occurred in countries that are anomalously corrupt. This section examines some of the ways – less dramatic but not necessarily less damaging – in which corruption corrodes the foundations of a stable society and economy.

# **_Impact on public finances_**

Corruption undermines government revenue and, therefore, limits the ability of the government to invest in productivity-enhancing areas, such as education, infrastructure and health. Not surprisingly, where corruption is endemic, individuals and citizens will view paying taxes as a questionable business proposition, often a way to indulge the government in some of its worst excesses. There is always a delicate tension between the government in its role as tax collector and the business community and individuals in their roles as tax payers. The system works reasonably well and the budget becomes an important mechanism of distribution when those who pay taxes feel that there is a good chance that they will see a future payoff, in terms of improvements in the country’s infrastructure, enhanced services, better schools and a bettertrained and healthier workforce, and so on. Corruption sabotages this implicit contract.

When government officials allow corruption to flourish they contribute to the creation of an environment in which those who pay taxes are either morally outraged at having to do so or, more likely, feel entirely justified in finding creative ways to avoid paying them or, worse, become bribers themselves. In some cases, lobbying and influence-peddling become relatively attractive alternatives to paying all taxes due, a natural response to the signal sent to the private sector by government bureaucrats or legislators: “we are for sale.” To the extent that corruption undermines revenue, it adversely affects government efforts to reduce poverty. According to the World Bank (2012) in 2010 (the latest year for which figures are available), there were 1,274 million people living on less than $1.25/day, the definition of extreme poverty. There were 2,472 million living on less than $2.00/day, equivalent to 41 percent of the population of the developing countries. Moneys that leak out of the budget because of corruption are moneys that will not be available to lighten the burden of the poor; bribery thus interferes with the fulfillment of basic human needs. Of course, corruption also undermines the case of those who argue that foreign aid can be an important element of the fight against global poverty—why should taxpayers in the rich countries be asked to support the lavish lifestyles of the kleptocrats in failing states?

Corruption, as we shall see below, distorts public investment and boosts overall spending, leading, other things being equal, to a larger government deficit than would otherwise be the case. A larger deficit will generally mean a larger accumulation of public debt, higher debtservice payments and, inevitably, constraints on other areas of expenditure which could more directly contribute to improved productivity and growth. So, corruption, by undermining revenue, increasing the effective tax burden and boosting expenditure is highly damaging to the public finances. Or, to put it in another way: when corruption depresses revenues, governments will be forced—to sustain a given level of expenditure—to increase tax rates and/or to forego the benefits of programs which cannot be financed because of lack of resources. Often, because they 19