Aerial view of a sprawling, dense, and poor neighborhood on the outskirts of a city
IMF AR 2018 IMF Annual Report 2018 Building a Shared Future

Reducing Corruption

Peeling back the many layers of corruption

Behind the scenes

IMF policy and capacity development fights corruption

The IMF policy on governance and corruption notes that the IMF has provided detailed policy advice on reducing corruption in reports on individual health checks. Advice was often developed to inform ongoing or prospective IMF loans and reflected the findings of IMF capacity development missions, in collaboration with the World Bank and other partners. Detailed policy advice on strategies for reducing corruption was provided as part of several Article IV reviews.

Good governance, including the absence of systemic corruption, is vital for macroeconomic stability as well as sustainable and inclusive economic growth. IMF research shows that systemic corruption—defined as abuse of public office for private gain—is associated with lower growth and investment and higher inequality.

The IMF recently updated its policy on governance and corruption. The new policy provides guidance on assessing the nature and extent of corruption and its macroeconomic impact. To ensure more systematic, candid, and evenhanded IMF work on governance and corruption, the policy focuses on both the “supply side” of corruption (the bribe given) and the “demand side” (the bribe taken). Dealing effectively with corruption must include steps to curb corrupt practices, whether direct—bribing foreign officials—or indirect—laundering dirty money.

The nature of corruption

Corroding the tax system

Corruption weakens the state’s ability to tax, in part by undermining the tax system through perceptions of unfairness and favoritism, which can drain state coffers. Corruption also distorts government spending by promoting oversize, wasteful projects that generate kickbacks, to the detriment of investments in areas like health and education that have a positive economic and social impact. And since the poor rely more heavily on government services, these distortions disproportionately affect them and limit their economic opportunities.

Impeding sustainable and inclusive growth

Sustainable and inclusive growth is also jeopardized if the government is unable to ensure a business environment based on impartiality and the rule of law. Bribes make investments more expensive—when corruption is systemic, bribery acts as a tax on investment. And if corruption spills over to financial sector regulation and supervision, financial stability could also be at risk.

Weakening the bonds of trust

Corruption can lead to mistrust of government and divisiveness in a country, which in turn has an indirect effect on stability and inclusive growth. For example, when young people see few rewards for investing in skills and education, it both shrinks prospects for increased productivity and fuels resentment.

How does corruption affect the economy?

IMF research shows that reducing corruption is associated with higher economic growth: 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, and a decline in the investment-to-GDP ratio by 1½–2 percentage points.