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

_IMF Blog, April 22, 2018_

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## Bibliographic details
- Authors: Christine Lagarde
- Published: April 22, 2018

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### 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.*

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## References

- [framework](http://www.imf.org/en/Publications/Policy-Papers/Issues/2018/04/20/pp030918-review-of-1997-guidance-note-on-governance)

_Source: https://www.imf.org/en/blogs/articles/2018/04/22/shining-a-bright-light-into-the-dark-corners-of-weak-governance-and-corruption_