Corruption: A Hidden Tax on Growth

IMF Blog, November 5, 2015

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Corruption can be seen as more than a transaction (e.g., a public official taking a bribe); experts increasingly view it broadly as:
- “the privatization of public policy.”
- “the lack of impartiality in government,” where public money and authority are used in ways that impact negatively on human well-being.
Manifestations include collusion of powerful elites in business and politics to control public institutions, capture policymaking, and monopolize government contracting and procurement.

Direct economic costs:
- Demand for bribes by providers of services undermines social outcomes (example: bribe to the taxman that reduces public revenues and government provision of public services; a school not built because allocated funds have been misappropriated).
Indirect economic costs (from Governance, Corruption, and Economic Performance by George T. Abed and Sanjeev Gupta, editors):
- Over-investment in rent seeking.
- Underinvestment in productive activities.
- Perpetuation of inefficient policies.
Quantified estimates and empirical links:
- A 2005 study estimated that the global cost of bribery alone could be as high as 1.5 trillion dollars (in the order of 2 percent of the world’s current GDP).
- Other studies show a strong correlation between lower levels of corruption and long-term improvements in GDP per capita and in human development indices.
Non-economic costs:
- Loss of public trust in government.
- Higher levels of inequality in political influence.
- Deterioration of public values.
- Diminution of citizens’ well-being or quality of life.
Conclusion: corruption is described as a tax on growth and investment and creates a vicious cycle of public-sector underperformance harmful to the economy long-term.

Consensus: addressing corruption requires a broad and multifaceted (holistic) approach built on leadership, changing incentives, and building values—each mutually reinforcing.
Leadership:
- Leaders must bring powerful vested interests to account—“the big fish rather than the small fish, the tigers rather than the flies.”
- Leaders should set an example by being above reproach (example cited: Lee Kuan Yew of Singapore).
Strong incentives (carrots and sticks):
- Clear, enforced frameworks to combat corruption.
- Ensure public officials earn a living wage.
- Openness of the economy through deregulation and liberalization to reduce incentives for corruption (example cited: Poland).
- Transparency of government operations and transactions as a disincentive.
Building values of integrity:
- Promote a culture that values clean government.
- Education of citizens, formal training, education system, peer pressure, and everyday institutional practices are emphasized for inculcating values.

Rationale: corruption affects the soundness of public finances and the stability of financial markets—areas of direct IMF interest.
IMF instruments and actions described:
- Assist countries to deter corruption through better design and transparency of public financial management systems (example referenced: IMF Fiscal Transparency Code).
- Support stable and transparent economic and regulatory environments to limit arbitrary and preferential treatment.
- In crisis situations where corruption is critical for macroeconomic stability, the IMF has been more active and has, in some instances, insisted on reform of legislative anti-corruption frameworks and law enforcement functions (examples cited: Kenya, Indonesia, Ukraine).
Role timing and sensitivity:
- Corruption often starts long before it becomes critical to the economy; questions arise about how early the IMF should become directly involved and whether discussions should be integrated in the IMF’s annual consultations with members.
- The IMF’s First Deputy Managing Director, David Lipton, noted the sensitivity of the topic and that the IMF role will require further examination and discussion.
- When a country shows real political will to tackle corruption, the IMF should help it make bold and comprehensive changes to economic policies and regulatory frameworks necessary to decisively limit the costs of this hidden tax.

Source: IMF blog post “Corruption: A Hidden Tax on Growth” by Vitor Gaspar and Sean Hagan, November 5, 2015.

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- “腐败”—对增长的隐形征税; iMFdirect博客; 2015年11月5日 (PDF)
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