A. Structural Reforms to Reduce Government Discretion

Structural reforms are defined as policy measures that reduce impediments to an efficient allocation of resources (Ostry, Prati, & Spilimbergo, 2009). In the context of governance, the reforms often include streamlining, simplifying, or removing excessive government regulation and oversight. Structural reforms reduce the need for contacts between the private sector and public officials, and with it the number of discretionary policy decisions. Removing a cap on trucking licenses means that there is no need for a public official to decide who should receive the license. Reducing the number of tax payments means fewer visits to the tax collection agency. In a cross-section of countries, less burdensome government regulation is indeed associated with a smaller shadow economy and lower corruption.¹²

Examples of structural reforms include:

• For businesses: reducing the number of documents, procedures, and costs to open and close firms, license new products, start construction, receive loans, fire and hire workers, comply with safety and other standards, or pay taxes and fees.

• For exporters and importers: removing impediments to trade and move capital across borders.

• For individuals: reducing licensing to enter a new profession or limiting requirements to sell a house or receive a driver’s license, among others.

• Removing the asymmetrical treatment of similar economic agents: for example, export subsidies, import quotas, special economic zones, or the favorable tax treatment of foreign investment, food or energy subsidies, different custom tariffs for similar products.

• Reducing regulatory overlap, when different agencies can issue regulations, permits, or licenses over similar matters. This can reduce the unpredictability and magnitude of bribery (Schleifer & Vishny, 1993).

• Privatization of state-owned enterprises (SOEs), with the caveat, that the privatization process itself can be subject to corruption and capacity constraints.

• Strengthening the independence of public institutions, including SOEs and in particular central banks (Barro & Gordon, 1983), subject to effective accountability frameworks. This includes less government discretion over the appointment and dismissal of management, recruitment within institutions, internal rules and procedures, and financial autonomy.

Removing and streamlining government regulations can reduce the space for policy error, yet the most challenging part is to identify which regulations are excessive. For example, some countries require over 20 procedures to get a construction permit. In some countries, it takes years to enforce contracts or resolve insolvencies. These extreme outcomes of regulation are hardly justifiable. But very often the answer is less clear. Some government regulations are essential. Even the most business-friendly countries take time to enforce contracts, grant construction permits or resolve insolvency. They do require businesses to register or obtain construction permits. Very often the choice is between addressing a governance failure versus addressing a market failure or achieving other societal goals (e.g., eradication of poverty or environmental sustainability).

How much regulation is too much? The answer ultimately depends on a country’s circumstances. Lower quality of governance, when corruption is pervasive and systemic, makes the case for stronger deregulation efforts. Georgia, for example, abolished 20 inspection agencies during 2005–2011, including food and fire safety inspections. At the time, these agencies were deemed too corrupt to perform even their basic functions (World Bank, 2012). This strategy would probably not work for all countries, including Georgia, in the long term. On October 30, 2015, a Colectiv nightclub fire in Bucharest, Romania, took the lives of 64 people, the main cause being blatant fire safety violations by the club that went unchecked by the responsible inspection agency (Barbera, 2019). Having no agency at all would not have saved lives. What could have helped was an agency, which would adequately perform its functions. Deregulation could be the first line of defense against poor governance, but it would not help solve all issues.

B. Case for Government Intervention: Automation, Outsourcing, Rules, and Procedures

Where the role of the government is essential, governance reform must go beyond streamlining. In order to reduce discretion and space for policy error, some policy decisions can be delegated to computer algorithms or, in other words, automated. Some can be delegated to third parties, which are more trusted or capable – a case of so-called “regulatory outsourcing”. Lastly and importantly, policy decisions can be constrained and guided by a set of rules and prescribed procedures.

Automation of government operations is becoming an increasingly viable solution thanks to rapid progress in information technology. Well-designed computer algorithms can remove human errors in decision-making and reduce opportunities for poor governance.¹³ They can be used to:

• Automatically assign tax audits, like in Estonia or France among other countries, – a part of the so-called risk-based approach (IMF, 2018; World Bank, 2011). This not only helps detect tax evasion more effectively but also removes potentially erroneous (or corrupt) policy decisions on whom to audit. The same risk-based approach is used at customs, for financial supervision, or to assign judges to court cases.

• Automatically identify eligible recipients of social transfers. For example, in South Africa, all social security recipients must periodically present proof of life – automatically by fingerprint or voice verification (IMF, 2018). This not only reduces the compliance cost for the recipients but also removes the opportunity for “leakages” – i.e. collusion between non-eligible recipients and Social Security Agency clerks. Similarly, the Indian Aadhaar is the largest biometric identification system in the world, used to automate social transfer and energy subsidy payments in the country (IMF, 2018).

• Automatically detect traffic violations, charge for parking or public transport, regulate congestion (through the pricing of road use).

• Provide government services online: pay taxes, utilities, fines; register businesses, vehicles; apply for birth, marriage, or death certificate; apply for driver’s license, etc. Depending on the service, 30 to 70 percent of countries offered them online in 2018 (Figure 6)- a boost to efficiency but also fewer personal interactions between public officials and households or firms. The COVID-19 pandemics highlighted the importance of digital solutions, enabling governments to efficiently deploy funds within their social assistance programs, as for example in the case of the Philippines’ Small Business Wage Subsidy Program.

