Why Tackling Corruption Is Essential for Ending Extreme Poverty

Corruption undermines government policies and institutions crucial for poverty reduction and economic development, jeopardizing the UN’s first Sustainable Development Goal of eradicating extreme poverty by 2030. In a new CGD policy paper, we review the diverse channels through which corruption impedes inclusive growth and outline reforms to reduce it.

Corruption’s toll

Corruption hurts efforts to reduce poverty and inequality through five main channels:

1. Corruption distorts the composition of expenditure and lowers the quality of public services

Corruption diverts resources away from essential services by favoring spending that is more susceptible to rent-seeking, such as defense. Countries with stronger control of corruption allocate a higher share of spending to social sectors in emerging market and low-income countries. In many low-income countries, persistent corruption has limited gains in social spending, despite debt relief and increased borrowing.

Corruption deprioritizes non-wage operations and maintenance expenditures, such as those for books and medicines, undermining service quality. It undermines government programs designed to provide affordable goods to the poor, often causing shortages as intermediaries siphon off the subsidized goods to resell in open markets.

In the areas of health and education, corruption is associated with higher child and infant mortality rates, a greater incidence of low-birthweight babies, and higher dropout rates in primary schools. Corruption compromises the quality of education, as reflected in low test scores on international examinations, potentially due to bribery in hiring teachers. Moreover, corruption raises the costs of education and health services through unofficial charges, discouraging the poor from using the services.

Corruption leads to the selection of low-quality investment projects with inflated costs, including those related to bribes for public officials. Countries in the top 25 percent in the controlling corruption index waste half as much public resources through inefficient public investment as those in the bottom 25 percent. The Control of Corruption Index provides a relative measure of perceived corruption that ranges from –2.5 (high corruption) to 2.5 (low corruption). Corruption also reduces the redistributive impact of fiscal policies, such as government transfer programs and income taxation.

2. Corruption exacerbates income and wealth inequality by creating rents for the well-connected, who are typically among the higher-income groups

Corruption limits competition in government procurement, enabling those with influence to secure a larger share of government contracts and earn disproportionately larger profits. Corruption is linked to unequal access to land distribution, which worsens inequalities in earnings from both labor and non-labor sources. These dynamics grant unfair advantages to the wealthy, preventing lower-income groups from fully participating in the economy.

3. Corruption undermines tax collection, impairing the government’s ability to finance social programs critical for achieving equitable growth

A one-third standard deviation improvement in the control of corruption index is associated with a 1.2 percentage point increase in government revenues as a share of GDP. Globally, reducing corruption could boost tax revenues by approximately 1.25 percent of global GDP, equivalent to $1 trillion.

4. Corruption’s dual effect of reducing revenue and increasing public spending creates persistent fiscal imbalances and high levels of public debt

As a result, fiscal space for effective policy interventions and crisis management becomes severely constrained. Reform efforts targeting tax and expenditure systems are frequently undermined by entrenched corruption, leaving these countries ill-prepared to stabilize their economies during crises or recessions. Countries with relatively weak institutions—as reflected in higher levels of corruption—tend to default more often.

5. Corruption fosters social unrest and conflict, particularly in resource-rich countries where competition for valuable assets is intense

Perceptions of leaders enriching themselves at the public’s expense breed resentment and grievances, often escalating into protests, strikes, or violent unrest. Such instability disproportionately affects the poor.

A blueprint for reform

Policymakers can pursue five major avenues to reduce corruption:

Improve fiscal transparency

By granting the public access to information about government decisions and financial transactions, transparency deters illicit behavior and enhances accountability. This is particularly important in areas such as fiscal and monetary policy and financial sector regulation, where opaque practices can create opportunities for corruption., There is substantial country-level evidence indicating that increased transparency—through mechanisms such as right to information or freedom of information laws—can significantly reduce corruption and enhance service delivery, as has been the case in Mexico and Ukraine.

Enforce strong anticorruption laws and streamline regulations

Effective prosecution of even a small number of high-ranking officials can send a powerful message and set a transformative example. However, in countries where corruption is deeply entrenched, the primary challenge lies in the integrity of the very institutions tasked with enforcing the law. Investigative agencies, the police, prosecutors, and the judiciary are often themselves compromised or subject to undue influence from powerful interests. To address these challenges, streamlining regulations and minimizing the discretion of officials are essential steps.

Strengthen budget processes and public financial management

Well-structured budget processes encompassing formulation, execution, and reporting are critical to minimizing opportunities for corruption. Unchecked discretion by the executive or legislature during budget formulation can create significant opportunities for corruption. To mitigate this, the coverage of expenditures and revenues in the budget must be comprehensive. Clear budget classifications and transparent budget documents ensure accurate reporting. Governments must publish pre-budget statements, budget proposals, and detailed documentation explaining revenue and expenditure projections. Sound cash management and robust internal controls over payroll and other expenditures are crucial during budget execution. Integrated Financial Management Information Systems and e-procurement platforms enhance efficiency, minimize human intervention, and reduce corruption risks. Transparent and competitive bidding processes, supported by digital procurement systems, can help reduce favoritism and collusion. Rigorous audits conducted by supreme audit institutions can uncover irregularities and evaluate efficiency. Making audit reports and financial statements publicly available fosters transparency and encourages public oversight.

Use digital technologies

These offer powerful tools for combating corruption, particularly in administering social programs, tax collection, and public service delivery. Digital technologies enhance transparency, streamline service delivery, and reduce opportunities for rent-seeking. By automating processes and maintaining digital records, the discretion of public officials is curtailed, face-to-face interactions are minimized, and tracking public fund usage becomes easier. Digitalization has a transformative role in public financial management, enabling governments to improve efficiency, transparency, and accountability. Blockchain technology, for instance, can create immutable and transparent records of public spending, ensuring funds are allocated as intended. Establishing and maintaining digital platforms require significant investments in technology, infrastructure, and training.

Strengthen international cooperation

Corruption often transcends national borders, with bribe recipients exploiting the opacity and secrecy of international financial centers to conceal illicit proceeds. This underscores the need for international cooperation as a cornerstone of anticorruption efforts and the development of stronger institutions. Encouragingly, an increasing number of countries, particularly OECD members, have followed the lead of the US Foreign Corrupt Practices Act (FCPA), which criminalizes the payment of bribes by US firms to secure business abroad. By setting a precedent, the FCPA has motivated similar legislation worldwide, including the UK Bribery Act and laws in other major economies. Additionally, coordinated international initiatives, such as the OECD Anti-Bribery Convention, have facilitated collective action against cross-border corruption.

In sum, a multifaceted approach will be needed to mitigate the adverse effects of corruption. The first step is enhancing transparency in government operations, particularly in budgeting processes, as greater budget transparency is strongly linked to lower corruption levels. The use of digital technologies can further improve budgetary outcomes by reducing government discretion, minimizing leakages, and improving the administration of government benefits and programs. However, these technological solutions must be supported by robust anticorruption frameworks and effective enforcement mechanisms—a domain where many countries continue to fall short.

While we know much about how to address corruption, there is scope for further research to help refine country strategies for moving forward. In particular, there is a need to understand the slow progress in strengthening countries’ budget processes and public financial management systems, despite decades of capacity-building assistance from international partners. Further study is also needed to provide a more granular understanding of specific fiscal institutions (such as anticorruption units) and their impact on corruption.

This blog post is based on a CGD paper forthcoming as a chapter in Corruption and the Sustainable Development Goals, edited by Robert Gillanders and Chandan Kumar Jha, Routledge.