Corruption leads to poverty. Poverty also promotes corruption. These two phenomena create an interlocking and self-reinforcing loop that supplements and sustains each. The vicious cyclical relationship between corruption and poverty is often referred to as the corruption-poverty nexus. This also means that addressing each requires resolving the other. Anti-corruption measures should work alongside anti-poverty measures.
A Look Into the Corruption-Poverty Nexus: Examining How Corruption Causes Poverty, and How Poverty Causes Corruption
How Corruption Breeds Poverty
Discussions about the relationship between corruption and poverty often include how the former causes the latter. There is a specific body of literature from scholars and institutional researchers that explain how prevalent corrupt practices create impoverished situations across the macro and micro levels of the socioeconomic environment.
A working paper by Sanjeev Gupta, Hamid Davoodi, and Rosa Alonso-Terme that was published in 1998 by the International Monetary Fund used a cross-country dataset to show that corruption is associated with higher income inequality and poverty. Results revealed that a worsening corruption index by one standard deviation was associated with a reduction in average secondary schooling of 2.3 years and a one-standard-deviation increase in the growth rate of corruption reduced the income growth of the poor by about 7.8 percentage points per year.
Researchers Eric Chetwynd, Frances Chetwynd, and Bertram Spector conducted a literature review and concluded that corruption does not produce poverty by itself. Prevalent corrupt practices in the government have direct consequences on economic and governance factors. These factors are considered intermediaries that produce poverty.
The economic model of the corruption-poverty nexus postulates that corruption affects poverty by first impacting economic growth factors, which, in turn, impact poverty levels. The model has demonstrated that there is a direct causal link between corruption and economic growth because the former impedes the latter by discouraging foreign and domestic investment, dampening entrepreneurship, lowering the quality of public infrastructure, decreasing tax revenues, diverting public talent into rent-seeking, and distorting the composition of public expenditure.
On the other hand, based on the governance model, corruption affects poverty by influencing governance factors, which, in turn, impact poverty levels. Corrupt practices weaken political institutions and citizen participation and decrease the quality of government services. The poor suffer disproportionately from inefficiencies in governance.
It is also important to mention that the structural theories of poverty represent one of the main schools of thought that explain the causes of poverty. Political science professor David Brady and economist Bradley Schiller have argued that poverty is not simply a result of individual shortcomings. Brady specifically explained that poverty tends to be prevalent in vulnerable demographic environments. Schiller emphasized that poverty is a condition that results from the absence of opportunities or lack of access to these opportunities.
Corruption causes structural poverty or systemic poverty through the creation of situations and processes or mechanisms that worsen impoverished individuals or drive individuals toward impoverished situations. Examples of these situations and mechanisms include inefficient resource distribution, economic growth impediments, and social injustice.
How Poverty Breeds Corruption
There are several theories that explain the causes of corruption or the reason behind its prevalence. The specific systemic theory of corruption and the collective action model of systemic corruption explain that prevalent corruption is a systemic problem that emerges in an environment that has mechanisms that encourage corrupt practices.
One of these mechanisms is poverty. Researcher Ezekiel Oluwadare Adeleye proposed the Pareto theory of poverty-induced corruption to explore and explain the nature of poverty and its relation to corruption. His 2016 study analyzed 61 countries that were grouped into three categories according to their ranking in the 2014 Corruption Perception Index. Results revealed that countries that have the highest corruption prevalence tend to be the most impoverished ones and have “disabled economies” due to Pareto Economic Disability.
The same study explained that widespread poverty in the qualified countries was not a product of corruption but a result of having disabled economies characterized by the presence of one or two main economic sectors that have significant gross domestic product contributions but provide few employment and livelihood opportunities to the people.
Adeleye supported the argument that corruption is poverty-induced. His study showed that countries where corruption and poverty are rampant have stringent anti-corruption measures in place. Several of these countries have even channeled a significant portion of government resources aimed at combatting corruption. The efforts remained ineffective as evident from the prevalence of corruption. The proposed solution to eradicate corruption centers on eradicating poverty by reducing Pareto Economic Disability.
M. K. Justesen and C. Bjørnskov established that bribery for private gain by government officials is more likely in poorer societies based on multi-level regressions across 18 countries. Results from the study of V. Negin, Z. Abd-Rashid, and H. Nikopour which involved 97 market economies showed that poverty positively and significantly affects corruption.
Poverty creates a breeding ground for corruption to thrive. For example, due to scarce resources, people are motivated to pursue rent-seeking behaviors in which they embark on achieving economic gains through non-productive activities to capture or redistribute existing wealth or resources. Poverty can also provide a structure for promoting or worsening a principal-agent problem in which agents, such as government officials, have the opportunity to act in their self-interest at the expense of their principals, such as the public.