• Automate the procurement process: online announcement, bidding process, monitoring, evaluation, and results.

E-Government on Rise

Citation: IMF Working Papers 2021, 098; 10.5089/9781513582467.001.A001

Source: UN E-Government Survey 2018 (UN, 2018)

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E-Government on Rise

Citation: IMF Working Papers 2021, 098; 10.5089/9781513582467.001.A001

Source: UN E-Government Survey 2018 (UN, 2018)

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E-Government on Rise

Citation: IMF Working Papers 2021, 098; 10.5089/9781513582467.001.A001

Source: UN E-Government Survey 2018 (UN, 2018)

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Automation of government operations helps improve governance, yet it comes with several risks. First, setting up automatic systems may require significant initial investment and building up capacity to operate these systems. Second, the most vulnerable can be excluded. While over 60 percent of countries offer online services for the poor (Figure 6), billions of people – often the poorest – still do not have Internet access or lack digital literacy to be able to benefit from these services. Without major investments in education and infrastructure, the poor can disproportionately be exposed to government inefficiencies, including extortion by public officials (UN, 2018). Third, the more services become automated, the larger is the potential cost of a cyber-security breach or digital identity theft. Improperly designed machine learning algorithms may also introduce biases and reduce the transparency of decision-making.

The second solution to limit discretion and space for policy decision error is outsourcing -the delegation of selected policy decisions to an institution with better capacity or less corruption. National regulatory authorities in 40 countries (as of 2019) collaborate with the World Health Organization’s Prequalification Program to accelerate the approval of medicines (’t Hoen, Hogerzeil, Quick, & Sillo, 2014; WHO, 2019). Since 2016 Ukraine has outsourced the procurement of medicines to UNICEF and UNDP, which helped save $66 million of state budget funds (UNDP, 2019). Colombia and the Philippines, among others, hire reputable private companies to do the pre-shipment inspection of imports (Yang, 2008).

Even high-level anti-corruption law enforcement can be outsourced, as in the case of Guatemala’s Commission against Impunity (UN, 2019). Nevertheless, outsourcing has its limits, as third-party dependency may have low political acceptability.

The third and the most universal solution is to guide policy decisions by rules and prescribed procedures. For example, a rule that sets strict time limits to issue or refuse a license may deter public officials’ attempts to require a bribe to “grease the wheels” of the bureaucratic process. A well-established routine for procurement or a budgetary process may help even inexperienced public officials perform their job well.

The most fundamental policies and institutions are guided by rules, starting with the constitution. The conduct of key macroeconomic policies – fiscal policy, monetary policy, financial sector regulation – is also increasingly subject to rules and procedures. Central banks in many countries set an explicit inflation objective to guide their monetary policy actions and communications (IMF, 2015). Fiscal policy is often anchored by fiscal rules in a form of lasting constraints on key fiscal indicators (Eyraud, Debrun, Hodge, Duarte Lledo, & Pattillo, 2018).¹⁴ Financial sector regulation includes, for instance, the so-called stress-testing – a procedure to check whether banks can sustain adverse economic conditions (Ong, 2014). The set of guidelines for all three policies is not limited to these examples. A broader overview is presented in the following subsections.

Successful inclusive growth strategy requires a governance framework – a set of appropriate rules and procedures – at the highest levels of government (OECD, 2016). It should feature a whole-of-government approach, including mechanisms to coordinate between line ministries. It should also employ tools to assess the government performance based on a dashboard of indicators measuring not only average economic growth – a traditional approach – but also the distribution of its benefits across the population as well as the quality of education, health services, and environmental sustainability. The framework should also align spending decisions with medium- and long-term inclusive growth objectives combined with comprehensive ex-ante and ex-post policy evaluation procedures. Finally, to enhance the design, implementation, and evaluation of inclusive growth policies, the framework should feature instruments for inclusive political institutions, e.g. those that facilitate the participation of all stakeholders – including to most vulnerable ones – in the decision-making process.

Well-functioning rules and procedures are key to good governance but, like with structural reforms, they involve trade-offs. Rules should be rigid enough to limit the discretion of public officials where appropriate, but flexible enough to perform equally well under different circumstances. This leaves two options. Rules can be made extremely complex, specifying all potential courses of action, though this raises the question of how well can such rules be enforced and complied with. Or alternatively, rules can be made less specific and less rigid – a case of “principles-based” regulation, allowing more discretion to public officials (Khan, 2018; Eyraud, Debrun, Hodge, Duarte Lledo, & Pattillo, 2018). For example, a strict annual limit on the budget deficit would reduce discretion. But it would imply raising spending during economic booms when tax revenue is high and cutting it during recessions when tax revenue is low and the economy needs fiscal stimulus. This is clearly not an optimal outcome. A solution would be to either specify different budget targets during booms and during recessions or allow more discretion, for example by setting the deficit limit over the medium term.

The choice between flexibility and rigidity of a rule ultimately depends on a country’s circumstances and the policy issue at hand. For example, Norway’s fiscal rule limits government spending to no more than three percent¹⁵ of the value of its sovereign wealth fund -on average over the medium term. The government is permitted to adjust the spending over the economic cycle to help stabilize the economy. The rule performed very well for Norway: it is almost twenty years old and has survived major economic shocks – the financial crisis of 2008 and the collapse of oil prices in 2015. But it is flexible, and it has required a high level of government discipline.

