## The Cost Of Corruption ## Source details **Canonical URL:** [The Cost Of Corruption](https://www.imf.org/-/media/files/publications/fandd/article/2019/september/the-true-cost-of-global-corruption-mauro.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2019/september/the-true-cost-of-global-corruption-mauro.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2019/september/the-true-cost-of-global-corruption-mauro.pdf.json) --- ### Economic and social costs - Corruption, defined as the abuse of public office for private gain, distorts state activities and undermines sustainable and inclusive growth. - Costs extend beyond lost money to distortions in spending priorities that drain resources away from education, health care, and effective infrastructure, reducing economic performance and living standards. ### Fiscal impact and revenue losses - The least corrupt governments collect 4 percent of GDP more in taxes than those at the same level of economic development with the highest levels of corruption. - If all countries reduced corruption in a manner similar to progress seen in some countries over the past two decades, they could gain $1 trillion in lost tax revenues, or 1.25 percent of global GDP. - Corruption reduces tax compliance and enables corrupt legislators to introduce tax exemptions and loopholes; complex and opaque tax systems increase opportunities for bribery and kickbacks. - Example case: municipal workers allegedly accepted bribes to make it appear unpaid taxes had been paid (reported example from 1996). ### Hot spots and mechanisms of leakage - Natural-resource sectors (especially oil and mining) are hot spots because the outsized profits create strong incentives for bribes and state capture. - State-owned enterprises are vulnerable to undue influence; in more corrupt countries, state-owned enterprises in sectors like energy, utilities, and transportation are less profitable and less efficient. - Public procurement is highly susceptible to corruption: public procurement accounts for 13 percent of GDP, on average, among members of the Organisation for Economic Co-operation and Development, which represents 36 advanced economies. - Grand corruption often clusters around large, complex, costly projects (construction, defense equipment) where uniqueness of projects makes cost comparison harder and concealment of bribes easier. - Corruption causes leakages across the public sector lifecycle (revenue collection, treasury/financial management, procurement, execution of the budget, extrabudgetary funds and public enterprises), including theft from unmonitored accounts, embezzlement enabled by weak financial controls, overpricing and low-quality goods and services, and diversion of funds by corrupt bureaucrats. ### Effects on public services and human capital - Spending on education and health is lower where corruption is high; among low-income countries, the share of the budget dedicated to education and health is one-third lower in more corrupt countries (chart note: Data are for 2016). - Test scores tend to be lower in countries where corruption is more prevalent; quality of instruction is worse even when classroom time is similar. - Petty corruption in education can take the form of bribes for access to teaching jobs and teacher absenteeism; where federal transfers for education are partially lost to corruption, dropout rates are higher and test scores worse. ### Successful reforms and illustrative case - Georgia (post-2003): an aggressive campaign to reduce corruption produced a jump in tax revenue from 12 percent to 25 percent of GDP in five years, even as tax rates were lowered. - Behavioral and service outcomes in Georgia: the share of people who felt it was never justifiable to cheat rose from about 50 percent to almost 80 percent; improvements in services (lower crime rates, fewer power outages) and renewed trust in government increased willingness to pay taxes and enabled clearance of wage and pension arrears. ### Policy recommendations and institutional lessons - Success is more likely when countries improve several mutually supporting institutions simultaneously, prioritizing higher-risk areas such as procurement, revenue administration, and management of natural resources, alongside effective internal controls. - A fiscal governance framework requires a professional and ethical civil service; heads of agencies, ministries, and public enterprises must set a clear tone at the top to promote ethical behavior. - Governments should invest in information and communication technologies and transparency to reduce opportunities for wrongdoing; electronic procurement systems (examples: Chile and Korea) have been powerful tools to improve transparency and curtail corruption. - Promoting transparency and a free press enhances accountability; fiscal data must be widely disseminated and explained. Examples: online platforms in Colombia, Costa Rica, and Paraguay that allow citizen monitoring of physical and financial progress of investment projects; release of audit results in Brazil affected reelection prospects of suspected officials, with greater impact where local radio stations were present. - Continuous upgrading of institutions, political will, and perseverance are necessary because progress is typically gradual rather than instantaneous. ### International cooperation - More than 40 countries have made it a crime for their companies to pay bribes to gain business abroad. - Aggressive crackdowns on money laundering and reductions in transnational opportunities to hide corrupt money in opaque financial centers are important complements to domestic reforms. _This article draws on “Curbing Corruption,” Chapter 2 of the IMF’s April 2019 Fiscal Monitor. PAOLO MAURO, PAULO MEDAS, and JEAN‑MARC FOURNIER, IMF Fiscal Affairs Department._ --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2019/september/the-true-cost-of-global-corruption-mauro.pdf_