Does Corruption Create Poverty?

Published on
by
Foreign Policy in Focus

Does Corruption Create Poverty?

The issue of corruption resonates in developing countries. In the Philippines, for instance, the slogan of the coalition that is likely to win the 2010 presidential elections is "Without corrupt officials, there are no poor people."

Not surprisingly, the international financial institutions have weighed in. The World Bank has made "good governance" a major thrust of its work, asserting that the "World Bank Group focus on governance and anticorruption (GAC) follows from its mandate to reduce poverty — a capable and accountable state creates opportunities for poor people, provides better services, and improves development outcomes."

Because it erodes trust in government, corruption must certainly be condemned and corrupt officials resolutely prosecuted. Corruption also weakens the moral bonds of civil society on which democratic practices and processes rest. But although research suggests it has some bearing on the spread of poverty, corruption is not the principal cause of poverty and economic stagnation, popular opinion notwithstanding.

World Bank and Transparency International data show that the Philippines and China exhibit the same level of corruption, yet China grew by 10.3 percent per year between 1990 and 2000, while the Philippines grew by only 3.3 percent. Moreover, as a recent study by Shaomin Lee and Judy Wu shows, "China is not alone; there are other countries that have relatively high corruption and high growth rates."

Limits of a Hegemonic Narrative

The "corruption-causes-poverty narrative" has become so hegemonic that it has often marginalized policy issues from political discourse. This narrative appeals to the elite and middle class, which dominate the shaping of public opinion. It's also a safe language of political competition among politicians. Political leaders can deploy accusations of corruption against one another for electoral effect without resorting to the destabilizing discourse of class.

Yet this narrative of corruption has increasingly less appeal for the poorer classes. Despite the corruption that marked his reign, Joseph Estrada is running a respectable third in the presidential contest in the Philippines, with solid support among many urban poor communities. But it is perhaps in Thailand where lower classes have most decisively rejected the corruption discourse, which the elites and Bangkok-based middle class deployed to oust Thaksin Shinawatra from the premiership in 2006.

While in power, Thaksin brazenly used his office to enlarge his corporate empire. But the rural masses and urban lower classes — the base of the so-called "Red Shirts" — have ignored this corruption and are fighting to restore his coalition to power. They remember the Thaksin period from 2001 to 2006 as a golden time. Thailand recovered from the Asian financial crisis after Thaksin kicked out the International Monetary Fund (IMF), and the Thai leader promoted expansionary policies with a redistributive dimension, such as cheap universal health care, a one-million-baht development fund for each town, and a moratorium on farmers' servicing of their debt. These policies made a difference in their lives.

Thaksin's Red Shirts are probably right in their implicit assessment that pro-people policies are more decisive than corruption when it comes to addressing poverty. Indeed, in Thailand and elsewhere, clean-cut technocrats have probably been responsible for greater poverty than the most corrupt politicians. The corruption-causes-poverty discourse is no doubt popular with elites and international financial institutions because it serves as a smokescreen for the structural causes of poverty, and stagnation and wrong policy choices of the more transparent technocrats.

The Philippine Case

The case of the Philippines since 1986 illustrates the greater explanatory power of the "wrong-policy narrative" than the corruption narrative. According to an ahistorical narrative, massive corruption suffocated the promise of the post-Marcos democratic republic. In contrast, the wrong-policy narrative locates the key causes of Philippine underdevelopment and poverty in historical events and developments.

The complex of policies that pushed the Philippines into the economic quagmire over the last 30 years can be summed up by a formidable term: structural adjustment. Also known as neoliberal restructuring, it involves prioritizing debt repayment, conservative macroeconomic management, huge cutbacks in government spending, trade and financial liberalization, privatization and deregulation, and export-oriented production. Structural adjustment came to the Philippines courtesy of the World Bank, the IMF, and the World Trade Organization (WTO), but local technocrats and economists internalized and disseminated the doctrine.

Corazon Aquino was personally honest — indeed the epitome of non-corruption — and her contribution to the reestablishment of democracy was indispensable. But her acceptance of the IMF's demand to prioritize debt repayment over development brought about a decade of stagnation and continuing poverty. Interest payments as a percentage of total government expenditures went from 7 percent in 1980 to 28 percent in 1994. Capital expenditures, on the other hand, plunged from 26 percent to 16 percent. Since government is the biggest investor in the Philippines — indeed in any economy — the radical stripping away of capital expenditures helps explain the stagnant 1 percent average yearly growth in gross domestic product in the 1980s, and the 2.3 percent rate in the first half of the 1990s.

In contrast, the Philippines' Southeast Asian neighbors ignored the IMF's prescriptions. They limited debt servicing while ramping up government capital expenditures in support of growth. Not surprisingly, they grew by 6 to 10 percent from 1985 to 1995, attracting massive Japanese investment, while the Philippines barely grew and gained the reputation of a depressed market that repelled investors.