The search for optimal rules is an ongoing exercise. The key point, however, is that for most policy decisions at least some level of discretion by public officials is unavoidable and often necessary, for example, to ensure the independence of key public institutions such as courts or central banks. It is therefore essential to incentivize the public officials to do what is in the best interest of their country, that is to reduce the likelihood of poor governance.

A. Encouraging Good Governance: Human Resource Policies, Political Institutions, and Capacity Building

All else equal, a higher public salary increases the reward for good governance (Becker & Stigler, 1974). It also attracts better talent, and hence more capacity in the public sector (Klitgaard, 1989). In practice, countries where public officials are paid more on average experience less corruption (Van Rijckeghem & Weder, 2001; IMF, 2019). More granular local episodes, where causality is easier to establish, are also consistent with this cross-country pattern, provided higher wages are complemented by monitoring and plausible penalties for wrongdoing.²⁰

Raising public salaries is costly, though. The public wage bill is a sizeable part of government spending (Table 1). A major public salary raise can also affect wages in the private sector and reduce a country’s competitiveness at least in the short run (Afonso & Gomes, 2014). Finally, if the hiring process is not transparent, higher public salaries may invite nepotism and corruption at the hiring stage (Shah, 2006). These costs should be carefully weighed against the presumed benefits.

^{Table 1.}

Public Wage Statistics from around the World, 2008–2016

source: Public wage statistics – Worldwide Bureaucracy Indicators (World Bank, 2018); corruption-Transparency International’s Corruption Perception Index (CPI) (Transparency International, 2019). Note: Countries with low corruption are those above 75^th percentile by the CPI in 2008–2016 (CPI above 44). Countries with high corruption are those below the 25^th percentile (CPI below 27). Public wage premium indicates by how many percent is the average wage in the public sector higher than the average wage in the private sector, controlling for education, age, gender, and location.

^{Table 1.}

Public Wage Statistics from around the World, 2008–2016

	10th percentile	Median	90th percentile	Number of observations
Public wage bill, %GDP	4.4	7.2	11.9	179
Public employment, % total	13.S	22.8	44.3	236
	Public wage premium, all employees
Countries with low corruption	0	22.9	41.6	35
Countries with high corruption	-15.5	25.1	43.4	39
	Public wage premium, employees with tertiary education
Countries with low corruption	-0.1	8.8	23.4	17
Countries with high corruption	-60	-6.1	23.3	10

source: Public wage statistics – Worldwide Bureaucracy Indicators (World Bank, 2018); corruption-Transparency International’s Corruption Perception Index (CPI) (Transparency International, 2019). Note: Countries with low corruption are those above 75^th percentile by the CPI in 2008–2016 (CPI above 44). Countries with high corruption are those below the 25^th percentile (CPI below 27). Public wage premium indicates by how many percent is the average wage in the public sector higher than the average wage in the private sector, controlling for education, age, gender, and location.

View Table

^{Table 1.}

Public Wage Statistics from around the World, 2008–2016

	10th percentile	Median	90th percentile	Number of observations
Public wage bill, %GDP	4.4	7.2	11.9	179
Public employment, % total	13.S	22.8	44.3	236
	Public wage premium, all employees
Countries with low corruption	0	22.9	41.6	35
Countries with high corruption	-15.5	25.1	43.4	39
	Public wage premium, employees with tertiary education
Countries with low corruption	-0.1	8.8	23.4	17
Countries with high corruption	-60	-6.1	23.3	10

source: Public wage statistics – Worldwide Bureaucracy Indicators (World Bank, 2018); corruption-Transparency International’s Corruption Perception Index (CPI) (Transparency International, 2019). Note: Countries with low corruption are those above 75^th percentile by the CPI in 2008–2016 (CPI above 44). Countries with high corruption are those below the 25^th percentile (CPI below 27). Public wage premium indicates by how many percent is the average wage in the public sector higher than the average wage in the private sector, controlling for education, age, gender, and location.

Overall, a competitive public salary is a necessary but not sufficient condition to improve governance. In most low corruption countries public employees can earn at least as much as they would in the private sector (Table 1). In high corruption countries, this is not always the case, especially for employees with tertiary education. Civil service reform, including an increase in wages but also a reduction in public employment, was an integral part of the anti-corruption campaigns in Georgia and Rwanda (IMF, 2019). At the same time, many high corruption countries, pay their public employees large premia, but it does not seem to help (Table 1).²¹

Other human resource policies should complement the competitive salary:

• Open contests at the hiring stage can impede bribery and nepotism.

• Meritocratic working environment, for example clearly specified procedures for performance assessment or bonus payments that are tied to performance.

• Properly designed and implemented Codes of Conduct²² at government institutions set expectations as to what constitutes appropriate behavior of staff to prevent corruption and conflict of interest. A well-functioning code should clearly specify within-institution ethics rules and values, definitions of corruption offenses, and rules to prevent conflict of interest (e.g. on acceptance of gifts and favors, the abstention of decisions, external activities, and declaring assets) (IMF, 2020). Measures should be taken to ensure proper implementation of the rules and to increase awareness about the code among staff.

