Inequality and Corruption are Two Sides of the Same Coin

Quite often the argument has been made that poverty is a cause of corruption.  The argument is that the existence of a high level of poverty is a breeding ground for antisocial and unethical behaviour such as bribe taking. That argument is supported by “all the surveys conducted since1995 matching wealth/poverty of nations to their levels of corruption. The world’s most corrupt nations are also among the poorest” Hawthorne (2013: 11).  It could also be added that the world’s least unequal nations, in Scandinavia, are also considered the least corrupt. 

Many studies have also found that economic development, or an increase in per capita GDP, leads to reduced corruption (Paldam 2002; Treisman 2000). Other studies have confirmed this link, but suggest that it is reduced corruption that allows economic development (for example, Kaufmann and Kraay, 2002). 

However, as a fairly recent study found:

The explanatory power of inequality is at least as important as conventionally accepted causes of corruption such as economic development… Because corruption also contributes to income inequality, societies often fall into vicious circles of inequality and corruption (You & Khagram, 2005: 136).

A variety of other studies have found an association between inequality/poverty and corruption (Dutta and Mishra, 2013) and Gyimah-Brempong (2002) found that increased corruption is positively correlated with income inequality in African countries.  However, authors tend to assume that it is corruption that is causing inequality and poverty rather than the other way around (for example, Gupta et al., 2002).  Certainly the association between inequality and corruption is dramatically clear, as the following graph shows (Gupta et al., 2002: 34):

Batabyal and Chowdhury (2015) find that corruption and income inequality are clearly positively correlated, but then use the ‘instrumental variables estimation’ technique to determine the direction of causality.  This they suggest indicates that it is corruption which is the independent variable and is causing inequality rather than the other way around – or that the two are mutually increasing each other.  They recognise that their:

results establish the existence of a statistically significant positive association between corruption and income inequality. However, this association could stem from reverse causation, that is, high income inequality can lead to higher corruption (page 60).

Statistical tests on causality (for example instrumental variables use by Batabyal and Chowdhury, 2015 and the Granger Test) are not strongly robust and so the hypothesis that it is only corruption that causes poverty and inequality cannot be assumed to be proved.  In addition, the two attributes of inequality and corruption are probably reinforcing each other as suggested by You and Khagram (2005) who also suggest in their study that it is inequality that is supporting corruption.  This they argue is because:

The wealthy have both greater motivation and more opportunity to engage in corruption, whereas the poor are more vulnerable to extortion and less able to monitor and hold the rich and powerful accountable as inequality increases (page 136).

Glaeser et al (2003: 215) argue that inequality has an adverse effect of on economic and social progress and that inequality may increase corruption by “the subversion of legal, regulatory, and political institutions by the powerful”.

A key challenge is that the fight against corruption is not generally seen as being linked to the fight against poverty, and especially, to campaigns for more equitable societies.  So, for example, a donor symposium on Anti-Corruption Development Assistance: Good Practices among Providers of Development Cooperation managed to talk about corruption for two days in Paris in December 2014 without mentioning poverty or inequality once.

In contrast, a recent paper by Batabyal and Chowdhury (2015) clearly made the link between inequality and corruption in a study of the data of 30 Commonwealth countries over the period of 1995–2008. They confirm that:

It is the poor in society that are often the hardest hit by the effects of corruption, being the most reliant on public services and the least capable of paying the high price associated with fraud, bribery and other forms of corrupt activity, to attain those services (page 51).

And concur with Tanzi (1995) that:

The benefits from corruption are likely to accrue more to the better-connected individuals in society, who belong mostly to the high income groups (page 51)

As a result of these trends, corruption will tend to make the poor poorer and the already rich richer – thus increasing the level of inequality in a country.  But not only this, inequality has been shown to be associated with corruption, thus Glaeser et al. (2003) have shown that as inequality increases, the wealthier members of society will have greater resources that they can use to buy influence, both legally and illegally.  Thus we have a vicious circle of corruption leading greater inequality which in turn will facilitate greater levels of corruption.  So an effective campaign against corruption must involve significant moves to reduce inequality.

These ideas are confirmed, at least in the case of Bulgaria, by Uslana (2006) and with the comprehensive paper by You & Khagram (2005):

we have found substantial empirical support for a causal relationship from inequality to corruption (page 151).

