As World Bank Director of the Global Indicators Group in DEC, Dr. Augusto Lopez-Claros has spent more than 30 years in the fields of public policy and economic research. Prior to his sabbatical from the World Bank, Dr. Augusto Lopez-Claros delivered a lecture at the George Washington University School of Business (GWSB) in 2017 on the topic of sustainable economic development and corruption.

In his lecture he pointed to some of the reasons why corruption is such a destroyer of human prosperity. He referred to empirical evidence showing that corruption undermines government revenue and, therefore, limits the ability of the government to invest in productivity-enhancing areas. Where corruption is endemic, individuals will view paying taxes as a questionable business proposition. When corruption is allowed to flourish, taxpayers will feel justified in finding creative ways to avoid paying taxes or, worse, become bribers themselves.

Second, there is solid evidence that the higher the level of corruption in a country, the larger the share of its economic activity that will go underground, beyond the reach of the tax authorities. Third, corruption discourages private-sector development and innovation and encourages inefficiency. Budding entrepreneurs with bright ideas will be intimidated by the bureaucratic obstacles, financial costs and psychological burdens of starting new business ventures and will either opt for taking their ideas to some other less corrupt country or, more likely, desist altogether. In either case, economic growth is adversely affected. Corruption lowers investment and, hence, economic growth.

Fourth, corruption has disturbing distributional implications. Empirical work shows that corruption actually contributes to worsening income distribution. By lowering economic growth, corruption perceptibly pushes up income inequality. It also distorts the tax system because the wealthy and powerful are able to use their connections to make sure that the tax system works in their favor.

Fifth, corruption creates uncertainty. There are no enforceable property rights emanating from a transaction involving bribery. The firm that obtains a concession from a bureaucrat as a result of bribery cannot know with certainty how long the benefit will last. The terms of the “contract” may have to be constantly renegotiated to extend the life of the benefit or to prevent its collapse. In an uncertain environment with insecure property rights, the firm will be less willing to invest and to plan for the longer-term. A short-term focus to maximize short-term profits will be the optimal strategy, whatever the cost.

This uncertainty is partly responsible for a perversion in the sorts of incentives that prompt individuals to want to seek public office. Where corruption is rife, politicians will want to remain in office as long as possible, not because they are even remotely serving the public good, but merely because they will not want to yield to others the pecuniary benefits of high office. Where long stays in office are no longer an option, then the new government will want to steal as much as possible as quickly as possible, given a relatively short window of opportunity.