, regardless of level of development. Corruption lowers tax revenues, increases government operating costs, increases government spending for wages and reduces spending on operations and maintenance, and often biases government toward spending on higher education and tertiary health care (rather than basic education and primary health care).
Adverse Effects Of Corruption
Petty corruption for the provision of public services is an experience of everyday life: the money slipped to the bureaucrat for the issuance of a new identity card, the unofficial payment to get the family planning pills which should be distributed free of charge at the hospital, or the occasional bribe to the policeman to avoid harassment.
While this sort of corruption affects society as a whole it is the poor who suffer from it most. Corruption eats into an already tight budget and extra expenditures mean cuts in other basic needs areas. Empirical analysis has shown that the poor pay a higher share of their income on bribes than the rich. The burden corruption places on the poor gets aggravated by the fact that they are more dependent upon public services than the rich. The poor simply cannot afford using private hospitals or private schools and therefore are more vulnerable to the demands for “grease money”.
The effects of the various faces of corruption are not merely financial. They may also be profoundly economic, moral, and social. If rice in a government aid project disappears it erodes poor people’s relationship with their community leaders and government officials. If a policeman or teacher takes advantage of his position to extract bribes it harms their reputation and relationship of trust, destroying social capital and decreasing moral standards. It also becomes a way of “getting things done”, eventually eroding the rule of law.
“Bribing becomes a habit and is imitated by other people in the community. Over time, people become lazy in following correct procedures, too many things are solved by bribing.”
Poor people’s lack of power also stems from a lack of legal recourse and representation. Property rights are often not well established and access to courts depends on the power of the purse.
Indirect Effects Of Corruption
Corruption and poverty are linked through many indirect channels. On a macro level, corruption has implications for a country’s ability to attract investment, for the effectiveness of its institutions, for income generation through taxation and hence in the end for economic growth and poverty alleviation. Consequently, since corruption negatively affects economic growth, higher growth in corruption is associated with lower income growth of the poor.
Corruption also affects the way money is allocated within the state budget, diverting expenditures away from less lucrative sectors such as health and education to high kickback areas such as construction. Spending on operations and maintenance may also be squeezed out in favor of new projects, leaving existing roads, hospitals and other public infrastructure to decay. Lack of precision in public expenditure planning can create opportunities for corruption and diversion of funds. At the same time, clearly allocated expenditures may never reach the intended recipients – a major source of deprivation to poor people. While this corruption hurts society in general it hurts the poor most since they are more vulnerable and dependent on the quality of governance and state support.
Corruption also feeds inequality. Inversely, empirical analysis suggests that good governance reduces poverty while improving (or, at a minimum, not worsening) inequality.
• Designing an anti-corruption strategy that is pro-poor involves recognising how wealth and poverty are created — and how abuse of power conditions the process. Corruption on the part of public and private sector actors facilitates market failures, which can generate and perpetuate income equalities. Most countries in Latin America, Southeast Asia and Sub-Saharan Africa present highly unequal income distributions along with elevated levels of corruption. When corruption occurs in the economy, breakdowns and abuses are often attributable to the inadequate regulatory and anti-corruption frameworks used by governments and companies.
• Pro-poor anti-corruption strategies — initiatives that assess the benefits and risks for the poor — are most effective when they promote citizens’ basic rights. In addition, tackling corruption where it begins — prior to elections, after public officials have just taken office and when policies are conceived and planned — increases the effectiveness of interventions.
• Linking the rights of marginalized communities and individuals to more accountable governments is a fundamental first step for developing a pro-poor anti-corruption strategy.
• Social exclusion that limits citizens’ access to political and economic decision-making is inconsistent with pro-poor anticorruption efforts. The marginalisation of groups of citizens from society is contrary to the concept of good governance and theoretically has no place in democratic societies. It leads to rules that are applied with a double-standard, even if countries claim to embrace democratic equality. Cleavages arise and the social fabric of society is threatened. As TI has cautioned ‘one system for the rich and another for the poor fractures communities’.
• Participatory poverty and social impact assessments can be useful tools at this step. They can help to include the perspectives of the poor in determining key integrity cracks and in formulating anticorruption initiatives that are integrated into the national development strategy. Participatory policy and budgeting exercises are one option for ensuring pledges are funded and that poor citizens have a seat at the planning table.
• Institutional structures, particularly at the local level, can be set up to formalise poor citizens’ roles in implementing decisions that affect their lives, such as the delivery of basic services. Many examples, including community councils, exist for how institutional arrangements can be made more accountable to citizens.
• Work would be done by and with the poor — and not for the poor. Each step of the process could promote their engagement and community involvement. Community action at the local level could be used to demonstrate the power of and need for collective citizen action.
• Development frameworks would be viewed as a way to provide all citizens with a level playing field, regardless of income, race, gender, religion, education or ethnicity. Ensuring the poor participate in political processes and that a country’s development policies uphold their human dignity reflects the need to respect the human rights of all citizens as agreed under UN conventions.
There are many myths about corruption which have to be exploded if we really want to combat it. Some of these myths are: corruption has become a way of life and nothing can be done about it; or that corruption is a post-independence phenomenon and it is the result of giving too much freedom and licence to the people in democracy; or that the poor people of underdeveloped countries are generally dishonest and untrustworthy by nature and easily tempted, while people of the developed countries are less prone to corruption; or that corruption exists only at the lower and the subordinate levels; or that corruption is found more among the illiterate than the educated people; or that corruption spreads mainly because of politicians. All these fallacies are too crude and we have to guard against them while planning measures to contain corruption.
For controlling corruption, we have to focus on law, procedure and administration. Laws and rules pertaining to the organization and behaviour of persons in specific situations with specific status are essential. Laws should not be such that they leave too much scope for discretion. In a democratic country like India, will people ever realize that they have to play a crucial role in combating evils like corruption? In fact, much of the corruption exists because of peoples’ tolerance or complete lack of public outcry against it, as well as the absence of a strong public forum to oppose it. While many intellectual, educated, well-informed and articulate citizens remain worried about this monstrous problem in the -country, they fail to channelize their resentment into strong public opinion against it. A concerted effort by the responsible and enlightened citizens can surely make a serious dent in the corruption level.
1. Transparency International, the Global Coalition against Corruption, available at www.forbes.com/2009/ 01/22/corruption.
2. Ruddar Dutt, K.P.M. Sundram, Indian Economy p. 343 (Revised Edn. 2009).
3. Amartya Sen, Development as Freedom (Oxford, United Kingdom Oxford University Press, 1999).
4. Ram Ahuja, Social Problems in India p. 449 (Rawat Publications, Jaipur and New Delhi, 2nd revised Edn., 2003).
5. S.C. Joshi, Social Problems: Genesis, Causes and Magnitude p. 224 (Akansha Publishing House, New Delhi, Edn. 2005).
6. The Lima Declaration. International Anti-Corruption Convention 7-11 September 1997. Available at www.transparency.ca/Reports/Readings/SR-B16-e-limadecl. pdf.
8. Corruption and Poverty: A Review of Recent Literature. Final Report by Eric Chetwynd, Francis and Bertran Spector available at www.eldis.org/../Doc 14285.pdf.
9. World Bank Report, 2000.
10. Gupta Sanjeev, Hamid Davoodi, Rosa Alonso Terme. 1998. “Does Corruption Affect Income Equality and Poverty?” IMF Working Paper 98/76.
11. Corruption, Poverty and Inequality by Kwale, Kenya 1996 available at web.worldbank.org>Home>Topics/PublicSectorGovern…>Anticorruption>Topics >Costs and Consequences.