These days, one could argue that we are experiencing a paradigm shift in understanding growth. Economics academics are increasingly viewing growth through political, historical and institutional lenses more than ever, with successive Nobel laureates being awarded for their works in economic history. These works examine growth not only mechanically but also by modeling it through perspectives of political economy and history.
These studies emphasize the relationship between sustained growth and inclusive institutions, a fair competitive environment, and the distribution of political power or the form of democracy (Acemoğlu et al. 2001). They also point to the need for institutions to be mechanisms that enhance mobility, openness, and competitiveness. They predict that this will lead to the economy's sustained growth through creative destruction, whereby it recreates itself with different actors and innovations (Aghion and Howitt 2008).
Moreover, there is one underlying common remark emphasized in both of these Nobel Prize-winning studies: corruption as an obstacle to sustained growth, for hindering the aforementioned requisites such as fair competition and openness, and reducing mobility and meritocracy.
Viewing through a macro lens: what does the data tell us?
Econometric evidence shows the relation between corruption and income inequality through a macro lens. From the work of Gupta et al. (2002), their results indicate that one standard deviation increase in corruption corresponds to an increase of eleven points in income inequality. With bigger data, looking at the cross-country analysis in Jong-Sung and Khagram's (2005) study of 129 countries, they also find that there exists a relation in the opposite direction; one standard deviation reduction in inequality leads to a two-thirds standard deviation reduction in corruption, ceteris paribus (Sulemana and Kpienbaareh 2018).
To understand this relation, Uslaner's framework is very useful: he says not all corruption is linked to inequality but corruption by its nature is exploitative and especially when it is organized through grand mechanisms including richer people in big businesses and political actors, it is the poorer who deal with the cost of their exploitatively generated payoff (Uslaner 2009).
Economists are not all on the same page when it comes to explaining the dynamics of the relationship between inequality and corruption. As both inequality and corruption are related to many factors themselves, it is often tricky to capture the correlation. While some argue that corruption is one of the effectors of inequality, others argue that the causal link is the other way around.
Thus, the bidirectional relationship between these two is evident, but when understanding corruption and through which factors it is generated, inequality is not the only thing to look at. Corruption is not merely economic, but is linked to various factors as both affectors and determinants of it — for example the country's performance and status as a developed or developing economy, or its governance style; authoritarian or democratic regimes can show varying and even contradicting evidence.
In their study, Samadi and Farahmandpour show a relation from urbanization (negatively correlated) to unemployment (positively correlated) (Samadi and Farahmandpour 2013), alongside education and various laws — there are a variety of components to look at. However, they argue that economic freedom and inequality remain the two biggest factors. So they argue that in order to fight corruption, inequalities should be fought and the economy should be liberated.
How can one escape?
While this ongoing debate converts to the age-old dilemma of "the chicken or the egg", some studies highlight that the relation may be bidirectional (Policardo and Carrera, 2018). This idea of bidirectional relation reinforces Uslaner's "inequality trap" argument where he claims there forms a vicious cycle from inequality to low trust, to corruption, and back again both to low trust and greater inequality — thus the "inequality trap".
Commonly as Acemoglu et al. (2001) highlights, corruption can be explained through trust, institutions and law. While Uslaner (2009) sees the importance of law, he opposes this idea by drawing attention to economic inequality and the mistrusting culture as a product of it. This difference in reasoning is important for understanding how to avoid corruption. In the case of Acemoğlu, the solution is straightforward: developing fair and open institutions for all. For Uslaner, corruption is rather sticky for two reasons: overcoming systemic inequality is a long process, changing expectations and judgements of societies about institutions and culture is harder than changing the institutions themselves.
Need to look at regional and local evidence
Macro theories might be misleading or provide so little information of the bigger picture, particularly because of the importance of culture and societal perceptions in the matter of corruption. That's why it would be more useful to run regional or country-based case studies with intra-disciplinary methods to reveal the interaction of local dynamics of culture, forms of government and institutional heritage. These do not show only how corruption is generated but also how it is related to inequality. While data for developed countries show that higher inequality leads to higher corruption, a study conducted in Sub-Saharan Africa shows that higher income inequalities lead to lower corruption levels. But higher corruption does lead to higher inequality (Sulemana and Kpienbaareh 2018). Similarly, looking at studies conducted in Latin America, the picture is very different due to the dominant informal sector influence in economic and social spheres.
In their study, Dobson and Dobson (2009) find that there is a trade-off between inequality and corruption which is not observed in formally regulated developed economies. This evidence from the Global South highlights another form of inequality more visible: the difference between global south and the north. Thus, from the example of corruption and the nature of its relationship to inequalities we go back to a very similar position as the Nobel Laureates insist — integrating various factors into the equation such as culture, law-making, institutions etc. but also highlighting the importance of rendering the relation of local to global dynamics. Overall, this calls for a more regional lens in viewing and understanding inequality.
Bibliography
Acemoglu, Daron, Simon Johnson, and James A. Robinson. 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation." American Economic Review 91 (5): 1369–1401.
Aghion, Philippe, and Peter W. Howitt. 2008. The Economics of Growth. Cambridge, MA: MIT Press.
Gupta, Sanjeev, Hamid Davoodi, and Rosa Alonso-Terme. 2002. "Does Corruption Affect Income Inequality and Poverty?" Economics of Governance 3 (1): 23–45.
Jong-Sung, You, and Sanjeev Khagram. 2005. "A Comparative Study of Inequality and Corruption." American Sociological Review 70 (1): 136–57.
Policardo, Laura, and Edgar J. Sánchez Carrera. 2018. "Corruption Causes Inequality, or Is It the Other Way Around? An Empirical Investigation for a Panel of Countries." Economic Analysis and Policy 59: 92–102.
Samadi, Ali Hussein, and Bahare Farahmandpour. 2013. "The Effect of Income Inequality on Corruption in Selected Countries (1995–2007)." Journal of Emerging Issues in Economics, Finance and Banking 1 (3): 214–31.
Sulemana, Iddisah, and Daniel Kpienbaareh. 2018. "An Empirical Examination of the Relationship between Income Inequality and Corruption in Africa." Economic Analysis and Policy 60: 27–42.
Uslaner, Eric M. 2009. "Corruption, Inequality, and Trust." In The Handbook on Social Capital, edited by G. T. Svendsen and G. L. H. Svendsen, 127–43. London: Edward Elgar.