Inclusive political institutions can also encourage good governance. Politicians tend to be less corrupt if they can run for re-election (Ferraz & Finan, 2011). Democracies, in general, are less prone to corruption, though causality is hard to establish at a cross-country level (Kolstad & Wiig, 2016; Treisman, 2007). While the optimal design of political institutions is still an open question (Kunicova, 2006), two features seem to matter the most: high degree of political competition, including low barriers to entry, and minimized electoral fraud, making it harder to misrepresent the public choice.

Even with inclusive political institutions and adequate human resource policies, good quality policy decisions may still be hard to make if the government capacity is low. Developing the capacity requires adequate physical infrastructure, high quality of general education, and importantly continuous investments in job training for government officials. For example, Kazakhstan’s Bolashak International Scholarship sends annually over a thousand students to study abroad, conditional on their return to the country for at least two years – civil service being one of the prioritized categories (Center for International Programs, 2019). International donors and organizations often sponsor or run public officials’ capacity development programs. IMF’s Institute of Capacity Development, for example, trained over 33,000 public officials in 2015–2019 in classrooms, and 19,000 more through online training.

B. Discouraging Poor Governance: Tangible and Non-Tangible Cost, Supply-Side Measures, Anti-Money Laundering, and Anticorruption Frameworks

Decent salaries, the prospect of career growth, and capacity development yet may not be enough. Some public officials may still lean towards engaging in corruption, so it is important to discourage it.

All else equal, more severe punishment should discourage corruption. In most countries, prison sentences are generally a norm even for petty bribery,²³ but whether this deters corruption depends on the quality of law enforcement.

Capacity constraints in law enforcement can be mitigated by the prosecution of illicit enrichment (also called unexplained wealth orders). The idea is to track the public officials’ wealth and criminalize the increases, which cannot be explained by the income from official sources – no need to prove that the unexplained wealth is linked to a particular illegal activity (Dornbierer, 2019). In Italy elements of it were in place already in the 1950s, Ireland adopted a comprehensive law in 1996, and many more countries followed in the 2000s. Modalities of the law differ: some countries (Ireland, Colombia, Australia, Tanzania among others) consider illicit enrichment a criminal offense (e.g. punished by imprisonment), while others (UK, France, Kenya among others) apply the principle only for assets recovery and confiscation (Hamilton, 2012). Regardless of modality, effective prosecution of illicit enrichment requires a number of important prerequisites, such as maintaining reliable accounts of wealth for public officials (asset declaration frameworks) or establishing beneficial ownership of assets. But the general conclusion is that it generally strengthens the government’s ability to monitor and punish corruption (Muzila, Morales, Mathias, & Berger, 2012).

Punishment should extend to bribe-givers – the supply side of corruption. Since both supply and demand sides carry the risk of penalty the coordination between the two becomes more complicated, increasing the effective cost of corruption. The UN Convention Against Corruption (UNCAC), signed and ratified by 186 countries as of 2019, requires all parties to criminalize the bribery of foreign public officials as well as to cooperate on extradition of offenders and return of stolen assets. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, signed by 44 countries as of 2019, contains even stricter and more obliging requirements on the prosecution of bribery abroad (Clifford Chance, 2019). Proper implementation of these agreements would effectively increase the cost of poor governance.

Political institutions are key to hinder the coordination between potential bribe-takers and bribe-givers. For example, political contributions are an important instrument of financing election campaigns, but in countries with less developed political traditions they can effectively legitimize a large-scale quid pro quo – money now in exchange for “services” later. Most countries regulate political contributions. Foreigners are generally prohibited to contribute; large amounts should generally be disclosed. Some countries (Japan, Chile, Italy, Morocco among others) set annual limits per legal entity or individual; others (France, Belgium, Brazil, Poland among others) ban contributions by legal entities altogether (Baker McKenzie, 2017).

Lobbying and pre/post-government employment, if not properly regulated, can also facilitate corruption. In principle, lobbying can be a useful input into policy-making, but the risk is that public officials may get over-exposed to special interest groups or, even worse, side with them because of personal connections or favors. Apart from the “gifts in exchange of service”, which is generally treated as corruption, particularly concerning is the “revolving door” phenomenon – when lobbyists are appointed into public office and, vice-versa, public officers get lucrative positions (often) in lobbying business after their tenure in government. Transparency helps mitigate these risks. For example, in 1946 the U.S. became the first country to require lobbyists to register and log their activity; more countries followed in the 1990s and 2000s. And to reduce the extent of the “revolving door” phenomenon, some countries (Canada, U.K., Slovenia, Chile among others) introduced a so-called “cooling-off” period – a prohibition for top public officials to engage in lobbying shortly after they leave the government (OECD, 2014).

Prohibitions and punishments are not the whole stories though: often a motivation for public officials to abstain from corruption is its high intangible cost – a motivation to do their job well. This motivation often depends on prevailing social norms, acceptability of corruption in society, as well as a perception of what others are doing (Ivanyna, Mourmouras, & Rangazas, 2015; Innes & Mitra, 2013). In some countries, a policeman is a highly-respected profession. For example in Switzerland, the police are trusted by 79 percent of the population (ETH Zurich Center for Security Studies, 2019). The profession attracts talent and integrity despite high risks and moderate salary, and corruption within the institution is not tolerated by peers. In other countries, policemen are trusted less – in fact on average police are the least trusted institution in the world (Transparency International, 2017). Often policemen cover-up organized crime, and corruption within the institution is widely accepted.

