A new Fiscal Monitor by the International Monetary Fund (IMF) notes that the abuse of public office for private gain erodes people’s trust in government and institutions, makes public policies less effective and fair, and siphons taxpayers’ money away from schools, roads, and hospitals.
While the wasted money is important, the cost is about much more. Corruption corrodes the government’s ability to help grow the economy in a way that benefits all citizens, according to the report.
But the political will to build strong and transparent institutions can turn the tide against corruption.
In its new Fiscal Monitor, IMF shines a light on fiscal institutions and policies, like tax administration or procurement practices, and show how they can fight corruption.
The report analyzes more than 180 countries and finds that more corrupt countries collect fewer taxes, as people pay bribes to avoid them, including through tax loopholes designed in exchange for kickbacks. Also, when taxpayers believe their governments are corrupt, they are more likely to evade paying taxes.
The report shows that overall, the least corrupt governments collect 4 percent of GDP more in tax revenues than countries at the same level of economic development with the highest levels of corruption.
Corruption is also a problem in state-owned enterprises, such as some countries’ oil companies, and public utilities like electric and water companies. The IMF analysis suggests that these enterprises are less efficient in countries with high levels of corruption.
Fighting corruption requires political will to create strong fiscal institutions that promote integrity and accountability throughout the public sector.
The chances for success are greater when countries design reforms to tackle corruption from all angles. For example, reforms to tax administration will have a greater payoff if tax laws are simpler and they reduce officials’ scope for discretion. To help countries, the IMF has built comprehensive diagnostics on the quality of fiscal institutions, including public investment management, revenue administration, and fiscal transparency.
Transparent, merit-based hiring and pay reduce the opportunities for corruption. The heads of agencies, ministries, and public enterprises must promote ethical behavior by setting a clear tone at the top.
Countries can also join efforts to make it harder for corruption to cross borders. For example, more than 40 countries have already made it a crime for their companies to pay bribes to gain business abroad under the OECD anti-corruption convention. Countries can also aggressively pursue anti–money laundering activities and reduce transnational opportunities to hide corrupt money in opaque financial centers, says the report.
Curbing corruption is a challenge that requires persevering on many fronts, but one that pays huge dividends. It starts with political will, continuously strengthening institutions to promote integrity and accountability, and global cooperation.
The Fiscal Monitor shows that countries with lower levels of perceived corruption have significantly less waste in public investment projects. The Fund estimates that the most corrupt emerging market economies waste twice as much money as the least corrupt ones.
Governments waste taxpayers’ money when they spend it on cost overruns due to kickbacks or bid rigging in public procurement. So, when a country is less corrupt, it invests money more efficiently and fairly.
Corruption also distorts government priorities. For example, among low-income countries, the share of the budget dedicated to education and health is one-third lower in more corrupt countries. It also impacts the effectiveness of social spending. In more corrupt countries school-age students have lower test scores, according to the IMF.
