Economies plagued by a significant degree of corruption, characterized by the abuse of power through financial or authoritative means to attain specific objectives in unlawful, deceitful, or unjust manners, lack the ability to thrive as effectively as those with minimal corruption. Corrupt economies face hindrances in their proper functioning as corruption obstructs the unhindered operation of natural economic laws. Consequently, when corruption infiltrates a nation's political and economic systems, the entire society endures the consequences indicated below.

Elevated costs for subpar quality

Corruption in the way deals are made, contracts are awarded, or economic operations are carried out, leads to monopolies or oligopolies in the economy. Those business owners who can use their connections or money to bribe government officials can manipulate policies and market mechanisms to ensure they are the sole provider of goods or services in the market. Monopolists, because they do not have to compete against alternative providers, tend to keep their prices high and are not compelled to improve the quality of goods or services they provide by market forces that would have been in operation if they had significant competition. Embedded in those high prices are also the illegal costs of the corrupt transactions that were necessary to create such a monopoly. If, for example, a home construction company had to pay bribes to officials to be granted licenses for operations, these costs incurred will, of course, be reflected in artificially high housing prices.

Inefficiently Allocated Resources

In best practice, companies choose their suppliers via tender processes (requests for tender or requests for proposal), which serve as mechanisms to enable the selection of suppliers offering the best combination of price and quality. This ensures the efficient allocation of resources. In corrupted economies, the companies that otherwise would not be qualified to win the tenders are often awarded projects as a result of unfair or illegal tenders (e.g., tenders that involve kickbacks). This results in excessive expenditure in the execution of projects and substandard or failed projects, leading to overall inefficiency in the use of resources. Public procurement is perhaps most vulnerable to fraud and corruption due to the large size of financial flows involved. It’s estimated that in most countries, public procurement constitutes between 15% and 45% of gross domestic product (GDP).

Unequal Wealth Distribution

Corrupt economies exhibit a skewed distribution of wealth, with a small middle class and a significant gap between the living standards of the upper and lower classes. The concentration of capital in the hands of oligarchs or individuals who support corrupt public officials leads to the majority of wealth being funneled to these individuals.

Limited Incentive for Innovation

In corrupt economies, the lack of confidence in the legal system allows for potential innovators to be uncertain about the protection of their inventions through patents. This uncertainty, coupled with the ability of individuals to bribe authorities to get away with copying innovations, creates a disincentive for innovation. Consequently, emerging countries often rely on importing technology rather than developing it domestically.

A Shadow Economy Persists

In nations with high levels of corruption, small businesses often choose not to register officially with tax authorities to evade taxes. Consequently, the revenue generated by many businesses operates outside the formal economy, escaping state taxation and remaining unaccounted for in the country's GDP calculations. Another drawback of shadow businesses is their tendency to pay employees below the government-mandated minimum wage. Additionally, they fail to provide adequate working conditions, such as proper health insurance benefits for their workers.

Limited Foreign Investment and Trade

Corruption serves as a deterrent to foreign investment. Investors seeking a transparent and competitive business environment are likely to steer clear of countries with rampant corruption. While emerging markets continue to attract investment, investors are understandably cautious about risking their capital in countries known for high levels of corruption. Research indicates a direct correlation between a country's corruption levels and the competitiveness of its business environment.

Inadequate Education and Healthcare

A working paper from the International Monetary Fund (IMF) highlights the detrimental impact of corruption on the quality of education and healthcare in emerging economies. Corruption raises the cost of education in countries where bribery and nepotism influence the recruitment and advancement of teachers. Consequently, the quality of education suffers, ultimately impacting the overall health of the economy.

The main point is that corruption in emerging economies affects the overall development of many countries. This inefficiency in resource allocation, the existence of a shadow economy, and poor education and healthcare quality impact the entire society. Consequently, corruption leads to a decline in living standards for the majority of the population.