The prevalence of poverty also widens and reinforces the power discrepancy between the rich and the poor or between those in positions of power and the common people. This means that there are more individuals who are vulnerable to exploitation or are enticed to partake in corrupt practices that advance the interest of those in power.
Understanding the Interplay Between Corruption and Poverty: Summary of the Corruption-Poverty Feedback Loop
The relationship between corruption and poverty can be considered a vicious cycle. Corruption perpetuates poverty, and poverty, in turn, fuels corruption. This feedback loop means that countries cannot address corruption without addressing poverty in the same manner that they cannot solve poverty without solving corruption.
Below is a summary of how corruption causes poverty:
• Reduced Economic Growth: Corruption does not directly produce poverty but dampens economic growth which affects economic productivity and individual income levels. There are several reasons and examples of how widespread corrupt practices negatively affect the economy. For example, due to perceived inefficiencies in governance, foreign investors would defer from investing in a corruption-ridden country. Practices such as bribery, nepotism, and cronyism also discourage market competition by giving selected businesses an unfair advantage on the basis of political patronage.
• Misallocation of Resources: A corrupt government diverts resources away from relevant public services and programs toward the pockets of involved government officials. For example, due to the absence of a well-funded public healthcare system, a middle-income household is one hospitalization away from falling below the poverty line. Limited funding in the education sector reduces access to high-quality education that is necessary for producing a productive workforce. Low-income individuals disproportionately suffer from inefficient and inadequate government services.
• Fosters Socioeconomic Inequality: The gap between the rich and the poor also widens because of corruption. Large businesses connive with government officials to create unfair advantages that can make it difficult for small businesses and startups to compete or for employees to demand livable wages. Rent-seeking behaviors do not create new wealth but redistribute existing wealth. Widespread corruption, which leads to insufficiencies in the delivery of government services, limits socioeconomic opportunities for individuals and also makes them vulnerable to poverty.
Below is a summary of how poverty causes corruption:
• Promotes Exploitation of People: Individuals who struggle to make ends meet are more prone to exploitation. An exploitable community creates a principal-agent problem because of information asymmetry or disparity in access to information or produces opportunities for specific forms of corrupt practices to take place. An example would be an impoverished but vote-rich community that can be exploited during elections through vote buying or a low-income and low-literacy community that can be taken advantage of by large corporations and local government officials.
• Motivation for Corrupt Practices: The same people who struggle to have decent livable wages and salaries are more prone to engage in corrupt practices or be involved in a wider system of corruption. This transpires among low-ranking government officials in several government offices and local government units where salaries are not enough to support a family. These individuals may resort to receiving bribes, embezzling public funds, or fabricating documents for personal financial gain. Corruptible individuals are also exploitable by more influential people in power.
• Hampers Proper Access to Justice: Remember that poor people are easier to be controlled and abused by influential and powerful people. Widespread poverty creates an environment where people do not have the relevant resources to seek legal remedies or even relevant knowledge to make them informed about their rights and privileges. This same environment creates opportunities for people in power to engage in activities aimed at fulfilling their self-interest while also giving them the capabilities to get away with corrupt practices like extortion and other forms of abuse of power.
FURTHER READINGS AND REFERENCES
- Adeleye, E. O. 2016. “The Pareto Theory of Poverty-Induced Corruption.” Journal of Poverty, Investment, and Development. 25: 73-78. Available online
- Brady, D. 2009. “Structural Theory and Poverty.” Rich Democracies, Poor People: How Politics Explain Poverty. Oxford: Oxford University Press. ISBN: 978-0-19-538587-8
- Chetwynd, E., Chetwynd, F., and Spector, B. 2003. Corruption and Poverty: A Review of Recent Literature. Available via PDF
- Gupta, S., Davoodi, H., and Alonso-Terme, R., 1998, “Does Corruption Affect Income Inequality and Poverty?” IMF Working Paper 98/76. International Monetary Fund. Available via PDF.
- Justesen, M. K. and Bjørnskov, C. 2014. “Exploiting the Poor: Bureaucratic Corruption and Poverty in Africa.” World Development. 58: 106-115. DOI: 1016/j.worlddev.2014.01.002
- Negin, V., Abd Rashid, Z., and Nikopour, H. 2010. The Causal Relationship Between Corruption and Poverty: A Panel Data Analysis. University Library of Munich, Germany. Available via PDF
- Schiller, B. 1972. The Economics of Poverty and Discrimination. 1st ed. New Jersey: Prentice-Halle