Graft and Corruption

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Corruption and Poverty:
A Review of Recent Literature
Final Report

Eric Chetwynd Frances Chetwynd Bertram Spector January 2003

Management Systems International 600 Water Street, SW Washington, DC 20024 USA

Table of Contents Executive Summary................................................................................................................3 Introduction ...........................................................................................................................5 1 Defining Poverty and Corruption ......................................................................................5 2 Examining the Relationship Between Corruption and Poverty ............................................6 2.1 Economic Model .........................................................................................................7 2.2 Governance Model ....................................................................................................11 3 Conclusion....................................................................................................................15

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List of Acronyms

USAID GDP PPP IMF BEEPS ECA TI CPI OECD FSU LAC

US Agency for International Development Gross Domestic Product Purchasing Power Parity International Monetary Fund Business Environment and Enterprise Performance Survey Europe and Central Asia Transparency International Corruption Perceptions Index Organization for Economic Cooperation and Development Former Soviet Union Latin American and the Caribbean

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Executive Summary
A substantial number of recent studies have examined the relationship between poverty and corruption to clarify the ways in which these phenomena interact. An understanding of this complex relationship can inform USAID planning and programming in democracy and governance, as well as in poverty reduction strategies. Corruption in the public sector -- the misuse of public office for private gain -- is often viewed as exacerbating conditions of poverty (low income, poor health and education status, vulnerability to shocks and other characteristics) in countries already struggling with the strains of economic growth and democratic transition. Alternatively, countries experiencing chronic poverty are seen as natural breeding grounds for systemic corruption due to social and income inequalities and perverse economic incentives. The literature points to the conclusion that corruption, by itself, does not produce poverty. Rather, corruption has direct consequences on economic and governance factors, intermediaries that in turn produce poverty. Thus, the relationship examined by researchers is an indirect one. This paper discusses two major models explaining this moderated linkage between corruption and poverty: an economic model and a governance model. The Economic Model postulates that corruption affects poverty by first impacting economic growth factors, which, in turn, impact poverty levels. Economic theory and empirical evidence both demonstrate that there is a direct causal link between corruption and economic growth. Corruption impedes economic growth by discouraging foreign and domestic investment, taxing and dampening entrepreneurship, lowering the quality of public infrastructure, decreasing tax revenues, diverting public talent into rent-seeking, and distorting the composition of public expenditure. In addition to limiting economic growth, there is evidence that corruption also exacerbates income inequality; regression analysis has shown a positive correlation between corruption and income inequality. Explanations for this link are that corruption distorts the economy and the legal and policy frameworks allowing some to benefit more than others; there is unfair distribution of government resources and services; corruption reduces the progressivity of the tax system; corruption increases the inequality of factor ownership; and lower income households (and businesses) pay a...
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