The presence of corruption’s intangible costs carries at least four policy implications:

• 1. Same anti-corruption frameworks (salaries, punishment, and monitoring procedures) may have different results in different countries or institutions. In New York parking violations by the United Nations diplomats – recorded but unpunishable until 2002 due to diplomatic immunity – were positively correlated with the level of corruption in diplomats’ home counties (Fisman & Miguel, 2007). The result was corroborated in experimental “bribery” games played by foreign students in U.K. universities (Barr & Serra, 2010). As a result, some countries, in particular at earlier stages of development, may require tougher tangible incentives to reduce corruption, and more rigid rules and institutional frameworks in general, while some may rely more on existing social norms and trust, and “principles-based” regulation (Khan, 2018). For example, unlike many other countries, Switzerland does not restrict political contributions at a federal level (Baker McKenzie, 2017), and yet this does not seem to lead to state capture or corruption. Swiss parties care about their reputation, they are highly trusted by the public (ETH Zurich Center for Security Studies, 2019), and in fact, the country is among the world’s top performers over many dimensions of inclusive growth.

• 2. Institutional crackdowns on corruption – a big push approach to fight corruption within an institution or small geographic area – can have a long-lasting effect. The crackdowns wipe out corrupt public officials and, in addition, change the culture and social norms within the institution, even if the rest of the government is swamped by systemic corruption. The newly (re)created institutions are also called “islands of excellence” or “islands of integrity” (Marquette & Peiffer, 2018). Georgia widely followed the big push approach in the late 2000s (World Bank, 2012). For example, the country fully dismantled its customs and police, then trained and hired completely new staff, raised the salaries and set new accountability frameworks, and finished off with small yet important details like new modern uniforms and promotional campaigns. Ukraine used the same approach in 2014 to reform its traffic police and create a new anti-corruption bureau.

• 3. Promoting gender equality can also disrupt the culture-of-corruption environment, as experimental and survey-based studies show that women tend to be less willing to engage in bribery, and gender equality within households promotes social trust (Stensota & Wangnerud, 2018).

• 4. Social and educational initiatives promoting integrity increase the intangible cost of and hence discourage illicit behavior. The initiatives include social advertisement, implementing codes of conduct for public employees, as well as senior public officials leading by example. For example, in Colombia’s capital Bogota in the late 1990s authorities hired 400 memes to shame traffic rules’ offenders. The city’s major Antanas Mockus appeared on TV saving water while taking a shower, and asking the city dwellers to follow his example. By 2003, both water usage and traffic fatalities dropped significantly (Mockus, 2012)

A. Transparency and Accountability

“Without transparency corruption is inevitable” (Collier, 2010). So are policy errors, even if public officials have no special interests. Shedding light on government operations is key to monitoring, both by official institutions and civil society. It is also essential to inform the policy.

The key policy measure to boost transparency is to open data. Opening it is about making it both available and usable. This means data must be clearly defined, reliable, comprehensive, and easy to compare over time and across units (firms, households, local governments, countries). It should also be easy to use – downloadable and stored in a machine-readable format (e.g. electronic tables vs. scanned images or non-digitalized paper documents) – and feature a simple and convenient user interface with flexible search and low barriers (registration or payment) to access.

The key step towards opening data is complying with the data dissemination standards, which are routinely set, maintained, and updated by various international organizations. UN’s System of National Accounts sets the standards for measuring basic macroeconomic aggregates (economic output, prices, etc.) at a country level (UN, 2009). The IMF’s and World Bank’s standards and codes initiative elaborate further on government finance, financial statistics, transparency in fiscal and monetary and financial policy among others (IMF, 2017).²⁵ International Labor Organization set standards on labor market indicators (ILO, 2018).

IMF’s Fiscal Transparency Code (FTC) focuses directly on the public sector, which makes it one of the most important standards for improving governance (IMF, 2012). For example, one of its guidelines for advanced transparency is to cover the fiscal operations of the central government, but also local governments and state-owned enterprises. This means shedding light in areas where misuse of public funds is usually more common (Baum, Hackney, Medas, & Mouhamadou, 2019). Guidelines to report tax incentives and functional classification of government spending (e.g. health, education, etc.) give the public a better idea of government priorities and policy focus. Disclosing not only official public debt but also liabilities that may potentially arise in the future (for example, government-guaranteed debt) informs the public of the risks that the government is taking.

Another important set of transparency standards are those covering the natural resource sector. With its often above-normal profits and large government revenues, the risk of corruption in this sector is high if transparency is not adequately addressed. Resource revenue management is one of the main pillars of the IMF’s FTC; it is also the focus of the Extractive Industry Transparency Initiative (EITI). As of 2019, 51 countries joined the EITI, though only seven achieved EITI-validated satisfactory progress on the standard as of 2019 (EITI, 2019). Among other things, the standard requires countries to disclose all contracts and licenses at a project level, beneficial ownership of all private developers who receive a license, and all government resource revenues.

