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Trillion-dollar cost of corruption

The costs of corruption can be substantial for economies at all levels of development, says the International Monetary Fund (IMF) in the April 2019 edition of its Fiscal Monitor. For example, comparing countries at similar income levels, the least corrupt governments collect 4 percent of GDP more in tax revenues than their peers with the highest levels of corruption.

If all countries were to reduce corruption by a similar extent, on average, as those that reduced it over the past two decades, global tax revenues could be higher by $1 trillion, or 1.25 percent of global GDP; the gains would likely be greater considering that lower corruption would increase economic growth, further boosting revenues.

Corruption, abuse of public office for private gain, distorts the activities of the state and undercuts sustainable and inclusive economic growth. Corruption helps some people evade taxes; others can end up paying more. The loss of revenues can also hamper governments’ ability to provide social spending. Moreover, the quality of public services and infrastructure is undermined when government decisions are driven by bribes or nepotism. Ultimately, corruption erodes trust in government and can lead to social and political instability.

The IMF report says: “The evidence also suggests that corruption distorts how governments use public money. Less corrupt countries dedicate a higher share of resources to social spending (for example, among low-income countries, the share of the budget dedicated to education and health is one-third lower in highly corrupt countries).” More corrupt countries overpay for building roads and hospitals, and their school-age students have lower test scores.

“Fighting corruption requires mustering political will. To ensure lasting improvements, however, it also requires developing good institutions to promote integrity and accountability throughout the public sector … Some of the lessons for national decision makers are:

“Build a professional civil service, based on transparent, merit-based hiring and remuneration procedures. It is vital for heads of agencies, ministries, and public enterprises to promote ethical behaviour by setting a clear tone at the top.

“Invest in high levels of transparency and independent external scrutiny, to allow audit agencies and the public at large to provide effective oversight.

“Focus on “hotspots” where international experience suggests that corruption occurs frequently — for example, public procurement, infrastructure, complex goods and services that are hard to price, natural resources, and public enterprises.

“Increase the chances of success by improving several mutually supportive institutions to tackle corruption. For example, reforms to tax administration will have a
greater payoff if tax laws are simplified and the scope for discretion by tax officials is reduced. Efforts to improve integrity in the civil service or to pursue tax evaders will depend on timely and evenhanded court proceedings. Likewise, the benefits of fiscal transparency are enhanced by the presence of a free press.

“Commit to improving institutions assiduously to reduce vulnerabilities to constantly evolving corruption challenges. Adopting new technologies helps to strengthen key fiscal functions, such as budget processes and revenue administration, as well as internal controls. For example, electronic procurement systems (e-procurement) can be a powerful tool to fight corruption by promoting transparency and improving competition (for example, Chile, Korea). Corruption is also a global problem demanding greater international cooperation to fight it. A growing number of international initiatives are under way to fight corruption and to make it more difficult to hide corrupt proceeds. However, more could be done:

“Countries should be more proactive in combating bribery by national companies that bribe officials in foreign countries, aggressively pursuing anti–money laundering activities, and reducing opportunities to hide corruption proceeds in opaque destinations.

“Greater transparency in the extractive industries (oil and mining) is needed given the presence of large economic rents and the role of major international players.

“Despite some improvements, international exchange of information remains limited. More cooperation is critical to fight tax evasion and to investigate and prosecute corrupt acts.”

“Finally, donors and international institutions can lead by example, by strengthening their own transparency. They can also help by disseminating good practices in institution building.”


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