Corruption and Poverty
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(1995) also shows the negative impact of corruption on investment and thereby on growth. Pak (2001) estimates that a 1 percent increase in corruption could reduce the growth rate (through the investment channel) by about 0.72 percent, which translates to about 21.4 percent of the effect of corruption on growth. In a recent IMF book titled Governance, Corruption, and Economic Performance, edited by Abed and Gupta (2002), cross-country analysis shows that high-corruption countries have lower tax revenues, lower per capita income, a higher incidence of poverty, and worse social indicators than low-corruption countries. The book further illustrates that corruption and rent-seeking behavior affect both the expenditure and revenue sides of the budget. By using cross-sectional data, Mauro (2002) shows that corruption is negatively associated with government expenditure on education. An increase in corruption by one unit (on a scale of 0 to 10) lowers the ratio of public spending on education by 0.2 percent of GDP. Corruption, therefore, could lead to a suboptimal composition of government expenditure. The reason for this is that education programs are less prone to rent seeking. Gupta, Davoodi, and Tiongson (2002) show that a high level of corruption has adverse consequences for a country’s child and infant mortality rates, the percentage of low-birthweight babies in total births, and primary school dropout rates. For example, an increase in corruption by one unit (on a scale of 0 to 10) raises the child mortality rate on average by 1.1 to 2.7 deaths per 1,000 live births. These results are consistent with predictions stemming from theoretical models and service-delivery surveys. An important implication of the results is that improvements in health and education outcomes do not necessarily require higher public spending, but rather better control over existing resources that are being diverted through corrupt channels. Tanzi and Davoodi (2002) provide further evidence on how corruption leads to allocations in favor of less-productive investment projects and against nonwage operations and maintenance expenditures, such as books and medicines, thereby reducing the quality and productivity of existing infrastructure. Corruption affects other types of public spending as well. Gupta, de Mello, and Sharan (2002) show that corruption is associated with higher military spending as a share of both GDP and total government spending, as well as with arms procurement in relation to the GDP and total government spending. Military spending is a monopoly of the state, and contracts are often drawn up in secret, with authorities exercising