IMF Survey : Fighting Corruption Critical for Growth and Macroeconomic Stability—IMF Paper

IMF News, May 11, 2016

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IMF Survey : Fighting Corruption Critical for Growth and Macroeconomic Stability—IMF Paper

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Bibliographic details

• Published: May 11, 2016

Overview and key findings

• Publication: IMF Survey, May 11, 2016.
• By vigorously reducing corruption, countries can improve economic stability and boost growth and development.
• Public corruption is defined as an abuse of public office for private gain and afflicts economies at all stages of development.
• Corruption is described as “macro-critical”—critical to the achievement of macroeconomic stability, which is at the core of the IMF’s mandate.
• A recent estimate put the annual cost of bribery at around $1.5 to $2 trillion (roughly 2 percent of global GDP).
• The economic and social costs of corruption could potentially be even larger.

How corruption hampers economic growth (enumerated mechanisms)

• Weakens the state’s capacity to raise revenue and perform core functions:
  • Harms the culture of compliance and increases tax evasion.
  • When tax exemptions are viewed as arbitrary, citizens have less incentive to pay taxes, reducing state revenue and public services, with negative consequences for growth.
• Inflates costs in public procurement and undermines quantity and quality of public spending:
  • Funds can be siphoned off through off-budget transactions.
  • Lowers resources available for public investment and priority spending, aggravating infrastructure gaps and impacting growth.
• Creates macroeconomic and financial stability risks:
  • Lower public revenues push countries to rely more on central bank financing, creating an inflation bias.
  • Corruption weakens financial oversight and stability through poor lending and regulatory practices and weak banking supervision.
• Raises cost of accessing financial markets and hampers private sector:
  • Lenders factor in corruption risk, raising costs.
  • Increases uncertainty for firms and acts as a barrier to entry for new entrants.
  • Resources are diverted to rent-seeking instead of productive activities.
• Social and environmental costs:
  • Reduced allocations for social programs and resources lost through corruption limit human capital build-up.
  • Weaker, poorly enforced environmental regulations lead to more pollution and excessive extraction of natural resources.
  • Systemic corruption can lead to political instability and conflict; natural resource abundance can accentuate the situation.

Mitigating strategies and policy guidance (four building blocks)

• Transparency:
  • Adopt international standards on fiscal and financial transparency.
  • Ensure transparency in extractive industries given their relative share in many economies.
  • Support international standards on transparent corporate ownership.
  • A free press plays a key role in exposing corrupt practices.
• Rule of law and enforcement:
  • Ensure a credible threat of prosecution; enforcement must also target the private sector.
  • In some cases, set up new specialized institutions where existing ones are corrupt.
  • Establish an effective anti-money laundering framework to minimize laundering of proceeds of corruption.
• Deregulation and simplification:
  • Eliminate excessive regulation that creates rents allocated at discretion of public officials.
  • De-regulation and simplification are cornerstones of efficient anti-corruption strategies.
  • Ensure an adequate institutional framework is in place when transitioning from state-controlled monopolistic markets.
• Legal framework and institutional capacity:
  • A clear legal framework is required, but implementation depends on effective institutions.
  • Develop a cadre of competent public officials who are independent of private influence and political interference.
  • Leadership must set a personal example and ensure decisive action is taken when needed.

IMF role and perspective

• The IMF has been actively engaged in helping members design and implement anti-corruption strategies given the potential impact of corruption on macroeconomic stability and sustainable economic growth.
• The paper, Corruption: Costs and Mitigating Strategies, draws on extensive literature and IMF country experience to provide practical guidance to policymakers.
• Emphasis on a comprehensive approach: short-term measures with immediate impact must be complemented with preventive measures and strict enforcement.

IMF Survey : Fighting Corruption Critical for Growth and Macroeconomic Stability—IMF Paper (IMF Survey, May 11, 2016).

References

• https://www.imf.org/en/News/country-focus
• PRESS CENTER
• IMF Research
• Read the paper
• Blog: Corruption: A hidden tax on growth
• Video: IMF seminar on individual integrity in public sector governance
• Book: Governance and corruption and economic performance
• IMF fiscal transparency code
• https://www.imf.org/en/home