Shining a Bright Light into the Dark Corners of Weak Governance and Corruption

IMF Blog, April 22, 2018

Source details

Canonical URL

Shining a Bright Light into the Dark Corners of Weak Governance and Corruption

Other formats

• Markdown version
• Structured JSON version
• Bundle manifest

Bibliographic details

• Authors: Christine Lagarde
• Published: April 22, 2018

Costs of corruption

• Entrenched corruption is "economically pernicious," undermining the ability of countries to deliver inclusive and sustainable economic growth.
• Empirical results presented in the paper show:
  • Sliding down from the 50th to 25th percentile in an index of corruption or governance is associated with a fall in the annual rate of growth of GDP per capita by half a percentage point or more.
  • The same slide is associated with a decline in the investment-to-GDP ratio by 1½–2 percentage points.
  • High corruption is associated with significantly lower growth, investment, FDI, and tax revenues.
  • Corruption and poor governance are associated with higher inequality and lower inclusive growth.
• Mechanisms through which corruption harms economies:
  • Weakens government’s ability to tax.
  • Distorts spending away from valuable investments (health, education, renewable energy) toward wasteful projects with short-term payoffs.
  • Acts as a tax on investment and increases uncertainty about demands for future bribes.
  • Causes young people to underinvest in skills and education because advancement depends on who you know rather than what you know.
  • Hurts the poor, hinders economic opportunity and social mobility, undermines trust in institutions, and causes social cohesion to unravel.
  • Represents a major obstacle to attaining the Sustainable Development Goals.

Stepped-up engagement

• The IMF Executive Board endorsed a new framework for stepping up engagement on governance and corruption in member countries.
• This engagement will be embedded in broader work promoting good governance in areas such as public financial management, financial sector oversight, and anti-money laundering.
• Rationale for broad focus:
  • Governance weaknesses are harmful in their own right and open the door to widespread corruption.
  • Anti-corruption strategies must go beyond prosecutions to include broader regulatory and institutional reforms.
  • "The most durable 'cure' for corruption is strong, transparent, and accountable institutions."
  • Governance weaknesses can help corroborate corruption assessments, since corruption is often hard to measure and strongly correlated with general lapses in governance.
• Historical context:
  • The IMF has had a governance policy in place since 1997.
  • The policy calls upon the IMF to address governance and corruption issues when they have a significant macroeconomic impact, to work with partner institutions (especially the World Bank), and not to interfere in politics or individual enforcement cases.
  • A review found the policy principles sound but implementation uneven, with inconsistent standards and analyses that "too often lacked clarity."
• New framework goals:
  • More systematic, evenhanded, effective, and candid engagement with member countries.
  • Develop a clear and transparent methodology for assessing the nature and severity of governance weaknesses, looking at a broad array of indicators:
  • Quality of the budgetary institutions that handle taxing and spending.
  • Soundness of financial sector oversight.
  • Integrity of central banks.
  • Transparency and impartiality of market regulation.
  • Predictability of aspects of the rule of law vital for economic health, especially contract enforcement.
  • Adequacy of frameworks to fight money laundering and terrorism financing.
  • Direct assessment of the severity of corruption.
  • Assess the economic impact of identified governance and corruption fault lines and provide country-specific policy recommendations.
  • Consider these issues over a longer time horizon to capture harm from slow institutional decay.
  • For lending programs, evaluate whether problems hinder the ability of countries to implement economic reforms.

Supply side of corruption

• Corruption is "a two-handed phenomenon": every bribe taken is a bribe given.
• Funds received through corruption are often concealed outside the country, frequently in the financial sectors of major capitals.
• Countries may have "clean hands" at home but "dirty hands" abroad.
• To address facilitation of corrupt practices by private actors, the IMF will encourage member countries to volunteer for assessments of their legal and institutional frameworks to determine whether they:
  • Criminalize and prosecute foreign bribery.
  • Have mechanisms to stop the laundering and concealment of dirty money.
• Nine countries—the entire G7 plus Austria and the Czech Republic—have volunteered for this assessment, described as "a major vote of confidence in the new framework."

Implementation and expected outcomes

• Implementation actions:
  • More assessment and discussion of governance and corruption in IMF surveillance and lending programs.
  • Stepped-up capacity development to help countries strengthen regulatory frameworks and institutions.
• Institutional principles guiding engagement:
  • Be candid, rigorous, transparent, and evenhanded.
  • Work closely with member countries and partner institutions.
• Intended outcome:
  • Harnessing transparency ("sunlight") to reduce places where corruption can hide, putting the global economy on a healthier and more sustainable path.
  • Expectation of "progressively fewer dark corners left for corruption to hide."

By Christine Lagarde, April 22, 2018 — IMF blog.

References

• framework