As people in developing countries fume over Panama Papers revelations about corruption of their venal elites, a new research paper has said the cost of corruption is wide-ranging, diminishing prospects of economic growth and advancement of societies.
The implications have corrosive effect on advancement of societies.
Take for example the high cost that bribery puts on societies by depriving people off development expenditures. While releasing a paper on the cost of corruption, the IMF this month cited the estimated annual cost of bribery at around $1.5 to $2 trillion (roughly 2 percent of global GDP).
“While the direct economic costs of corruption are well known, the indirect costs may be even more substantial and debilitating, leading to low growth and greater income inequality. Corruption also has a broader corrosive impact on society. It undermines trust in government and erodes the ethical standards of private citizens,” said IMF Managing Director Christine Lagarde.
The Fund, which has named the paper “Corruption : Costs and Mitigating Strategies,” notes that “public corruption, defined as an abuse of public office for private gain, afflicts economies at all stages of development. Governments around the world face the challenge of addressing citizens’ increased concerns over high corruption as evidenced by recent scandals in many countries.”
REPERCUSSIONS OF CORRUPT PRACTICES
The economic and social costs of corruption could potentially be even large, the Washington-based lending institution noted, while detailing repercussions of corruption as below:
First, corruption weakens the state’s capacity to raise revenue and perform its core functions. By harming the culture of compliance, corruption increases tax evasion. For instance, when tax exemptions are viewed as arbitrary, citizens’ have less incentives to pay taxes. As a result, the state collects less revenue and is unable to provide public services, with potential negative consequences for growth.
Second, by inflating costs in the public procurement process, corruption undermines the quantity and quality of public spending. Funds can also be siphoned off through off-budget transactions. This lowers resources available for public investment and other priority spending, aggravating infrastructure gaps and impacting on growth.
Third, because of lower public revenues, countries tend to rely more on central bank financing, which creates an inflation bias in the country. At the same time, corruption further weakens financial oversight and stability of the financial system. This arises from poor lending and regulatory practices and weak banking supervision.
Finally, corruption can even raise the cost of accessing financial markets as lenders factor in corruption. The private sector is further hurt because it raises uncertainty for firms and act as a barrier to entry for new entrants. Resources are allocated to rent-seeking activities instead of productive activities.
WHAT CAN FIGHT CORRUPTION
The IMF paper also identifies four building blocks to curb and stem corrupt practices, as outlined below:
Transparency is a pre-requisite. Countries need to adopt international standards on fiscal and financial transparency. Because of the relative share of extractives industries in many economies, transparency in this particular sector is crucial. Governments need also to support international standards on transparent corporate ownership. A free press also plays a key role in exposing corrupt practices.
To enhance the rule of law, a credible threat of prosecution must exist. Enforcement must also target the private sector. In certain cases, new specialized institutions must be set up where existing ones are corrupt. An effective anti-money laundering framework must be in place to minimize the laundering of proceeds of corruption.
Excessive regulation creates rents which are allocated at the discretion of public officials and must be eliminated. De-regulation and simplification are cornerstones of efficient anti-corruption strategies. However, it is important to have an adequate institutional framework in place first when transitioning from state controlled monopolistic markets (emerging economies in Eastern Europe).
A clear legal framework is required. However, all of the best frameworks come to nothing, unless they are implemented. And implementation is all about effective institutions. In particular, a key objective is to develop a cadre of competent public officials who are independent of both private influence and political interference—and are proud of this independence. Finally, leadership plays a critical underlying role. Leaders must set a personal example and ensure decisive action is taken when needed.