Transparency and accountability of the central bank’s actions are key to the effectiveness of the monetary policy.²⁶ IMF’s Central Bank Transparency Code (IMF, 2020) is a comprehensive, central bank-focused set of principles and practices encompassing transparency in:

• Governance: legal structure, mandate, autonomy, decision-making arrangements;

• Policies: policy frameworks, policy decisions, supporting analyses;

• Operations: instruments, coverage, access;

• Outcomes: reports on governance actions, policies, operations;

• Official relations: with government, other agencies, and internationally.

Transparency goes beyond what has been discussed so far. For example, many countries collect and open public finance and other data at a local government level. Shining the light there may uncover the gaps between budgeted and actual spending of as much as 87 percent, as was in the case of local school grants in Uganda in 1991–95 (Reinikka & Svensson, 2004). National and local laws, statutes, and regulations are usually published online. To strengthen political accountability many countries also publish the draft legislation and voting on bills. To minimize electoral fraud Brazil, France, Romania among others open the data on election results at a polling station level. Canada, Mexico, Paraguay, Slovakia among others open the data on procurement (announcements, bidders, winners of contracts, and contracts themselves) – another area where corruption risks are high (Figure 8).

Open Data Across Government Activities

Citation: IMF Working Papers 2021, 098; 10.5089/9781513582467.001.A001

Source: (Open Knowledge Foundation, 2019)Note: See the exact definition of the index as well as a description of government activities at (Open Knowledge Foundation, 2019)

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Open Data Across Government Activities

Citation: IMF Working Papers 2021, 098; 10.5089/9781513582467.001.A001

Source: (Open Knowledge Foundation, 2019)Note: See the exact definition of the index as well as a description of government activities at (Open Knowledge Foundation, 2019)

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Open Data Across Government Activities

Citation: IMF Working Papers 2021, 098; 10.5089/9781513582467.001.A001

Source: (Open Knowledge Foundation, 2019)Note: See the exact definition of the index as well as a description of government activities at (Open Knowledge Foundation, 2019)

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Monitoring corruption can be enhanced by maintaining and opening land and company registers. First, if data is open, real estate and business ownership become harder to manipulate. Second, proceeds from corruption and tax evasion are usually invested in real estate or businesses. So, opening land and company registers makes illicit enrichment move visible. Latvia and Turkey among others make their land registers publicly available, but overall there is still a lot of space for progress (Figure 8). As of 2020, the land registers in 88 countries did not even fully cover their capital or main business cities (World Bank, 2019). Several dozen countries open company registers (Figure 8), but only recently and only a handful of countries, notably the U.K., started to publish the information on beneficial ownership – a key piece needed to identify real asset owners behind no-name shell companies (Open Government Partnership, 2019).

Asset declarations by public officials are another key piece of information needed to track illicit enrichment and prevent potential conflict of interests. Changes in declared wealth can be compared to the public officials’ income, and then cross-checked with land and company registers. Even if illicit enrichment is not considered a crime, it can still have political cost if the asset declarations are open to the public. Besides, public officials can also be criminally liable for non-declaring or declaring false information. Open asset declarations can also expose conflicts of interest in areas like state contracts, licenses, or procurement – when public officials arrange favorable conditions for the companies they own. For the reasons above, wealth disclosure by public officials is recommended by the UN’s Conventions against Corruption (UNCAC). As of 2016 over 160 countries adopted some form of it, though significant differences remain on comprehensiveness, transparency, and de-facto implementation (Rossi, Pop, & Berger, 2017).

The benefits of transparency can be enhanced by international cooperation, which includes:

• Shared data that enables governments to make policy decisions based on international experience, which is why complying with the international data dissemination standards is so important.

• Exchange of information on tax payments, beneficial ownership that helps with monitoring corruption. The proceeds from corruption and tax evasion may and often are hidden abroad. Without international cooperation, neither law enforcement agencies nor civil society would be able to detect them. OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes, joined by over 150 countries as of 2019, aims at faster and in some cases automatic exchange of information between tax authorities across countries (OECD, 2019). The Financial Action Task Force (FATF) standard facilitates the global exchange of information on beneficial ownership (FATF, 2013).

• Sharing data between custom offices, which helps detect trade fraud. Importers, often in collusion with customs officers, may try to evade tariffs by misrepresenting the goods they are bringing across the border. But there is no reason to misrepresent exports when the same goods leave the country of origin. One way to identify trade fraud is to reconcile exports and imports data – a simple action that nevertheless requires the cooperation of customs in at least two countries. The impact of this reconciliation may be quite large: the gap between the reported exports and reported imports is as large as 12 percentage points of GDP in some countries²⁷ (IMF, 2018).

Transparency is crucial, but it involves trade-offs. First, collecting and maintaining data can be costly. Complying with international data dissemination standards requires extensive capacity building and full-time staff working on it. Reporting beneficial ownership down to the smallest owner can be quite costly too. And millions of public officials have to submit their asset declarations, in many cases as often as once per year (Rossi, Pop, & Berger, 2017). Second, transparency may go into conflict with privacy and, sometimes, safety. For example, the information from open land or company registers, or asset declarations could be potentially used for extortion or identity theft by organized crime groups.

