Corruption Disintegration

Reading Time: 8 minutes

November 29, 2018

American Conference Institute

35th International Conference on the Foreign Corrupt Practices Act

Gaylord National Resort and Convention Center

National Harbor, Maryland

Introduction

Thank you, Jonathan, for the very kind introduction. Thanks also to ACI—and really to all of you—for having me here today to talk about this extremely important topic.

It’s great to be here with so many of you who focus, in many different ways, on addressing the pernicious effects of corruption. Its effects not only on the economy, but also on social norms, ethics and, ultimately, on trust in our national and international institutions.

Let me also say what a delight it is to be in the presence of so many lawyers ! I mean that with no disrespect to my wonderful economist colleagues at the IMF. But lawyers at the IMF are a small minority in an institution of over 1500 economists. So, it’s wonderful, even if only briefly, to once again be part of the majority!

This afternoon, I would like to focus on two big questions:

  • Why does the IMF care about corruption?
  • What is the IMF doing about it?

Why does the IMF care about corruption?

First, why does the IMF care about corruption? The answer is simple: because it impedes the IMF’s basic objectives of promoting global economic stability and helping our member countries achieve strong, sustainable and inclusive economic growth .

Corruption is not a victimless crime. It hasvery real direct and indirect economic and social costs. These costs impact millions around the world—and do so on a daily basis.

The direct economic costs are easy to see . Think of a bribe given to evade taxes. This results in a loss of revenue—meaning that governments are less able to pay for basic services or for important infrastructure projects that they need to boost economic growth. As another example: think of a bribe given to bypass the public procurement process. This could lead to both higher public expenditure and lower-quality public investment.

The annual global cost of bribery alone is estimated at around $1.5 to $2 trillion dollars a year! [1] This amount is massive in terms of the global growth we seek to achieve, amounting to roughly 2 percent of 2016 global GDP.

These are the direct costs. There are also indirect costs that I would argue are even worse.

For a start, corruption does grave harm to a country’s fiscal position. On the revenue side, it can lead to low tax compliance by delegitimizing the tax system. If people know that the wealthy elites and the politically connected can dodge taxes, then the entire tax system can lose legitimacy.

On the expenditure side, corruption undermines the scale, composition and quality of public spending —skewing it towards big infrastructure projects thatgenerate big bribes, butonly small economic and social benefit. It can also lead to inflated procurement costs and off-budget transactions.

Adding this all up: the combined effects of lower revenue and wasteful spendingresult in large fiscal deficits and substantial debt accumulation for many countries. You can see why the IMF takes this so very seriously.

But these pernicious effects are not limited to the public accounts—they extend to the private sector too. Why? Because corruption also impedes foreign and domestic investment. The higher costs associated with corruption, including compliance costs, regulatory uncertainty and increased “country risk”, are a form of tax on investment. Many of you in this room know this well!

(Of course, not everyone in the private sector is innocent when it comes to corruption—corruption, after all, requires two hands. I will talk more about that later.)

Another pernicious effect: corruption weakens financial oversight and stability. This can lead to weak lending practices, poor banking supervision, and unwarranted regulatory forbearance—threatening the stability of the financial system.

I could go on. Corruption is a great friend of inefficiency. Because an over-regulated economy provides opportunities for regulators to demand bribes,corruption creates a strong incentive to undermine both transparency and innovation.

These are the economic effects. But corruption has disastrous effects on social outcomes, which in turn have knock on economic effects. For example, spending on education and health is typically lower when corruption is rampant —making it harder if not impossible to reduce poverty and inequality. Even worse, by breeding distrust in government, corruption undermines the state’s capacity to undertake vital redistributive goals.

And when corruption becomes extreme and pervasive, it can lead to political instability and conflict.

It’s interesting to look at the root of the word “corruption”: it implies disintegration, rotting, decomposing. And when we think of it, corruption is indeed a disease that causes our social bonds to rot, and the values that underpin social trust to corrode. It simply is not possible for a person or a society to flourish in these circumstances.

