Is corruption really bad for inequality? Evidence from Latin America
In this paper the authors present new evidence regarding the relationship between corruption and income inequality. They use panel data to show that in Latin America lower levels of corruption are correlated with higher income inequality. The authors’ contribution is two-fold. Firstly, they provide an empirical investigation of the link between corruption, a mechanism that is most commonly used to explain the region’s problems, and inequality in Latin America. Secondly, their findings challenge empirical work in other regions of the world, which find corruption and inequality to be positively related, while building on recent theoretical findings that the relationship between corruption and inequality is non-monotonic. They use four-year panel data over the period of 1982-2002 for 19 Latin American countries.
The authors attribute the counterintuitive results of their study to the conditions they believe to be unique to Latin American countries. Firstly, they posit that the large informal sector in many countries in Latin America provides jobs to the poorest people in society, who would otherwise find it difficult to secure employment due to discrimination and existing institutional barriers. Once corruption is reduced, this sector becomes formalised and jobs are lost as a result of the rise of operational costs and reduction of profits. Secondly, it is argued that corruption may be seen as tolerable if it means the retention of large public welfare projects, which normally provide the greatest opportunity for corrupt exchanges. The authors admit that the interpretation of their findings into policy (i.e. allowing corruption to grow in order for inequality to be reduced) is perilous. While they identify the reasons for this relationship between corruption and inequality, they believe that the best way forward in terms of policy is to continue to encourage anti-corruption policies, along with promoting the productivity of the poorest citizens in society.
Citation: Institute for Advanced Development Studies Development Research Working Paper Series, no. 2 (2010)
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