Ultimately, the balance between privacy, transparency, and its cost depends on a country’s circumstances. The case for transparency is stronger for countries with lower governance quality, and in areas where corruption risks are higher. For example, in the case of disclosing beneficial owners, the priority is likely higher for license-wining companies in the natural resource sector, or for companies that win state procurement contracts. It is common to most countries that all politically exposed persons (PEPs) have to submit their asset declarations, but fewer countries go further down the public service career ladder (Rossi, Pop, & Berger, 2017). As for the balance between privacy and transparency, for example, the UK and Denmark publish in their beneficial ownership registers only what’s necessary for a meaningful public investigation and exempting those with legitimate safety concerns.²⁸ For example, the UK publishes only owners’ names, months, and year of birth – not enough to identify a person exactly, but enough to “flag” a suspicious case and hand it down to official law enforcement (Open Ownership, 2019).

The effectiveness of transparency can be greatly enhanced, and its cost reduced if governments harness and embrace the IT advances. Not only policy decisions themselves can be automated, as discussed above in this chapter, but also monitoring and informing the policy-making can be made more effective. Examples abound:

• Big data is now widely used to do short-term projections of key macroeconomic indicators – GDP, trade, inflation, etc. (Buono, Kapetanios, Marcellino, Mazzi, & Papailias, 2018).

• Satellite imaging offers new ways to measure economic activity, inequality, land use, air pollution, etc. at a high-resolution level (Donaldson & Storeygard, 2016). These measures are then used as key inputs for various policies.

• In Boston, USA, Yelp²⁹ restaurant reviews have been used to identify potential food safety violations, thereby increasing the efficiency of restaurant inspections (e.g. number of violations per inspection) by 25 percent since 2017 (DrivenData Labs, 2020).

• In Estonia and France, machine learning algorithms analyze tax payments to identify potential evasion (IMF, 2018).

• Romania’s PREVENT system automatically cross-checks procurement contracts with asset declarations by public officials to flag potential conflicts of interest (Dragos & Neamtu, 2018).

• Instagram³⁰ photos of public officials’ luxurious lifestyles are being used in investigations of illicit enrichment (Kreamer, 2019).

B. Official Anti-Corruption Institutions

Effective anti-corruption efforts require a well-defined and comprehensive legal framework and policies regarding prevention, investigation, and prosecution of corruption as well as freezing, confiscation, and recovery of corruption proceeds.

The key element of anti-corruption efforts is the establishment or designation of specialized anti-corruption agencies.³¹ One of the main functions of anti-corruption agencies is preventive, which includes anti-corruption policy development, monitoring, and coordination, prevention of conflicts of interests, raising public awareness. Another key function is law enforcement – investigation and prosecution of corruption and related offenses.

Anti-corruption agencies can be represented by a separate specialized agency (e.g. Independent Commission against Corruption in Hong Kong SAR) or be a part of a broader body (e.g. public prosecutors in Germany). The case to establish a separate and independent specialized anti-corruption agency is stronger in countries where corruption is pervasive, potentially extending to law enforcement, and trust in the existing institutions is low. Such an agency could focus exclusively on high-level corruption, which is particularly damaging to inclusive and sustainable growth.

An effective anti-corruption agency requires:

• A transparent process for the selection of the agency’s leadership, which would enhance public trust in anti-corruption institutions. The leadership should enjoy the security of tenure and their removal should be based on a limited set of criteria in a clearly defined procedure.

• Strong internal controls and accountability, as well as periodic reporting of the agency’s activities.

• Independence, including sufficient resources and budgetary autonomy, authority over the selection, promotion, and dismissal of personnel, operational autonomy. The agency should also have a clear mandate and powers, including unobstructed and timely access to various state databases, the ability to request and share information with other agencies, and a wide range of investigative tools.

Judiciary plays a crucial role in the anti-corruption criminal justice system and is key to ensure that anti-corruption investigations lead to convictions. Considering the complexity of high-level corruption cases, judges should have the necessary skills and expertise that are required to understand, for example, financial analysis, opaque corporate structures, and evidence received from abroad. Therefore, countries can also consider establishing a specialized anti-corruption judiciary, either as specialized chambers in existing courts or as separate courts.

An important role in the detection, investigation, and confiscation of corruption proceeds belongs to the Financial Intelligence Units (FIUs) – national agencies in charge of collection and analysis of suspicious transaction reports from the financial institutions and other businesses. The FIUs disseminate the results to law enforcement agencies that can use it to initiate or support ongoing corruption investigations.

As corruption and laundering of its proceeds in many cases expand across country borders, countries should adopt legislative measures to allow for effective international cooperation of anti-corruption institutions. This cooperation should include mutual legal assistance in investigations, prosecutions, and adjudication, extradition, information exchanges between law enforcement, and international cooperation in confiscation. Overall, confiscation of proceeds of corruption, including the recovery of assets hidden abroad, is one of the key policy goals of anti-corruption efforts aimed at reducing the potential benefits of corruption.

C. Engaging Civil Society

An inclusive decision-making process is critical to improving governance for inclusive growth. Policy decisions are informed by the feedback from the active public and independent councils, as well as by international experience. Official anti-corruption institutions are more effective with the input from investigative journalists or whistleblowers.

