Does corruption create poverty?
By Walden Bello*
From Common Dreams, April 23, 2010
The issue of corruption is a very resonant one 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.” (1)
There is no doubt that corruption is to be condemned and corrupt
officials resolutely prosecuted because it erodes trust in government.
It also weakens the moral bonds of civil society on which democratic
practices and processes rest. But while research suggests that
corruption has some bearing on the spread of poverty, the claim that
corruption is the principal cause of poverty and economic stagnation,
although popular with voters, is questionable.
World Bank and Transparency International data show that the
Philippines and China exhibit the same level of corruption, yet China
grew by 10.3 per cent per annum between 1990 and 2000 while the
Philippines grew by only 3.3 per cent. 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.”
(2)
Limits of a Hegemonic Narrative
The “corruption-causes-poverty narrative” has become so hegemonic that
it has often marginalized policy issues from political discourse. One
key reason is that it appeals to the elite and middle class, which
dominate the articulation of public opinion. It is also a safe
language of political competition among politicians, that is, one that
they can deploy for electoral effect against one another without
arousing the destabilizing effects of a discourse based on class.
Yet it is a discourse that has increasingly less appeal to 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 the lower classes have rejected most
decisively 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 and are fighting
to restore his coalition to power. The reason is that they remember
the Thaksin period from 2001 to 2006 as one where Thailand recovered
from the Asian financial crisis owing to Thaksin’s kicking out the
International Monetary Fund (IMF) and his promotion of 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 when it comes to addressing poverty, pro-people policies are more
decisive than corruption. Indeed, in Thailand and elsewhere, clean-cut
technocrats have probably been responsible for greater poverty than the
most corrupt politicians. And one suspects that one of the reasons the
corruption-causes-poverty discourse is so popular with the elites and
the international financial institutions is that it serves as a
smokescreen for the structural causes of poverty and stagnation and for
wrong policy choices.
Bad Policies and Poverty: the Philippine Case
The case of the Philippines since 1986 is illustrative of the greater
explanatory power of the “wrong-policy narrative” than the corruption
narrative. In contrast to an ahistorical narrative that sees massive
corruption as having suffocated the promise of the post-Marcos
democratic republic, the wrong-policy narrative locates the key causes
of Philippine underdevelopment and poverty in historical events and
developments.
The complex of policies that have pushed the Philippines into the
economic quagmire over the last 30 years might be summed up in that
formidable term: structural adjustment. Also known as neoliberal
restructuring, it involved prioritization of debt repayment;
conservative macroeconomic management involving 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,
International Monetary Fund, and the World Trade Organization, but it
was internalized and disseminated as doctrine by local technocrats and
economists.
Corazon Aquino was personally honest—indeed the epitome of
non-corruption--and her contribution to the reestablishment of
democracy was indispensable, but her submitting to the International
Monetary Fund's (IMF) 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 per cent in 1980 to 28 per cent in 1994.
Capital expenditures, on the other hand, plunged from 26 per cent to 16
per cent. Since government is the biggest investor in the
Philippines—indeed in any economy—the radical stripping away of capital
expenditures goes a long way toward explaining the stagnant one per
cent average yearly growth in gross domestic product in the 1980’s and
the 2.3 per cent rate in the first half of the 1990’s.
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 per cent 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 to 5 per
cent and bring the Philippines into the World Trade Organization and
the Asean Free Trade Area (AFTA), moves that were 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 more
apparent than real, and they were, at any rate, crushed as a result of
another neoliberal policy: financial liberalization. The elimination
of foreign exchange controls and restrictions of speculative investment
attracted billions of dollars in the period 1993-1997. But this also
meant that when panic hit the ranks of foreign investors in Asia in the
summer of 1997, the same lack of capital controls facilitated the
stampede of billions of dollars from the country in a few short weeks
in mid-1997. This 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. New liberalization initiatives
in the next few years were initiated on the trade front, with the
government negotiating free trade agreements with Japan and China.
These pacts were entered into despite clear evidence that trade
liberalization was destroying the two pillars of the economy, industry
and agriculture.
Radical unilateral trade liberalization severely destabilized the
Philippines’ manufacturing sector, with textile and garments firms, for
instance, being 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 World Trade Organization in 1995
transformed the Philippines from a net food exporting country and
consolidated it into a net food importing country after the
mid-1990’s. The year 2010 is the year that the China ASEAN Trade
Agreement (CAFTA) negotiated by the Arroyo administration goes into
effect, and the prospect of cheap Chinese produce flooding Philippines
markets has made Filipino vegetable farmers fatalistic about their
survival.
What likewise became clear during the long Arroyo reign were the
stifling effects of the debt repayment-oriented macroeconomic
management policy that came with structural adjustment. With 20-25 per
cent of the national budget reserved for debt service payments owing to
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 take the necessary steps to contain the key factor acting as the
main drain on expenditures; that is, it refused to declare a debt
moratorium or at least renegotiate the terms of debt repayment 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 their
collection. Under pressure from the IMF, the government levied this
burden on the poor and the middle class via the adoption of the
expanded value added tax (EVAT) of 12 per cent on purchases. The tax
was passed on to poor and middle class consumers by commercial
establishments, forcing them to cut back on consumption, which 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, and a subservient debt policy kept the
economy from expanding significantly, resulting in the percentage of
the population living in poverty increasing from 30 to 33 per cent
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
1980’s. Trade liberalization followed adjustment in the 1990’s as
developing countries were dragooned into the World Trade Organization
and later into free trade agreements with rich countries.
The results:
- The gains in economic growth and poverty reduction posted by the
developing countries in the 60’s and 70’s were wiped out in the 80’s
and 90’s.
- In practically all structurally adjusted countries, huge swathes of
industry were wiped out by trade liberalization, and countries enjoying
a surplus in agricultural trade were turned into and consolidated into
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 word’s poor mainly occurred
in China and those countries of East Asia that spurned the policies of
structural adjustment and trade liberalization that were imposed on the
Philippines and other developing economies by the multilateral
institutions and local neoliberal technocrats.
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, so it is inescapable
that what made the decisive difference between their performance and
that of countries that were subjected to structural adjustment was
economic policy.
Corruption erodes the credibility of government and weakens the moral
bonds pm which democratic governance rests. That is why it must be
denounced and corrupt officials must be resolutely prosecuted. But
corruption is not the main cause of poverty, and challenge of poverty
will not be met by the “anti poverty, anti-corruption” crusades that so
enamor the middle classes and the World Bank. Bad economic policies
create and entrench poverty, and unless the policies of structural
adjustment, trade liberalization, and conservative macroeconomic
management are reversed, there is no escaping the poverty trap.
1) Guiding Principles for Strengthening World Bank Group Engagement on Governance and Anticorruption
2) www.informaworld.com; DOI:10.1080/09692290802577446
*FPIF columnist Walden Bello is representative of the party-list
Akbayan in the Philippine House of Representatives. He can be
contacted at waldenbello@yahoo.com
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