Wednesday, June 6, 2012

Poor countries lose $1.4T to corruption in 2008

Corruption, which always takes place in poorer countries, has hurt economic performance by reducing private investments, by adversely affecting the quantity and quality of public infrastructure, by reducing tax revenue, by resulting in a shallower and less efficient financial system, and by reducing human capital formation, says a 2011 report by the Paris-based Financial Action Task Force.

In its report titled "Laundering the Proceeds of Corruption," the task force claimed that corruption can also have adverse distributional effects as it hurts the poor disproportionately, adding that countries with high levels of corruption achieve lower literacy rates, higher mortality rates, and overall have worsen human development outcomes.

The task force estimated that between USD 1.26 trillion to USD 1.44 trillion disappeared from the national coffers of poorer countries in 2008 due to corruption. "These numbers have increased and corruption plays a significant role in the illicit financial flows", it added. As a consequence of capital flight, scarce resources are diverted away from domestic investment and other productive activities due to corruption.

The FATF further said that the most prominent economic effect of corruption seems to be diversion of money from the government budget to expenses with lower multiplier effects. "If money that is meant as an investment in economic development or poverty relief is diverted as result of embezzlement or other forms of public corruption towards private spending – it will in most cases incur a transfer towards expenditures with a lower multiplier effect, such as imported Hummers, instead of medicines for the hospitals, or foreign fittings in newly built middle-class city mansions instead of school materials."

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