Abstract
The Role of the Fund in Governance Issues - Review of the Guidance Note - Preliminary Considerations - Background Notes
Note IV. Analytical Work of the Fund on Governance and Corruption1
This note assesses the Fund’s analytical contributions on governance and corruption, with a focus on key publications as well as outreach events that have helped disseminate Fund views.
A. Analysis and Research
1. Fund staff have made important contributions to the growing literature on governance and corruption (bibliography below). Staff’s analysis of governance and corruption issues is usually framed in the context of economic growth and development, and leverages individual expertise and experience on a wide array of topics. Working papers and occasional papers have been published on such fundamental and diverse subjects such as the causes, consequences, and scope of corruption, effect of corruption on growth, corruption and income inequality, structural reform, privatization, institutionalized corruption, corruption and natural resources, corruption and public finances, corruption and health care and educational services, etc.
2. In the 1990s, early work by Fund staff sought to guide the development of Fund policies on governance and corruption. This work was inspired in part by the parallel academic literature on economic institutions analyzing significant economic and political developments around the world. These include the growth of international trade and business, which created temptations for multinational companies to offer large bribes to public officials in order to obtain contracts, get privileged access to markets, or secure special benefits (e.g., tax incentives) (Tanzi, 1998). Post-cold war transitions experienced in post-communist Europe and reformist countries in sub-Saharan Africa also opened opportunities for abuse and corruption in the privatization processes of state enterprises. The economic analysis of governance and corruption issues were enriched with the launch of cross-country indicators such as Transparency International’s Corruption Perception Index (1995) and the World Bank’s Worldwide Governance Indicators (1996). An early impetus for the Fund’s analytical work on governance and corruption was driven by Vito Tanzi, with seminal publications provided by Sanjeev Gupta, Hamid Davoodi, and Paolo Mauro, among others.2
3. The 2000s saw a deepening of this analysis. The internationalization of governance and corruption issues in the 2000s contributed to continuing interest in specialized studies in these fields, including areas in which the Fund had a comparative analytical advantage. The entry into force of the United Nations Convention Against Corruption and other regional treaties helped strengthen a global consensus against corruption and contributed to developing common standards on addressing the vulnerabilities of institutions to corrupt activities (including with respect to fiscal transparency, money laundering, and asset recovery, among others). Academic literature during this period tended to analyze in greater depth the impact of corruption on investment, growth and poverty across countries, and were sustained in part by public uproar against large-scale corruption scandals (e.g., UN Oil-for-Food Program and Siemens bribery scandals). Building on earlier work, Fund staff explored issues of governance and corruption for specific sectors (such as natural resource extraction, fiscal decentralization, and taxation) and for specific regions and countries. For example, oil rents were found to significantly increase corruption, resulting in a substantial welfare loss due to misallocation of resources. (Arezki, et al., 2009) For fiscal decentralization to be a catalyst for improved governance and accountability, appropriate economic and political institutions are needed to insulate the decentralization process from excessive capture of the benefits of government provision by the elites (de Mello and Barenstein, 2001). A study of tax revenues in the Middle East showed that government revenues from taxation could rise if corruption falls and recommended measures such as modernizing the tax administration, changing incentives for tax administration staff, and strengthening internal control systems (Imam and Jacobs, 2007).
4. Staff’s recent work on corruption has been in the context of growing international attention to the issue. Following the global financial crisis, heightened public attention to governance and corruption have led to renewed interest in analyzing their drivers and effects, in which the Fund is playing an important role. Causes for this general reengagement could be various, including the increased political salience of the corruption issue in social upheavals (e.g., Arab Spring, Ukraine’s Maidan Revolution), and the increase in enforcement actions against foreign corrupt acts by larger economies (e.g., 1997 US Foreign Corrupt Practices Act and 2010 UK Bribery Act). The global financial crisis also contributed to exacerbating economic inequalities, which in turn contrasted evidence of corruption among powerful elites with the difficult economic adjustment faced by the majority. Major news stories (e.g., FIFA corruption allegations and Mossack Fonseca documents) revealed the complexity of corruption schemes and opportunities in the era of increasing interconnectedness and globalization.
5. With heightened attention to issues of corruption in Ukraine, the Fund was asked by the Ukrainian government to assist in conducting a diagnostic study. This study examined corruption, the business climate and the effectiveness of the judiciary, and produced a frank and hard-hitting assessment of institutional vulnerabilities.3 The authorities agreed to publish the report, which has since formed the basis for the governance measures included as part of the current Fund-supported program in Ukraine.
6. More generally, the 2016 Staff Discussion Note (SDN) provided a global perspective on the impact of corruption. Responding to the growing global attention to corruption, the Fund published an SDN on “Corruption: Costs and Mitigating Strategies” (IMF, 2016b). This describes how corruption undermines growth and economic development and enumerated several factors that could assist members to address corruption and to mitigate corruption risks.
