Does Corruption Affect Income Inequality and Poverty?


WP/98/76-EAWP/98/76


Summary

Studies of the consequences of corruption have mainly focused on economic
efficiency. This paper illustrates that corruption can also have distributional
consequences.


Corruption increases income inequality and poverty through lower economic
growth; biased tax systems favoring the rich and well-connected; poor targeting
of social programs; use of wealth by the well-to-do to lobby government for
favorable policies that perpetuate inequality in asset ownership; lower social
spending; unequal access to education; and a higher risk in investment
decisions of the poor.


Cross-country regression analysis for 1980.97 shows that high and rising
corruption increases income inequality and poverty through the above channels.
The impact of corruption on income inequality and poverty is considerable. A
worsening in the corruption index of a country by one standard deviation (2.52
points on a scale of 0 to 10) is associated with the same increase in the Gini
coefficient as a reduction in average secondary schooling of 2.3 years. A
one-standard-deviation increase in the growth rate of corruption (a
deterioration of 0.78 percentage point) reduces income growth of the poor by
7.8 percentage points a year. The results are valid for countries at different
stages of economic development, with different growth experiences, and using
various indices of corruption. They hold even when controlling for other
factors that affect income inequality and poverty such as natural resources,
capital-output ratios or capital productivity, educational attainment, access
to education, and distribution of land. The results further show that higher
social spending reduces poverty but has no effect on income inequality.


These findings suggest that adverse distributional consequences of corruption
can be mitigated by sound management of natural resources; broad-based,
labor-intensive growth; efficient spending on education and health; effective
targeting of social programs; and increased access to education.