When Aquino's successor, Fidel Ramos, came to power in 1992, the main agenda of his technocrats was to bring down all tariffs to 0–5 percent and bring the Philippines into the WTO and the ASEAN Free Trade Area (AFTA), moves intended to make trade liberalization irreversible. A pick-up in the growth rate in the early years of Ramos sparked hope, but the green shoots were short-lived. Another neoliberal policy, financial liberalization, crushed this early promise. The elimination of foreign exchange controls and speculative investment restrictions attracted billions of dollars from 1993-1997. But this also meant that when panic hit Asian foreign investors in summer 1997, the same lack of capital controls facilitated the stampede of billions of dollars from the country in a few short weeks. This capital flight pushed the economy into recession and stagnation in the next few years.

The administration of the next president, Joseph Estrada, did not reverse course, and under the presidency of Gloria Macapagal Arroyo, neoliberal policies continued to reign. Over the next few years, the Philippine government instituted new liberalization measures on the trade front, entering into free-trade agreements with Japan and China despite clear evidence that trade liberalization was destroying the two pillars of the economy: industry and agriculture. Radical unilateral trade liberalization severely destabilized the Philippine manufacturing sector. The number of textile and garments firms, for instance, drastically reduced from 200 in 1970 to 10 in recent years. As one of Arroyo's finance secretaries admitted, "There's an uneven implementation of trade liberalization, which was to our disadvantage." While he speculated that consumers might have benefited from the tariff liberalization, he acknowledged that "it has killed so many local industries."

As for agriculture, the liberalization of the country's agricultural trade after the country joined the WTO in 1995 transformed the Philippines from a net food-exporting country into a net food-importing country after the mid-1990s. This year the China ASEAN Trade Agreement (CAFTA), negotiated by the Arroyo administration, goes into effect, and the prospect of cheap Chinese produce flooding the Philippines has made Filipino vegetable farmers fatalistic about their survival.

During the long Arroyo reign, the debt-repayment-oriented macroeconomic management policy that came with structural adjustment stifled the economy. With 20-25 percent of the national budget reserved for debt service payments because of the draconian Automatic Appropriations Law, government finances were in a state of permanent and widening deficit, which the administration tried to solve by contracting more loans. Indeed, the Arroyo administration contracted more loans than the previous three administrations combined.

When the deficit reached gargantuan proportions, the government refused to declare a debt moratorium or at least renegotiate debt repayment terms to make them less punitive. At the same time, the administration did not have the political will to force the rich to take the brunt of bridging the deficit, by increasing taxes on their income and improving revenue collection. Under pressure from the IMF, the government levied this burden on the poor and the middle class by adopting an expanded value added tax (EVAT) of 12 percent on purchases. Commercial establishments passed on this tax to poor and middle-class consumers, forcing them to cut back on consumption. This then boomeranged back on small merchants and entrepreneurs in the form of reduced profits, forcing many out of business.

The straitjacket of conservative macroeconomic management, trade and financial liberalization, as well as a subservient debt policy, kept the economy from expanding significantly. As a result, the percentage of the population living in poverty increased from 30 to 33 percent between 2003 and 2006, according to World Bank figures. By 2006, there were more poor people in the Philippines than at any other time in the country's history.

Policy and Poverty in the Third World

The Philippine story is paradigmatic. Many countries in Latin America, Africa, and Asia saw the same story unfold. Taking advantage of the Third World debt crisis, the IMF and the World Bank imposed structural adjustment in over 70 developing countries in the course of the 1980s. Trade liberalization followed adjustment in the 1990s as the WTO, and later rich countries, dragooned developing countries into free-trade agreements.

Because of this trade liberalization, gains in economic growth and poverty reduction posted by developing countries in the 1960s and 1970s had disappeared by the 1980s and 1990s. In practically all structurally adjusted countries, trade liberalization wiped out huge swathes of industry, and countries enjoying a surplus in agricultural trade became deficit countries. By the beginning of the millennium, the number of people living in extreme poverty had increased globally by 28 million from the decade before. The number of poor increased in Latin America and the Caribbean, Central and Eastern Europe, the Arab states, and sub-Saharan Africa. The reduction in the number of the world's poor mainly occurred in China and countries in East Asia, which spurned structural readjustment policies and trade liberalization multilateral institutions and local neoliberal technocrats imposed other developing economies.

China and the rapidly growing newly industrializing countries of East and Southeast Asia, where most of the global reduction in poverty took place, were marked by high degrees of corruption. The decisive difference between their performance and that of countries subjected to structural adjustment was not corruption but economic policy.

Despite its malign effect on democracy and civil society, corruption is not the main cause of poverty. The "anti poverty, anti-corruption" crusades that so enamor the middle classes and the World Bank will not meet the challenge of poverty. Bad economic policies create and entrench poverty. Unless and until we reverse the policies of structural adjustment, trade liberalization, and conservative macroeconomic management, we will not escape the poverty trap.

Walden Bello

Foreign Policy In Focus columnist Walden Bello is senior analyst of the Bangkok-based institute Focus on the Global South and representative of Akbayan (Citizens’ Action Party) in the House of Representatives of the Philippines. He can be reached at waldenbello@yahoo.com.

More in: