Corruption can be defined as ‘dishonest or fraudulent conduct by those in power, typically involving bribery’. Corruption is notoriously hard to measure due to the difficulty of categorising the effectiveness of a government and due to most corruption happening under the radar. However, there are economic signs that can expose certain corrupt practices and the effects are often detrimental to society. The main consequence is a reduction in economic growth, followed by a decrease in development and society suffering from these economic consequences. However, corruption can also lead to countries being denied aid or membership from multilateral institutions, leading to countries spiralling as they attempt to deal with the consequences of corruption themselves.

Due to corruption, economic growth tends to slow down as a result of many different factors. To begin with, the most common form of corruption within governments is valuable tax revenue and (most prominent in developing countries) foreign aid, being misused. This may be government officials misusing such funds for their own personal purposes or funding of “good causes” which benefit enterprises of their family members or friends (e.g. using government funds to buy expensive Covid protective face-masks provided at a very high price by a company affiliated with sibling of the health minister). This may mean that due to excessive spending or merely money being misappropriated, this can lead to a large budget deficit. Underinvestment into areas that would otherwise spur growth, will occur. This includes a lack  of money going towards the building of new infrastructure such as new roads, airports, fibre optic cables.  To combat this underfunding, taxes may have to rise significantly and lack of public funding may result in slowdown in any public sector wage increases. This in turn can lead to public having less disposable income and consuming less which then reduces the real GDP and leads to a general reduction in economic growth. Furthermore, other than for misuse of public funds, bribery can also occur within large investment projects and public private partnerships, leading to low quality outcomes and public services worsening. With less provision / lower quality of public sector goods such as healthcare, people tend to suffer further. For the example of healthcare, lower quality healthcare leads to people staying ill for longer so they take longer periods of time off work or are less productive if they do continue to work. This results in a reduction in output and thus real GDP, causing less economic growth.

Can corruption be ever solved? One possible solution is through more policies with the aim of stabilisation, deregulation and liberalisation. Corrupt governments tend to fail to do so and thus rent-seeking behaviour, one of the major causes of corruption, is rife. Protectionist measures are often implemented to increase the growth of the country but can have the opposite effect if championed by a corrupt government. Tariffs and subsidies created to aid struggling domestic markets may not be correctly set due to firms lobbying the government to create policies that are in their self interest, this process is known as regulatory capture. Bribes from business owners as well as other lobbying groups may lead to certain firms benefiting more than others, monopolies occurring and anti-competitive behaviour becoming common. This is especially the case if there is an absence of regulatory bodies such as the Competition Market Authorities. This negatively benefits consumers who may be exploited. In addition, such corrupt behaviour within the government can lead to less trade with other countries. These countries may realise that the  the domestic firms are also participating in corrupt practices, so the domestic country exports less which  worsening the current account. This is especially detrimental to developing countries that tend to be export led countries and despite tariffs preventing imports from increasing, a reduction in exports would still hinder economic growth.

Finally, corruption can also have an adverse effect on the country's reputation internationally, which can create many negative economic consequences. The UN and other multilateral institutions such as the IMF, have the aims of ensuring countries remain economically and socially prosperous and peaceful thus they do attempt to aid countries that have corrupt governments however the extent to which they are successful can be debated. Corruption can often lead to countries defaulting on their debt such as the likes of Zambia and Sri Lanka. If this does occur and the country wishes to receive aid from the IMF, due to their corrupt nature, the IMF may give them a list of changes to make within their economy in order to be eligible to receive the aid. These ‘demands’ are often discretionary fiscal changes such as increased taxation and a reduction in spending in certain areas with the aim of increasing the foreign reserves of these countries so they are able to have a more sustainable debt level. However, this can also lead to wider negative implications for society and often the large impact corruption has had on society such as an increase in absolute poverty, is worsened and not solved. This can also lead to public uproar due to the standard of living deteriorating and being neglected. Protests such as those in Kenya that occurred due to the cuts in government spending by the president to gain access to 3 billion US dollars worth of bail-out from the IMF. Evidently, corruption can lead to many wider societal as well as economic issues for a country due to the way that other countries and institutions treat them. External groups do have positive intentions of ensuring economic stability and eradicating corruption within the country however this does not come without an opportunity cost. 

Overall, kleptocratic governments have a great negative effect on the economy with negative economic growth occurring, stagnant development and poverty increasing which creates a low standard of living for the people and makes the country overall poorer. The effect that corruption may have on an economy does depend upon the scale of corruption within the country. If there was a small number of ministers mis-embezzling government funds in a developing country, this may merely result in a small scale scandal that does not effect a large proportion of the wider population. The culprits are likely to be fined and then fired as the overarching government is not corrupt, so the wider negative impact on society and the economy can be prevented. However, if the country is developing , with its leader being the most corrupt individual in the country, having a great influence on those who work for him, then the economic effects are likely to be drastic. This is because the country is likely to struggle to overcome these issues as the people in power believe what they are doing is right. The cycle of corruption can be hard to combat with successive leaders being driven by the desire to steal as much power they can when they are the leader. With a poor economic situation in the country, the people begin to believe that honest behaviour is much less profitable than a dishonest behaviour, so corruption continues.

References:

https://www.imf.org/external/pubs/ft/issues6/

https://www.economist.com/finance-and-economics/2024/09/12/the-imf-has-a-protest-problem