Engagement of civil society is more likely if it is easy and safe to self-organize, monitor, and communicate with public officials, and these actions find feedback in policy decision making. Key policy recommendations are:

Create and use official channels of communication. Two-sided communication of government and the public is essential to good governance. Governments need to know public preferences and concerns to prioritize their policies. In turn, policy reforms can only be successful and sustainable if they are understood and accepted by the public. The channels of communication include official meetings with voters, press-conferences, collaboration with mass media, and possibilities to submit official requests to government agencies, household and business surveys to gauge public opinion, and ensuring the right for peaceful assembly (e.g. protest) and petition. The de-facto usage of these channels, despite the formal guarantees, leaves a lot of space for progress: as of 2018 as much as 37 percent of the world’s population lived in countries with a very low level of political and civil rights, e.g. classified as “Not Free” by (Freedom House, 2019).

Go beyond the traditional channels of communication. An example is participatory budgeting at local governments, where the main idea is direct public oversight over the discretionary public spending – in form of public hearings, discussions, and up to direct vote by elected representatives of civil society. While not without risks and cases of failure, participatory budgeting is generally associated with more inclusive and efficient local spending (Shah, 2007). It also serves as a nursery for civil activism (Shah, 2007). Another example is direct civil society participation in the design of politically sensitive reforms or appointments to key non-elected government positions. In 1996, Namibia’s National Deregulation Task Force, comprised of various stakeholders across the economy, formulated the key principles of the energy subsidy reform, which were then implemented by the government and contributed to the reform’s sustainability (IMF, 2013). In 2015 the head of Ukraine’s Anti-Corruption Bureau was appointed after a pre-selection by a panel of government and civil society representatives (Marusov, 2016). The whole selection process was broadcasted live on TV.

Harness progress in IT to make the government-public communication less expensive and more efficient. Examples include national government web-portals; electronic contact forms; platforms to report bribery and other transgressions (e.g. Indian web-platform “I Paid A Bribe”); platforms for e-participatory budgeting (e.g. D-Brain in South Korea); platforms to submit and sign petitions; communication through social networks. Social media also make it easier for people to self-organize – be it a protest, a discussion group, or a non-governmental organization. For example, Twitter activity preceded protests in Tahrir Square in Cairo during Egypt’s Arab Spring events in 2011–12 (Acemoglu, Hassan, & Tahoun, 2014).

Educate people about the government’s functions and responsibilities. Freedom and the availability of mass media are associated with lower corruption and better governance (Stromberg, 2015). For example, the gap between budgeted and actual spending in Uganda’s local school grant program fell significantly (and student enrollment increased) after the government introduced a newspaper campaign informing parents and teachers about the funding their schools were supposed to get (Reinikka & Svensson, 2011).

Where traditional mass media are not free, social media may fill the information gap. Even after controlling for the level of development, social media penetration (extent of use) is associated with lower corruption, especially when traditional mass media do not talk about it much (Enikopolov, Petrova, & Sonin, 2018). Social media come with risks though: they may embolden hate crime and help spread false information (Miiller & Schwarz, 2019; Gorodnichenko, Pham, & Talavera, 2018). Handling these risks is crucial in order to harness the benefits of informing and engaging civil society.

Bring governments closer via properly designed decentralization, i.e. giving more political, financial, and administrative power to local governments (Boadway & Shah, 2009). Decentralization makes governments more accountable, makes government-public communication more direct, and requires less coordination effort for civil activity. In a decentralized country people can also vote with their feet – move to a jurisdiction which they think is governed better – and this puts pressure on all local governments to do their job better. Properly designed decentralization – that is when local public officials are elected and have significant autonomy both to spend and collect taxes – is indeed associated with less corruption (Ivanyna & Shah, 2011; Fisman & Gatti, 2002).

Make civil participation safe. This includes proper investigation of crimes against investigative journalists, who cover politics and corruption: 426 cases of murders have been confirmed between 2009 and 2019, including, for example, Daphne Caruana Galizia in Malta in 2017 and Jan Kuciak in Slovakia in 2018 (Committee to Protect Journalists, 2020). It is important to properly investigate these crimes, and do not let them happen in the future. This also includes encouraging and not restricting the activity of anti-corruption civil society organizations, the latter being an unfortunate global trend after 2009 (Freedom House, 2019; Transparency International, 2018).

Protect whistleblowers - those who expose poor governance from within their institutions. The protection includes measures like introducing channels for the disclosure (for example, a hotline), guarantee of confidentiality or anonymity, and penalties for potential retaliation.

Cooperate with independent councils and institutes. For example, as of 2016, 39 countries operated independent fiscal councils (Beetsma, et al., 2018). The main objective of these is to oversee fiscal policy: whether government conforms with fiscal rules, whether the underlying government’s forecasts are realistic, etc. Adding independent experts to state-owned enterprise boards is also a good corporate governance practice (IMF, 2020).

Use the help of the international community. The IMF, for example, monitors economic developments in its member countries and provides authorities with recommendations on key macroeconomic and structural policies – the so-called Article IV consultations (IMF, 2020). Similarly, other international organizations, academic and research institutions provide their advice to governments. The policy advice menu includes the governance reform itself, as in, for example, Transparency International’s National Integrity System Assessment (Transparency International, 2012) or IMF’s Governance Diagnostics (IMF, 2017; IMF, 2020).