2015-2016

English paper

Corruption in developing countries

Arnaud Pattyn
Henri Haeck
 Corruption in developing countries

0. Introduction
Corruption, a recurring factor in almost every research concerning the question: “Why are poor
countries poor and rich countries rich?”. This paper investigates the importance of corruption and its
effect on the ability of a country to develop. The first section will analyze the negative effects of
corruption on society provided with some evidence based on regression studies. We also become a
remarkable result why poor countries are having a hard time to escape the vicious circle of poverty.
After that, we will explain the impact of corruption on the economic activity and poverty by introducing
the economic and governance model. We will finish off with a short conclusion to mention our most
remarkable findings.

1. Negative effects of corruption

1.1. Setting

First of all we must acknowledge that corruption can be found in many different kind of forms.
Corruption appears to be present at every level of governance in large firms and is also present at
governments. Literally, corruption can be defined as “the abuse of power for private gain”. However
the negative effects of corruption are tremendous, we are going to focus on the costs of corruption
induced by illicit governments that are the most significant noticeable in developing countries.

1.2. Negative effects

Corruption harms the society in a multitude of ways. In the worst cases, it costs lives. Short of this, it
costs people their freedom, health or money. The negative effects of corruption can be divided into
four main categories: political, economical, social and environmental.

On the political front, corruption is a major obstacle to democracy and the rule of law. In a democratic
system, offices and institutions lose their legitimacy when they’re misused for private advantage. This
is harmful in established democracies, but even more so in newly emerging ones. It is extremely
challenging to develop accountable political leadership in a corrupt climate.

Economically, corruption depletes national wealth. Corrupt politicians invest scarce public resources
in projects that will line their pockets rather than benefit communities, and prioritize high-profile
projects such as dams, power plants, pipelines and refineries over less spectacular but more urgent
infrastructure projects such as schools, hospitals and roads. Corruption also hinders the development
of fair market structures and undermines entrepreneurship, which in turn deters investments.

Thirdly corruption corrodes the social fabric of society. It undermines people's trust in the political
system, in its institutions and its leadership. A distrustful public can then become yet another hurdle
to challenging corruption.

Environmental degradation is another consequence of corrupt systems. The lack of environmental
regulations and legislation allows precious natural resources to be exploited carelessly. This can even
cause entire ecological systems to be ravaged. Large companies across the globe continue to pay
majestic bribes in return for unrestricted destruction.

1.3. Evidence

Regression studies as those in Mauro (1995) provide evidence that corruption may affect investment
and economic growth. They linked countries’ CPI (Corruption perception index) with the annual growth
of its GDP and concluded that there is a negative correlation between them. In other words, the more
corrupt a country and its government, the lower its economic growth is and the less investments tend
to go to these countries.

Barro (1999) also developed a model to examine if corruption acted simply as though it were a tax on
income. If so the amount and composition of government expenditure would be independent of
corruption. It seems reasonable to interpret any empirical relationships between corruption indices
and particular components of government spending as corrupt bureaucrats obtain more revenue for
themselves by shifting the composition of government expenditure to those areas in which bribes can
be more efficiently collected. The model shows a significant and negative association between
government expenditure on education and higher levels of corruption. Government expenditure on
health care is also found to be negatively associated with corruption. Simply put, countries with a more
corrupt government are in favor of spending less money on education and health care because there
is not that much money to steal.

Based on this last study we can even go further by presuming that corrupt countries are lacking on
education and health care. When comparing developing countries with advanced economies, the two
main obstacles poor countries have to tackle, to catch up with the wealthier ones are actually also
health care and education. This remarkable result clarifies why it is even more difficult for a corrupt
developing country to escape from the vicious circle of poverty.

 2. Impact of corruption
Although it seems very clear that there is a relationship between corruption and poverty, most studies
suggest that corruption is not directly producing poverty. It rather has direct consequences on
economic and governance factors, which in turn lead to higher levels of poverty. These factors are
explained by the research literature in two models, more precisely the economic model and the
governance model.

2.1. The economic model

The economic model is based on the fact that countries with higher corruption experience less
economic growth. Studies have shown that corruption discourages foreign and domestic investment,
hurts entrepreneurship especially among small businesses, lowers the quality of public infrastructure,
decreases tax revenue… All these negative impacts limit a country’s ability to grow and prosper. A
seminal study by Mauro (2002) suggests that if a country could improve its corruption index from a
score of six to eight on a ten-point scale, it would boost the annual GDP growth by nearly one-half
percent. On top of that the investment rate would increase with more than 4%. This economic model
now links the fact that corruption undermines the economic growth and the correlation between
economic growth and poverty. It is common knowledge that weak economic growth goes hand in hand
with a high level of poverty. In short the theory states that corruption limits a country ability to grow,
which in turn will lead to high poverty rate and an inability to decrease it.

2 .3. The governance model

A second theory that explains the impact of corruption on poverty is the governance model. This model
postulates that increased corruption reduces governance capacity, which has a negative effect on
poverty. Corruption destabilizes governance institutions, reduces the provision of services by the
government, disrupts governance practices, reduces respect for the rule of law and reduces public
trust in the government and its institutions. The theory states that these negative impacts on
governance result in higher poverty rates. In 1999 a team at the World Bank led by Kaufman researched
these factors and suggested that there is an association between good governance and poverty
alleviation. Another World Bank study in 2000 even suggested that there is also a reverse relation.
From these studies we can conclude that corruption has a negative impact on governance and bad
governance will lead to increased corruption, which both affect the poverty rate in an adverse way.

3. Conclusion
In our paper we first talked about the significant and negative effects of corruption, especially in
developing countries. From that point we could already notice a positive correlation between
poverty and corruption, based on regression studies. Thanks to a simple presumption we were able
to declare why poor countries are having a hard time to catch up with more developed countries.
After this we introduced the economic and governance model, which give a more rational
explanation of how corruption has an impact on poverty. We can conclude that we have succeeded
in explaining the importance of corruption and its effect on the ability of a country to develop.

References

Academic sources

Paolo Mauro.”The Effects on Growth, Investments, and Government Expenditure : A Cross-Country

Analysis ». Iinstitue for International Economics. 83-106

Benjamin A. Olken, August 2011.”Corruption in Developing Countries”. MIT Rohini Pande. Harvard
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Eric Chetwynd, Frances Chetwynd, Bertram Spector. January 2003.”Corruption and Poverty: A
Review of Recent Literature Final Report”. Management Systems International 600 Water Street, SW
Washington, DC 20024 USA

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