Corruption, Poverty, and Inequality

Kwale, Kenya 1996 ^[1]

Poverty is about more than inadequate income. It is about access to and quality of public services vital to the poor such as education, health and water and sanitation. It is about lack of opportunities and fear of harassment. It is also about lack of voice, lack of representation and access to information.
Corruption has many faces. But a common theme is that it hurts the poor disproportionately.

Corruption affects the poor directly since it increases the price for public services, lowers its quality and often restricts poor people’s access to water, education, health care and many other key services. It also distorts poor people’s relationships with and trust for public officials, the police and people in authority who extort bribes from them.

Corruption thrives in an environment where power of individual members of society measured in terms of access to people in power and financial resources supersedes the rule of law. The poor lack power and thus lack opportunity to “make it” in such a society. They are more vulnerable to extortion and cannot use corruption in their favor.

But corruption also hurts the poor indirectly because corruption is an impediment to economic growth, reinforces inequality, distorts public expenditure allocation and through many other channels is an obstacle to poverty alleviation.

Direct Effects - Administrative Corruption ^[2]

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. A governance and corruption survey in Cambodia revealed that lower income households on average spend 2.3% of their income on bribes compared to 0.9% for rich households (cf. diagnostic survey on Cambodia, in: The World Bank. 2000b). 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”.

In some cases, corruption compromises the effectiveness of aid projects where food or other aid targeted to the poor get misallocated to the non-poor, is only given against an additional payment or “disappears” before it reaches the poor. In South Africa for instance, an estimated 10% of the social security budget is lost due to fraud, theft and inefficiencies. The key shortcomings lie in weak or non-existent auditing and management controls and disbursement procedures. This has especially detrimental consequences for the poor since on average, one pension drawer supports 7 to 11 people with his pension, making it the most important poverty alleviation project in South Africa. (Camerer. 1997)

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.”

Group analysis of causes of corruption in electricity provision, Yogyakarta, Indonesia ^[3]

Often, corrupt opportunities arise from discrepancies of power between public officials or community leaders who have control over a good or service and the poor who lack education, knowledge, access to information, the financial resources as well as good connections.

The poor are dependent on public officials or community leaders which explains why they are hesitant to speak up about corruption cases.

“I do not speak up because I am afraid that next time around, when rice is delivered to my village, I will be excluded from the allocation.”

Male participant on causes of corruption in the Social Safety Net Program, Makassar, Indonesia ^[4]

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. Not having the means to bribe the judge often results in losing a case. In a country with a corrupt justice system, justice becomes a matter of negotiating a price, much to the advantage of the rich and powerful who have virtually no limits imposed on their actions. The poor make similar experiences in their interactions with the police:

“When we contacted a lawyer to defend our son in court he asked for Rp.3 million as a bribe to the judge.” ^[5]

“We were told by the police officer who handled the case that our son could be set free if we paid Rp.300,000. We of course could not afford that
amount of money.” ^[6]

Indirect Effects of Corruption – State Capture ^[7]

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. Gupta et al. [Gupta et al, 1998] found that a 1% increase in aggregate growth is associated with a 1.2% increase of income growth of the poor. 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. (See Corruption, Growth, and Investment for a detailed discussion). ^[8]

Corruption also feeds inequality. Inversely, empirical analysis suggests that good governance reduces poverty while improving (or, at a minimum, not worsening) inequality (cf. Knack. 1999).

There are various ways in which inequality and corruption interlink:

In a corrupt system power is to a large extent based on asset ownership. The larger the say of a group or individual in policy-making the larger their asset ownership and vice versa. Assets can be used as collateral to borrow and invest, which further perpetuates income inequality.(cf. Gupta et al, 1998). Higher inequality reduces economic growth which in turn leads to less poverty reduction. (cf. UNDP, 1997).

Corruption creates incentives for higher investment in capital-intensive projects at the expense of labor-intensive industry, which traditionally employs poorer people. (cf. UNDP, 1997. The more persistent corruption and the more entrenched the vested interests, the stronger the distributional consequences of corruption.

Last but not least small and micro enterprises are more exposed to the need for bribing than large firms. Cross-country data of 22 transition countries from the Business Environment and Enterprise Performance Survey showed that small enterprises pay, on average, more than twice as much of their annual revenue in bribes than do large firms. Furthermore, the level of bribery at the household level is strongly correlated with participation in a micro enterprise.

What further disadvantages small businesses is the uneven distribution of risk between the poor versus the non-poor with the poor facing a larger risk premium for investment decisions. (cf. Gupta et al, 1998) This becomes particularly apparent if we look at small business owners’ rights versus conglomerates. Small business owners or petty traders are much more vulnerable to changes in regulations or economic shocks. They are also faced with more uncertainty since they are subject to changing rules influenced by a corrupt elite and often do not enjoy legal protection and rights (property rights).

^[1] Cf. Narayan, Raj Patel, Kai Schafft, Anne Rademacher and Sarah Koch-Schulte. 2000. Voices of the Poor: Can Anyone Hear Us? New York, N.Y.: Published for the World Bank, Oxford University Press. p. 93
^[2] “administrative corruption refers to the intentional imposition of distortions in the prescribed implementation of existing laws, rules, and regulations to provide advantages to either state or non-state actors as a result of the illicit and non-transparent provision of private gains to public officials.” Cf. The World Bank. 2000. p. xvii
^[3] Hardjono and Teggemann (2002)
^[4] Hardjono and Teggemann (2002 )
^[5] Hardjono and Teggemann (2002)
^[6] Hardjono and Teggemann (2002)
^[7] “State capture refers to the actions of individuals, groups, or firms both in the public and private sector to influence the formation of laws, regulations, decrees, and other government policies to their own advantage as a result of the illicit and non-transparent provision of private benefits to public officials.” Cf. The World Bank . 2000. p. xv
^[8] These findings are supported by empirical analysis. For the effects of corruption on economic growth cf. Mauro, 1995; Knack and Keefer, 1995. For the diverting effect of corruption on expenditures cf. Mauro, 1997.

This page was developed by Stefanie Teggemann.