Corruption in Latin America: Taking Stock

IMF Blog, September 21, 2017

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Corruption continues to make headlines across Latin America, with notable cases including the Panama document leak schemes, Petrobras and Odebrecht scandals, and eight former Mexican state governors facing charges or being convicted.
Public discontent is increasing and citizens are demanding governments tackle corruption more aggressively.
The IMF has committed to work together with members to confront systemic corruption.

Corruption defined as "the abuse of public office for private gain" and involves illicit payments or favors and how they are distributed.
Can occur at:
- "grand" or political level;
- "petty" or bureaucratic level.
Systemic corruption: pervasive and entrenched behavior that can affect design and implementation of policies and skew regulatory or state decisions.
Examples:
- Odebrecht: construction firm spent considerable resources buying support of key public officials in exchange for contracts in several Latin American economies.
- Corruption in licensing and zoning, and in awarding or renegotiating individual projects.
Corrupt activities can be initiated on the supply side (offering a bribe) or demand side (asking for a bribe); in practice it is often hard to separate the two.

When systemic corruption is the norm, individual beliefs and expectations sustain corrupt equilibria: people expect others accept or offer bribes, making deviation costly for individuals.
Firms that offer bribes are more likely to win contracts—even if less efficient—perpetuating inefficiency.
Proceeds from past corrupt actions can be used to secure future benefits, reinforcing the equilibrium.
Breaking the trap requires:
- forceful policies that change social perceptions so corruption is seen as the exception rather than the rule;
- strong leadership and society’s support;
- multifaceted and resolute actions rather than isolated efforts.
As corruption falls, governments can more easily detect remaining corrupt actors because they will stand out.

Across different measures of corruption perceptions, Latin America and the Caribbean appear on par with other emerging market economies, but fare substantially worse than advanced economies.
Regional averages mask large cross-country variation:
- Chile and Uruguay have corruption perceptions similar to levels seen in advanced economies and score well in other institutional and governance indicators; they also have relatively higher income per capita levels.
- The rest of the region scores worse, reflecting factors such as poor law enforcement, lack of fiscal transparency, bureaucratic red tape, loopholes and weak contractual frameworks in public procurement and investment, and weak governance in state-owned enterprises.

Corruption is difficult to measure; different measures of corruption perceptions correlate strongly but are not fully comparable across time.
Perceptions of corruption may rise even when corruption falls because more is being investigated and uncovered.
Some emerging market countries have shown significant improvement over the past 20 years, but fewer success stories in Latin America.
Honduras is noted as having noticeably improved control of corruption (though it remains high), reflecting recent actions regarding the police force, the social security administration, and the tax administration.
Overall, most changes in Latin America are relatively small; "Corruption is hard to get rid of once it’s there."

Systemic corruption weakens the state's capacity to perform core functions and can be macro-critical.
Higher corruption tends to be accompanied by higher inequality.
Commonly recognized costs evident in parts of Latin America include:
- lower provision of public goods (hurting the poor disproportionately);
- misallocation of talent and capital through distorted incentives;
- higher levels of distrust in society and lower legitimacy of government;
- higher economic uncertainty;
- lower private and foreign investment.
Illustrative estimate: an improvement in corruption from the lowest quartile to the median could raise per capita income by about $3,000 in Latin America over the medium term, although part of this gain reflects coinciding factors like overall institutional improvements.
Causation between corruption and development is two-way, making precise statistical attribution difficult.

Public impatience with corruption creates a "window of opportunity" for national leaders.
Developing and enforcing a coherent anti-corruption strategy is difficult, entails learning by doing, depends on country circumstances, and should be part of a broader development strategy.
Drawing from international and regional experience can provide insights and guidance.
The next blog in the series will offer concrete suggestions for Latin America.

IMF blog post: Corruption in Latin America: Taking Stock (David Lipton, Alejandro Werner, Carlos Gonçalves, September 21, 2017).

Corrupção na América Latina: Algumas reflexões
- Corrupção na América Latina: Algumas reflexões (Markdown version)
- Corrupção na América Latina: Algumas reflexões (PDF)