It is therefore not surprising that corruption makes people angry and frustrated in so many countries. Not only because they lack opportunity, but because they lack hope. Not only because economic growth is lower, but because social relations are poisoned.

Given this, it is also not surprising that global opinion surveys rank corruption as one of the most serious problems facing the world today, on a par with poverty and unemployment. This is especially true for the young.

In these circumstances, it is hardly surprising that citizens are taking to the streets . Think about the recent huge protests in Brazil, Moldova, South Africa and South Korea—even leading to presidential impeachments in Brazil and South Korea. Think about the 2014 Ukraine Maidan revolution and even the 2012 Arab Spring, which erupted in large part due to concerns about rampant corruption and poor governance.

This anger is being magnified by technology—social media has become a powerful tool both in disseminating information and in organizing citizens’ responses.

So, in sum, there are among the very significant economic reasons why the IMF cares about corruption . It is truly “macro-critical” in terms of its effects on both domestic and global economic stability.

Interesting—and likely for these same reasons— we are also finding that our IMF member countries themselves have become much more open to discussing corruption . And many of them want the IMF to address this issue in a more forthright and systematic manner.

What is the IMF’s Policy Response to Corruption?

2017 Stocktaking of the 1997 Policy

Let me now turn to what the IMF is doing.

We had a policy on governance and corruption that dated back to 1997 . In 2017, taking into account some of our own analytical work showing the pernicious effects noted earlier, plus also considering how much the global landscape had changed after two decades, we decided a stocktaking of that policy was in order. So, we did one.

The review pointed to considerable progress, but also some important weaknesses. Or, as others might put it more bluntly, some of the results were not pretty! Let me highlight four key findings:

  • First, we found that IMF staff was often hesitant to even use the word “corruption” . Our diagnosis and policy recommendations were frequently shrouded in euphemisms—and in addition they were sometimes superficial.
  • Second, we were not entirely evenhanded. We focused more on poorer countries and less on richer ones; more on those that needed our lending and less on those that didn’t; more on the demand-side of corruption than on the supply-side.
  • Third, the policy called for us to engage members on corruption if its impact was assessed as having significant macroeconomic implications in the short- to medium-term. But the stocktaking found we didn’t do a good job in these assessments, especially when a country was doing well at the time of assessment.
  • Fourth, we could have collaborated better with others looking at the same issues, including other international institutions, the private sector, and civil society. We needed to leverage others’ expertise and minimize duplication.

Key Elements of the IMF’s Enhanced Policy Framework

In response to the findings of this stocktaking , the IMF has now developed an enhanced framework for dealing with governance and corruption. Our Executive Board adopted this framework in April 2018 and we are now implementing it. What exactly are we doing?

First, we now have a more systematic way of assessing when to ring the bell on corruption and governance issues . A key aspect of course is that we will more directly and consistently assess the severity of corruption itself. But, in addition, we will also examine closely the extent to which those state functions that are most relevant to economic activity are undermined by governance vulnerabilities.

We focus on six specific state functions in this context: (i) fiscal governance; (ii) financial sector oversight; (iii) central bank governance and operations; (iv) market regulation; (v) rule of law; and (vi) anti-money laundering and combatting the financing of terrorism.

Governance failures in these six areas are important in their own right. But they are also cracks through which corruption can creep in . Focusing on these issues allows us to be specific, concrete, and granular—and hopefully to be more helpful to our members.

This broader focus on governance and not only corruption also reflects the realization that you cannot fight and solve corruption by throwing everyone in jail . Prosecution is important, yes. But the most sustainable way to end corruption is to clean the house— by addressing broader governance vulnerabilities that give rise to opportunities for corruption in the first place .

