Inequality causes Corruption…or is it the other way around?

Senior Lecturer in Public Financial Management at the School, Andy Wynne, briefly surveys one of today’s most pressing debates

Last December, in Paris, attendees at an OECD donor symposium entitled Anti-Corruption Development Assistance: Good Practices among Providers of Development Cooperation debated the causes and consequences of corruption for two full days. But poverty or inequality were hardly mentioned. This was not a simple matter of oversight: it was a deeply troubling omission of the mounting statistical evidence. While debate concerning the direction of influence between corruption and inequality continues, researchers now take the strong correlation between the two variables as effectively read.

Surveying the relationship between inequality and corruption across 30 Commonwealth countries between 1995 and 2008, Batabyal and Chowdhury (p. 51), for example, claim 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.

The authors echo the findings of a study published two decades earlier which claimed:

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

Both studies share the suggestion that corruption tends to make the poor poorer and the rich richer. Corruption, they allege, can serve to perpetuate prevalent national levels of economic inequality. The benefits of corruption, for their part, tend to accrue to the rich. This happens, according to Glaeser et al (p. 215), through “the subversion of legal, regulatory, and political institutions by the powerful” and, according to You and Khagram (p. 136) 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.

The claim that high levels of poverty breed corruption is supported by “all the surveys conducted since 1995 matching wealth/poverty of nations to their levels of corruption”. A vicious circle of corruption leads to greater inequality which, in turn, facilitates greater levels of corruption. This aggregate international idea has also been confirmed within national studies, including studies of the nation about which I can claim some expertise: Nigeria. While it is difficult to pin-point the exact time that corruption became a major issue in Nigeria, some suggest that date it back to the start of the 1980s, when the economy collapsed and inequality increased. The world’s least unequal nations, in Scandinavia, by stark contrast, are also considered the least corrupt.

In light of the fact that correlations between corruption and inequality are frequently found, what practical solutions are available to us? How, in other words, should the Paris conference delegates have conducted their discussions, instead of bracketing out corruption? Here’s where the debate gets even trickier. Economic development and an increase in per capita GDP are among the factors which have been said to reduce corruption levels. Others have specified these conclusions further: corruption, they claim, is related not so much to aggregate levels of poverty as it is to relative levels of inequality. Others complicate the matter further by confirming the existence of these statistical relationships while problematizing the direction of causality: the reduction of corruption, they claim, leads to economic development, not the other way around. So, while some suggest corruption causes inequality, as plotted in the table below, others reverse the direction of causality between corruption and inequality.

The association between inequality and corruption, from Gupta et al., 2002, p. 34

The prevalent statistical tests of causality are clearly not as robust as researchers would like them to be. Otherwise the ongoing debate concerning the relationship between corruption and inequality would have reached a definitive conclusion. Neither the hypothesis that corruption causes inequality (and/or poverty), nor the hypothesis that inequality (and/or poverty) causes corruption, have been definitively proven. An important consensus nevertheless exists. While there isn’t a clearly discernible direction within the relationship between the equation’s core variables, we know that each side has played a role in reinforcing the other.

The globally coordinated fight against corruption very often runs in parallel to the fight against poverty and inequality. It is time for all those involved in those struggles to join forces. The statistical evidence is clear: any effective campaign against corruption must involve significant moves to reduce inequality. Unless these battles are fought on both fronts, corruption afflicted nations will continue their downward spiral.