Does corruption affect income inequality and poverty?

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 favouring the rich and well-connected; poor targeting of social programs; use of wealth by the well-to-do to lobby government for favourable 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. 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. These findings suggest that adverse distributional consequences of corruption can be mitigated by sound management of natural resources; broad-based, labour-intensive growth; efficient spending on education and health; effective targeting of social programs; and increased access to education.