Their statistical tests also confirm previous findings (Gupta et al. 2002; Li et al. 2000) that “corruption is significantly associated with income inequality” (page 152). You & Khagram (2005) conclude by saying that “income inequality is likely to be a significant and no less important determinant of corruption than economic development” (page 153), but also go on to conclude that corruption is also:

likely to reproduce and accentuate existing inequalities. Countries may thus be trapped in vicious circles of inequality and corruption (page 154).

This thesis is confirmed if we look at the case of Nigeria. It is difficult to pin-point the exact time that corruption became a major issue in Nigeria.  However, (Agbiboa, 2012: 331) states that:

“By the start of the 1980s, corruption had become so rife and so intertwined with the civil service that some scholars referred to it as ‘‘the political economy of state robbery’’ (Madunagu 1983 , p. 1)”

So corruption arose as a major issue at roughly the same point in time that the economy collapsed and inequality increased – that is in the 1980s. Agbiboa (2012) explains the mechanisms of the causal link between poverty, inequality and corruption:

In a study of the Nigerian bureaucracy, Adebayo (1972 , p. 235) observed that the salary ratio of the highest to the lowest paid civil servants in Nigeria is about 30:1. Although Adebayo’s study was completed in 1972, that gap has widened significantly as most of the income generated within the country continues to accrue primarily to a few individuals and groups (page 332).

In the late 1980s and 1990s, the bad economic conditions meant that many public servants were paid low wages and often went months for even this. “Several researchers have argued that individuals faced with these types of working conditions are quite vulnerable to corruption and are likely to actively engage in corrupt practices to secure the resources they need to meet their basic needs. (Gould and Mukendi 1989 ; Ostrom et al. 1993 ; Buchanan et al. 1980 )” (page 333).

Thus the consensus of academic research is that inequality and the level of corruption are positively correlated and that they may reinforce each other.  Countries with high levels of corruption tend also to have high levels of inequality.  Unless action is taken to simultaneously reduce both corruption and inequality then these societies tend to enter into a downward spiral as inequality and corruption each provide the conditions for the other to deteriorate.

References

Agbiboa, Daniel Egiegba (2012) Between Corruption and Development: The Political Economy of State Robbery in Nigeria, Journal of Business Ethics, 108: 325-345

Batabyal, Sourav and Chowdhury, Abdur (2015) Curbing corruption, financial development and income inequality, Progress in Development Studies, 15, 1, pp. 49–72, Sage

Dutta, Indranil and Mishra, Ajit (2013) Does Inequality Foster Corruption? Journal of Public Economic Theory, 15 (4), pp. 602–619.

Glaeser, E., Scheinkman, J. and Shleifer, A. (2003) The injustice of inequality. Journal of Monetary Economics 50, 199–222.

Gupta, Sanjeev, Hamid R. Davoodi, and Rosa Alonso-Terme (2002) "Does Corruption Affect Income Inequality and Poverty?" Economics of Governance 3:23-45.

Gyimah-Brempong, K. (2002) Corruption, economic growth, and income inequality in Africa. Economics of Governance 3, 183–209.

Hawthorne, Omar E.  (2013) Transparency International’s Corruption Perceptions Index: ‘best flawed’ measure on Corruption?
3rd Global Conference on Transparency Research, HEC Paris, October 24th – 26^th

Kaufmann, Daniel, Aart, Kraay and Pablo, Zoido-Lobatón (1999) Governance Matters, World Bank: Washington DC

Paldam M (2002) "The Cross-Country Pattern of Corruption: Economics, Culture, and the Seesaw Dynamics." European Journal of Political Economy 18:215-40.

Tanzi, V. (1995) Corruption: Arm’s-length relationships and markets. In Fiorentini, G. and Peltzman, S., editors, The economics of organized crime, Chapter 7. Cambridge University Press, 161–80.

Treisman, Daniel (2000) "The Causes of Corruption: A Cross National Study." Journal of Public Economics 76:399-457

Uslaner, Eric M. (2006) Corruption and inequality, Research Paper, UNUWIDER,

United Nations University (UNU), No. 2006/34,

You, Jong-Sung and Khagram, Sanjeev (2005) A Comparative Study of Inequality and Corruption, American Sociological Review, Vol. 70 (February 136-157)