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There’s a reason for the lack of trust in government and business: corruption

An Op-ed first published in The Guardian Newspaper by Christine Lagarde *

The world is facing a crisis of trust in institutions across all sectors that shows no sign of abating. In 20 out of the 28 countries surveyed this year by the Edelman Trust Barometer, average trust in institutions is less than 50%.

There are many reasons behind this heightened sense of dissatisfaction—the long tail of the global financial crisis, a perception that economic rewards are not being shared fairly, and growing anxiety about future job prospects. But when I talk to young people all over the world, one theme comes up repeatedly: corruption—the abuse of public office for private gain. I am convinced that corruption both feeds and is fed by the broader crisis of trust, which sustains a vicious cycle that undermines economic health and social cohesion.

By siphoning off precious reserves of trust, corruption makes it harder for society to take the collective decisions needed to advance the common good.

The economic and social costs of corruption are clear. Consider, for example, the effects of corruption on the public accounts. It robs the tax system not only of revenues, but of its very legitimacy. Corruption can also shift government spending away from valuable areas in health, education, and social protection, toward wasteful projects that enhance neither productive capacity nor human wellbeing.

Given all of this, it is not surprising that new research by the IMF found that corruption does serious damage to economic growth, investment, FDI, and tax revenues—and to income distribution and inclusive growth too.

In light of this, the IMF is stepping up its engagement in the corruption and governance arena. This is only right—the mandate of the IMF, after all, is to secure financial stability and sustainable and inclusive economic growth, and our ability to pursue this mandate is jeopardized by deep-seated corruption.

From this point on, we will be enhancing our analysis by making it deeper, longer, broader.

Starting with deeper: the cancer of corruption cannot be cured by criminal enforcement alone. That is not the job of the IMF, anyway. In my experience, the best tonic for depleted trust is heightened transparency. The best way to fight corruption is to put in place robust, accountable, and transparent institutions. Accordingly, the IMF will look not only at corruption itself, but at the cracks in the various institutional frameworks that might let corruption creep in. Especially important here is transparency over the government budget, so that nothing is hidden from view or obscured. It is also important to keep regulations clear and simple, to reduce opportunities for corruption and cronyism.

When it comes to sealing up the institutional cracks, I believe that digitalization offers much promise. As one example, fraud is more difficult to execute when tax transactions are fully electronic. IMF research found that using digital tools to clamp down on cross-border fraud could boost tax revenue by up to 2 percent of GDP each year. Similarly, digitalization could help shine a light on wealth stashed away in offshore financial centers—which today amounts to a staggering 10 percent of global GDP.

IN TERMS OF THE “LONGER” FOCUS, there may be countries where corruption has long been entrenched, with little harm to the economy surfacing today. But corruption hurts the economy through the slow atrophy of institutional trust.

THE “BROADER” FOCUS SUGGESTS THAT where bribery is concerned, it takes two to tango. If a corrupt official is taking a bribe, somebody else is giving a bribe—and somebody else again is often helping to stash away the proceeds. It is wrong—both morally and economically—to pin the blame solely on officials in recipient countries. The net also needs to capture foreign investors, large corporations, and financial institutions that supply and conceal the payments.

In today’s world, where funds can move quickly with little oversight, corruption is a global problem warranting a global response. For this reason, the IMF is asking countries with large financial and foreign investment sectors to volunteer for a check-up to see whether they criminalize and prosecute foreign bribery and have mechanisms to stop the laundering and concealment of dirty money.

Restoring trust in institutions will not be quick or easy. But an important first step must be to build a strong foundation of governance and TACKLE CORRUPTION HEAD-ON. Otherwise, we will not be able to make progress on the pressing economic challenges of our times—including jobs and productivity growth, inequality and opportunity, climate change.

* Christine Lagarde is Managing Director of the IMF

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