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Studies of the consequences of corruption have mainly focused on economic efficiency. This paper illustrates that corruption can also have distributional consequences. Corruption increases income inequality and poverty through lower economic growth; biased tax systems favoring the rich and well-connected; poor targeting of social programs; use of wealth by the well-to-do to lobby government for favorable policies that perpetuate inequality in asset ownership; lower social spending; unequal access to education; and a higher risk in investment decisions of the poor. Cross-country regression analysis for 1980.97 shows that high and rising corruption increases income inequality and poverty through the above channels. The impact of corruption on income inequality and poverty is considerable. A worsening in the corruption index of a country by one standard deviation (2.52 points on a scale of 0 to 10) is associated with the same increase in the Gini coefficient as a reduction in average secondary schooling of 2.3 years. A one-standard-deviation increase in the growth rate of corruption (a deterioration of 0.78 percentage point) reduces income growth of the poor by 7.8 percentage points a year. The results are valid for countries at different stages of economic development, with different growth experiences, and using various indices of corruption. They hold even when controlling for other factors that affect income inequality and poverty such as natural resources, capital-output ratios or capital productivity, educational attainment, access to education, and distribution of land. The results further show that higher social spending reduces poverty but has no effect on income inequality. These findings suggest that adverse distributional consequences of corruption can be mitigated by sound management of natural resources; broad-based, labor-intensive growth; efficient spending on education and health; effective targeting of social programs; and increased access to education. [author]