The second significant improvement is stepped-up evenhandedness . We are now assessing the nature and severity of governance and corruption vulnerabilitiesevery year in virtually every one of the IMF’s 189 member countries. These assessments are being conducted in a centralized, institutional process using agreed criteria. And we won’t shy away from supply-side issues—more on that in a moment.

Third, the new policy makes a breakthrough in assessing macroeconomic impact . We know from our research that if governance and corruption vulnerabilities are severe, then growth will be lower in the long-term —even if things look good today. So, under the new framework, whenever governance and corruption vulnerabilities are assessed to be severe, the economic impact will be deemed sufficiently significant to require an assessment and policy recommendations in the IMF’s annual economic review of the particular country.

Fourth, the revamped policy re-emphasizes the importance of collaboration with other institutions and entities , to leverage their expertise, share knowledge, and minimize duplication. We are now actively collaborating with the World Bank, UN and OECD, among others, in our efforts.

Focus on the Supply-Side

Let me now turn, as promised, to the issue of the supply-side .

There are many countries where corruption is pervasive and therefore a major concern domestically: this is the demand-side of corruption.

But there are also actors from other countries who are able and very willing to bribe foreign officials in corrupt countries—this is the separate but very important supply-side.

These actors, which include powerful multinational corporations, are often from richer countries—countries that themselves might not suffer from significant corruption, but nonetheless might have cracks in their legal and institutional frameworks that contribute to global corruption.

Our supply-side focus also encompasses “facilitation” issues . We use the term to describe our assessment of whether countries have gaps that allow the proceeds of corrupt acts to be concealed . Corrupt public officials often want to hide their dirty money by sending it abroad. And actors in some foreign countries—again, often richer countries with large financial sectors—are often willing to facilitate the concealment.

Under the revamped policy, the IMF is now assessing all aspects of these supply-side and facilitation issues . The good news is that members are taking this seriously. The G7 countries plus Austria and the Czech Republic have already volunteered to be assessed, and other countries are moving in this direction.

A key issue here is whether countries adequately criminalize and prosecute the bribery of foreign public officials.

Of course, this brings us squarely to the Foreign Corrupt Practices Act (FCPA) that is the subject of this conference . The U.S. has traditionally been a global leader in this area, inspiring the OECD Anti-Bribery Convention and the ensuing national legislation of many countries that adhere to that convention. The IMF will now be assessing whether these national laws adequately criminalize foreign bribery and whether they are effectively enforced.

It is important to note that we won’t be reinventing the wheel here. We will lean on work already done by the OECD in monitoring how its Anti-Bribery Convention is being implemented—which in the United States is through the FCPA. Just this month, we completed the first two supply side assessments, for the United Kingdom and Japan.

This is a good example of concrete collaboration between two international organizations . We gain from the expertise of the OECD, and the OECD gains from the added peer pressure on countries through IMF channels.

For countries that are not signatories to the OECD Convention, we are working to reach an agreement with the United Nations Office on Drugs and Crime (UNODC)to rely on its assessments of supply-side issues under the United Nations Convention Against Corruption (UNCAC).

What about facilitation issues? Here, we will assess whether countries have effective anti-money laundering systems . Again, we will not reinvent the wheel, but rather lean heavily on work already done by the Financial Action Task Force (FATF), FATF-style regional bodies, the World Bank, and indeed our own existing work—the IMF has a very active program focused on anti-money laundering and countering the financing of terrorism.

Conclusion

Let me conclude by thanking all of you for the critical role you play in this multi-faceted fight —some would say, this good fight—against corruption. We are all in this together—civil society, legal profession, others in the the private sector, national authorities, and international organizations.

And let us remember what we’re fighting for—our own children, children around the globe, and their respective futures. We want to avoid global economic “disintegration” from the disease of corruption. We want instead to achieve a future of “integration” into a global economy that is more productive, efficient, fair and ethical .

I look forward to continuing this dialogue with you—and, yes, this fight—beyond today’s conference.

Thank you very much!

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