By Dana Sookdeo
Corruption is poison in the pool of economic development.
Corruption costs developing countries $1.6 trillion dollars every year. That is almost enough money to raise the 1.4 billion people living on less than $1.25 USD per day out of poverty and allow them to remain at that status for at least six years (World Economic Forum 2019).
Is corruption a crime? According to the United Nations, corruption is considered not only a crime, but one that undermines social and economic development and weakens the fabric of modern-day society. By no mistake, corruption is just one of the different forms of crime, and the impacts on economic growth and development are not the only ways in which crime affects the economy. Different types of crime bear their own different implications on the workings of the economy and must be addressed separately.
Corruption has traditionally been at the basis of economic crises, inequality, forced migration, and violence, among other things. People die as a result of corruption when poverty increases, or when the medications they are given are old or of poor quality due to corrupt health officials, or when a bribe allows a businessman to bypass certain procedures and standards. Corruption also denies the world’s poorest people access to education, health care, clean water, and shelter.
The fight against corruption has almost been a losing one as most developing countries continue to suffer from disastrous levels, costing them much more than just economic growth. Corruption has a detrimental impact on economic development, which is measured by economic growth and equally as important, factors like poverty and income inequality.
When one thinks of corruption, the thought of very few elites becoming richer prevails. However, the links between corruption and poverty are significantly more numerous and persistent. Corruption causes economic growth to be delayed, distorted, and diverted. It takes many forms, and while no two countries are similar, there are common challenges that everyone can note. Inequalities have always been a major source of poverty all over the world, and are one of the key reasons for chronic poverty, according to economist Paul Krugman. Therefore, as corruption widens the gap between the rich and the poor, existing poverty levels are also worsened and exacerbated.
Corruption and poverty are linked in both ways, affecting both persons and businesses: poverty promotes corruption, while corruption worsens poverty. Corruption both generates and feeds on flaws in critical economic, political, and social institutions. In poor and corrupt nations, it is difficult to create trust, which is vital for financial markets and efficient governance worldwide. Poor individuals and struggling enterprises have limited economic options, and in places where substantial corruption is the norm, they are much more prone to abuse. However, when delving into the impact of corruption on poverty and income inequality, it is necessary to comprehend the impact of corruption on economic growth, as the impact of corruption on growth is what feeds into the problem of income inequality and poverty.
The link between corruption and economic growth is formed through various different channels. Corruption deters both domestic and international investment since there are less incentives for investors, as rent collecting raises expenses and creates uncertainty among them. The impact of this on economic growth is severe as investment is a major component of GDP, and of great importance to developing countries as some rely on foreign direct investment. It is especially needed in countries that are oil rich and suffer from the resource curse and dutch disease (like Trinidad and Tobago).
Entrepreneurship is also affected by corruption as entrepreneurs and inventors need certain licences and permissions, which may be lengthy and tiresome processes in some economies where the ease of doing business remains costly. This may persuade people into paying bribes for these items, thus reducing their marginal profits. This is particularly detrimental to the lower class of citizens who may be trying to find their opportunities through small business start ups, thereby widening the gap between the rich and the poor. According to empirical studies, the poor groups pay the largest percentage of their income in bribes. Further, the poor and vulnerable in society may even be preyed upon since they are perceived as helpless to protest. This mechanism keeps poor and vulnerable groups at a disadvantage, causing entrepreneurship as a means of economic opportunity to have a negligible effect.
The quality of public infrastructure is worsened by corruption as resources allocated to the public become diverted for private party use, waiving requirements and reallocating finances for operations in favour of more rent-seeking activities. It diverts public funds away from infrastructure expenditures that may assist the poor, such as health clinics, and instead increases public spending on capital-intensive ventures that provide greater potential for bribes, such as defence contracts. It reduces the quality of infrastructure since bribes on equipment acquisitions are more profitable. Corruption also jeopardises the delivery of public services which the poor groups then pay the price for. Corruption in public health or police services may be crippling for people without money or connections and impacts the lives of impoverished people in a variety of ways.
Tax income is also reduced by corruption through redirecting enterprises and activities into the informal sector, and taxes are cut in return for payoffs to tax authorities. Talents are also diverted into rent-seeking behaviours through corruption. Employees who would have been productively engaged become preoccupied with rent seeking, with increasing returns encouraging more rent-taking activity. This forms a biased system that encourages further criminal activity, where citizens feel as though they must engage to economically advance themselves, which creates a disastrous cycle.
Corruption also distorts the composition of government spending as rent seekers will undertake projects where rent seeking is easiest and best hidden, diverting funds from other sectors such as education and health, where the poor and vulnerable groups benefit from and need the most and into capital projects where bribes can be sought out. It therefore diminishes the government’s capacity and willingness to deliver quality public services, reduces compliance with health and safety standards and procedures, and increases fiscal pressures on the government.
Biased tax systems that favour the well-connected are also encouraged with corruption, reducing the tax base and progressivity of the tax system, thereby increasing income inequality. This is seen empirically in many developing countries where trickle down economic policies are practised.
The crime of corruption is naturally designed to widen the gap between the rich and the poor, and further increase poverty in developing countries. Though, while the fight against corruption may seem like a losing battle for some, the world is more aware than ever before of the detrimental repercussions of corruption, and further policies and initiatives are being implemented in the fight against it. Prevention strategies aimed at establishing lost values and nurturing new behaviours in the next generation are being pushed forward. What remains required is imaginative leadership in all aspects of society, not just politics, enhanced cooperation with the private sector and proper utilization of ICT tools.
“Corruption and Poverty – United States Agency for International Development.” Accessed June 5, 2022. https://pdf.usaid.gov/pdf_docs/PNACW645.pdf.
Ellis, Tom. “The Roots of Corruption and How to Sever Them.” eKathimerini.com. Accessed June 4, 2022. https://www.ekathimerini.com/opinion/interviews/207463/the-roots-of-corruption-and-how-to-sever-them/.
“Poverty and Corruption.” Forbes. Forbes Magazine, July 11, 2012. https://www.forbes.com/2009/01/22/corruption-poverty-development-biz-corruption09-cx_mj_0122johnston.html.
Written by Børge Brende, President. “The Private Sector Is Key in the Fight against Corruption. Here’s Why.” World Economic Forum. Accessed June 4, 2022. https://www.weforum.org/agenda/2021/12/the-private-sector-is-key-to-fighting-corruption/.