In How corruption affects climate change TRANSPARENCY INTERNATIONAL claimed that Climate change, like Corruption, is a matter of Life or Death and it sees its role in this to help ensure that the  billions of dollars already pledged go where they’re needed. This requires transparency.

Chatham House looked at the phenomenon of corruption generally, and at how to combat it. A holistic approach being needed, Sean Hagan, author of this article, advises based on his as well as on the IMF’s own experience, that there are four key elements to an effective anti-corruption strategy: transparency; enhancing the rule of law; economic reform; and the building of institutions. Graft is not just a moral and political problem, it can also 
be an economic disaster, writes Sean Hagan.

Cancer in the system

Corruption is a global problem that is coming increasingly into sharp focus. Across the world, recent high-profile cases of corruption have caused moral outrage − and justifiably so. 

In many countries, rising inequality and faltering trust feed a perception of unfairness and the belief that elites play by different rules. In response, governments are showing an increasing willingness to get to grips with this problem. Importantly, they understand that systemic corruption is not just a moral and political problem but also an economic one.

Indeed, recent analytical and empirical work done at the IMF reveals the extent to which corruption can undermine sustainable and inclusive growth. In particular, when corruption is systemic – that is when it is no longer the exception to the norm but the norm itself – it can undermine the government’s capacity to perform important state functions. These functions include the conduct of fiscal and monetary policies, the design and implementation of market regulation, financial sector oversight and the rule of law.

Take, for example, fiscal policy – that is, the exercise of the government’s power with respect to both raising revenue and public expenditure. In a country with entrenched corruption, the ability of the state to tax suffers. Low levels of trust in the government arising from entrenched corruption translate to a weak culture of tax compliance and a high rate of tax evasion. Declining government revenues create economic instability as the government is forced to accumulate debt that can quickly become unsustainable.

On the expenditure side, systemic corruption distorts spending decisions towards wasteful, large projects that generate kickbacks and away from more economically and socially valuable investments in areas such as health and education. 

Weak expenditure controls and corrupt procurement practices simply waste public resources, undermining the ability of the government to provide much-needed social services. Since they rely more heavily on government services, the poor are disproportionately affected by these distortions, thereby entrenching poverty.

The ability of the government to attract private investment is also limited by systemic corruption. Bribes make investments more expensive. Indeed, corruption is often referred to as a tax on investment. Perhaps even more importantly, for an investor considering a large capital investment, the prospect of having to pay a continuous series of bribes may dissuade him or her from making the investment in the first place.

Entrenched corruption also undermines financial inclusion. When credit cannot be enforced because of corruption within the court system, it generally increases the cost of credit, making it more difficult to obtain. 

At a higher level, corruption weakens financial sector oversight and stability through corrupt lending practices, poor supervision of banks and regulatory capture.

More generally, systemic corruption weakens the social fabric with a disproportionate impact on the youth. When young people see that what is important is who you know rather than what you know, it can undermine their incentive to pursue an education. At its extreme, corruption can create civil unrest and armed conflict − with devastating economic and human consequences.

How does one combat corruption? The starting point is to acknowledge that there is no quick fix. A holistic approach is needed and, based on the IMF’s own experience, there are four key elements to an effective anti-corruption strategy: transparency; enhancing the rule of law; economic reform; and the building of institutions.

‘There are few deterrents more powerful than a credible threat of prosecution’

In addition to promoting efficiency and sound decision-making, transparency is a very effective anti-corruption tool. This is hardly surprising because corruption thrives on secrecy and opaque structures. In its own work, the IMF promotes compliance with international standards aimed at enhancing transparency and accountability in 12 policy areas of its core competence. These include data dissemination, fiscal policy, and monetary and financial policy.

Enhancing the rule of law is obviously critical, too. There are few deterrents to corruption more powerful than a credible threat of prosecution of corrupt officials and confiscation of ill-gotten assets. To be sure, in countries beset by systemic corruption, the institutions charged with the prosecution of corruption may themselves be corrupt. In these cases, experience has revealed that it may be necessary to establish and empower new institutions even for a transitional period until adequate capacity is developed. Importantly, governments should tackle not just public officials who receive bribes, but should also prosecute private sector operatives who pay bribes as well as those private actors who facilitate the laundering of proceeds.

The third element is economic reform. While regulation is essential in any market economy, steps need to be taken to address excessive regulation, especially where the regulatory process is opaque. As an economist would say, excessive complexity and opacity create ‘rent-seeking opportunities’. Technology is a particularly useful mechanism in this regard, since it can remove the exercise of discretion in simple approval processes, limiting the opportunity for officials to solicit bribes.

Finally there is institutional reform. Well-functioning institutions support transparency, the rule of law and economic reform. Indeed, a reform agenda is only as good as the officials charged with implementing its elements – whether it is the courts, prosecutors, tax officials, bank regulators or customs personnel. 

To succeed, reform efforts should seek to develop a cadre of competent public officials who are independent of both private influence and political interference. This requires a clear legal framework that establishes and empowers the respective institutions, technical expertise of the officials and clear incentive systems for public officials rewarding professionalism and competence while punishing improper conduct. But perhaps, most importantly, it requires effective leadership. There are a number of examples of leaders who, through their own integrity and attitude of zero-tolerance, have transformed the norms of behaviour of public officials in a relatively short time.

This is not a new issue for the IMF. Indeed, as early as 1997, the IMF outlined a policy for addressing governance and corruption in member countries – building in part on our experience up to that time. 

In 2017, twenty years after the policy on governance and corruption was first adopted, the IMF looked at how implementation of the policy had fared. It is fair to say that the review showed that, while the IMF had made progress, more work was needed. In particular, there is recognition that to be effective, the IMF needs to develop a more systematic approach when assessing, among its members, the severity of governance vulnerabilities – including corruption – and the macroeconomic impact of these vulnerabilities. Such an approach will promote fairness, by ensuring that similarly situated members are treated similarly. The IMF’s Executive Board will be considering these potential reforms in the near future. Stay tuned

 

AUTHOR: Sean Hagan is General Counsel and Director of the Legal Department, IMF. The views expressed in this article are those of the author and do not necessarily represent the views of the IMF management or its Executive Board