Corruption and poverty rise and fall together. It is not a coincidence that the countries who sit at the top in terms of the Corruption Perception Index (CPI) are the ones that are also badly mired in poverty. Exceptions are there but few and far between. Generally a clear and consistent pattern is discernible between corruption and poverty. The continent of Africa is a pertinent example; it is considered the biggest growth disaster of the 20th century. A number of African countries are characterised by high levels of corruption arising from rent-seeking activities like exploration of natural wealth (diamonds, oil, etc). On the other hand, the countries of Western Europe (especially the Scandinavian countries) are the least corrupt as per CPI scores. The levels of poverty are low as well. Pakistan is also an obvious manifestation of the corruption-poverty nexus, where both poverty and corruption are persistently on the rise.
How does corruption aggravate poverty? There are a number of channels of transmission. First of all, corruption negatively impacts economic growth. Dampening of growth means that the cake will not be sufficient to feed the increasing number of mouths. China is cited as an outstanding example of decrease in poverty in the last few decades. The empirical literature on China shows that poverty reduction was mainly possible due to sustained growth rates. If you are not able to fatten the size of the cake and widely distribute it, poverty reduction will not be possible.
Corruption also impacts economic growth by deepening income inequalities. It is an empirically well-established fact that the impact of corruption is not uniform on individuals as well as businesses. The negative impact is disproportionately severe and deep on the poor and marginalised sections of society. Ultimately it is the poor who bear the brunt of corruption and that too through their nose, irrespective of the magnitude of corruption, whether it is committed by a low-grade public functionary or a big business tycoon.
For example, if a rickshaw driver or a small street vendor pays a meagre amount of bribe (assume Rs 50) to a policeman to avoid harassment, the impact on these poor chaps will be deep and severe as an amount of Rs 50 constitutes a major chunk of the daily incomes of these poor chaps. It is not a big amount in absolute terms but it eats into their already tight budget. Compared with the daily income of the wage earners, the impact of this seemingly little amount can be well imagined on the household budget of the poor.
On the other hand, if a businessman pays (assume Rs 200,000) to a tax collector, he will get an enormous personal benefit. But due to this collusion of the tax evader and tax collector, millions of rupees will not enter into the state kitty and will be dribbled through corruption. The taxes evaded due to this under the table deal, if properly collected, could be utilised for developing infrastructure, transfer payments or social spending for poverty alleviation in the country. This simple illustration shows: first, the impact of corruption is disproportionately high on the poor and second, corruption widens the inequality gap between the rich and the poor. Rising inequality has severe ramifications for economic growth and may completely uproot the social order if not taken care of through sound distributional policies.
Corruption also breeds poverty through perpetuating distortions in the tax system. Due to corruption, tax evasion is rampant. Tax administration is poor and consciously or unconsciously favours the rich and the well-connected. Exemptions are high and the tax base is low, that in turn results in low revenue and more income inequality. Low revenue means that the state will not have sufficient money to invest for the development of its people, and increasing income inequalities have negative implications for economic growth.
Corruption also affects targeting of social programmes. If corruption is pervasive, leakages in such programmes will be high. Distribution of zakat funds is a case in point. There is anecdotal evidence to show that all the money allocated for distribution among the poor did not reach the intended targets. A substantial percentage of such funding was squandered away through corruption during the process of distribution. Further, targeting of the poor was riddled with nepotism and patronage, and zakat money was siphoned off to the rich and undeserving. In this way, the impact of such social programmes on poverty alleviation is badly diminished.
Moreover, corruption enhances the operating costs of the government and reduces the resources available for social spending. The budget for the health and education sectors gets squeezed, having negative implications for human capital formation. It is an open secret now that the major chunk of the funds allocated for development of infrastructure like roads, schools and hospital buildings is eaten into by corruption as commissions and kickbacks by the engineers, contractors and construction companies. Resultantly, the quality of the infrastructure is low and deterioration creeps in within no time on their completion. Added to this, repair and maintenance is accorded low priority in the budget allocation compared with allocations for new projects, which have vast potential for corruption.
If we are able to plug such leakages of corruption, the pace of poverty reduction can be accelerated even within the resource constraints we are facing. So the point is that corruption has severe negative implications for poverty reduction. If corruption is not tackled effectively, it will render even the sincere efforts aimed at poverty reduction a farce. The fight against corruption and poverty should, therefore, go hand in hand.
The writer is a graduate from the Columbia University, USA, in Economic Policy Management and studied economic governance in the UK. He can be reached at [email protected]