B. The Fund’s Flagship Publications
7. World Economic Outlook Report (WEO). Since the late-1990s, the Fund’s flagship publications have analyzed the detrimental effects of corruption and recommended targeted measures to promote good governance. In the late 1990s, the Fund urged country authorities to increase the transparency of fiscal data as a necessary element for sound government finances, good governance and overall fiscal integrity, and noted that economies in transition had made the greatest progress towards this end (IMF, 1998). The May 1998 WEO dedicated a chapter to fiscal reform in transition economies and recognized the need to implement legal frameworks on the financial operations of government, which should be characterized by accountability and transparency (IMF, 1998). The October 2000 WEO focused again on transition economies, noting that corruption, weak courts and an overbearing bureaucracy could undermine enterprise efficiency and long-term investment incentives by increasing transaction costs and constraining the efficiency of resource allocation (IMF, 2000). The September 2003 WEO, focusing on developing countries, argued that the quality of institutions has a strong influence on economic growth, as good institutions encourage productive activities rather than rent-seeking, corruption and other unproductive activities (IMF, 2003). Some WEO reports also mentioned (but sometimes only in passing) significant governance and corruption concerns in vulnerable countries (e.g., Nigeria, Russia, Pakistan, Bangladesh, Cambodia, Kenya, Italy, etc.).4
8. Regional Economic Outlooks (REOs). Governance and corruption issues were likewise analyzed in some REOs, most notably those produced by AFR and APD. The 2006 AFR REO argued that good governance is essential if higher aid flows are to be effective, and reiterated that pervasive corruption tends to be associated with poorly enforced property rights, weak rule of law and weak incentives for productive investment, all of which damage economic growth (IMF, 2006b). In the same year, APD’s REO noted that governance is a significant determinant of foreign direct investment and that structural improvements in the investment environment, notably in governance frameworks, would in some instances be helpful to deal with uncertainty, raise expected rates of return, and improve competitiveness in the face of globalization (IMF, 2006a). More recently, the 2016 REO for Central, Eastern and Southeastern Europe pointed to concerns over the quality of institutions in key countries affected by corruption (e.g., Ukraine, Macedonia and Moldova), and found that creating reform momentum requires taking into account political economy factors since improvements in government effectiveness may be constrained by poor accountability, low quality of bureaucracy or weak control of corruption in politics (IMF, 2016a). A forthcoming REO for the same region will also include a thematic chapter on governance and institutions.
9. Global Financial Stability Report (GFSR). In assessing the global financial system and markets, GFSRs have highlighted systemic issues that could pose a risk to financial stability and sustained market access. Although GFSRs generally do not cover issues of public governance and corruption, the recent reports following the global financial crisis looked at related issues of corporate governance (2016) and banking governance (2014). Financial stability benefits associated with improved corporate governance strengthen the case for further reform, including recommendations to reform the legal, regulatory and institutional frameworks to foster effectiveness and enforceability of corporate governance regimes.5 Excessive risk-taking by banks was held to be a contributing factor to the global financial crisis, and policy measures to improve bank governance were recommended, including the need to foster transparency as a critical factor to the accountability and effectiveness of market discipline.
10. Fiscal Monitor. Launched in 2009 in the aftermath of the global financial crisis, the Fund’s Fiscal Monitor surveys and analyzes the latest public finance developments, updates fiscal implications of the crisis and medium-term fiscal projections, and assesses policies to put public finances on a sustainable footing. These reports often discuss fiscal governance reforms and the strengthening of institutions. For example, the October 2016 report concluded that strong governance principles should be applied in decision-making processes to safeguard public funds.6
C. Outreach
11. Dialogue and Outreach. The Fund helps promote discussions on governance and corruption issues through its various outreach activities. In recent times, the Fund’s annual meetings have been a venue to foster dialogue on relevant issues such as ethics and finance (October 2014), integrity in public sector governance (October 2015), and youth perspectives on the costs of corruption (October 2016). Fund management have also discussed the problem of corruption in their public engagements.7 Recent significant developments (e.g., Arab Spring, Ukraine’s Maidan Revolution and massive banking scandals),8 global forums (e.g., 2016 London Anti-Corruption Summit)9 and numerous seminars and conferences (2016 International Bar Association Conference)10 have presented unique opportunities for Fund management to expound on the negative macroeconomic consequences of corruption and to call on stakeholders from the public and private sectors to effectively combat it. Contributing to the collection of essays for the 2016 London Anti-Corruption Summit, the Managing Director highlighted the need to address corruption, concluding that turning a blind eye is not a viable option (Lagarde, 2016).
D. Conclusion
12. Overall Assessment: In the Fund’s analytical work on governance and corruption issues, there is widespread institutional acceptance that strengthening governance and reducing corruption are crucial to improving a country’s prospects for overall economic development. Fund publications and staff working papers have analyzed the negative economic impact of corruption on growth and efficiency and have often recommended measures to strengthen transparency, enhance the rule of law, prioritize appropriate economic reform and regulation, and build the capacity of institutions to improve their effectiveness.
13. Positive Feedback Loop: The Fund’s analytical work together with its outreach activities assist in guiding Fund staff in its discussions of governance and corruption issues in the context of surveillance, programs and capacity development projects. The WEOs and REOs are based on feedback from country mission teams, which provide their assessment of whether governance and corruption concerns will have macroeconomic significance to the country’s growth projections. The bi-annual publication of WEOs and REOs likewise guide the mission teams in their discussions with the authorities in the periodic Article IV surveillance consultations. The Fund’s analytical work in specific countries can likewise aid the formulation of structural benchmarks on governance and corruption for Fund-supported programs, such as Ukraine’s diagnostic study. Outreach programs, which are informed by analytical and research work, in turn inform the Fund’s work and build support for Fund engagement with its members on governance and corruption issues.
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Prepared by Jonathan Pampolina (LEG).
See Tanzi (1994, 1998, 1999), Mauro (1996, 2004), Tanzi and Davoodi (1997, 2000), and Gupta, et al. (1999, 2000).
Government of Ukraine, 2014.
Nigeria, see IMF, 2000 at Chapter 1; Russia, see IMF, 2000 at Chapter 3, Box 3.3; Pakistan and Bangladesh, see IMF, 2004 at Chapter 1; Cambodia and Kenya, see IMF, 2003 at Chapter 3, Box 3.4; Italy, see IMF, 2012 at Chapter 3.
IMF, 2016d at Chapter 3.
IMF, 2016c at Chapter 1.
De Rato, 2005; Camdessus, 1998; Camadessus, 1997.
See Lagarde’s remarks in IMF (2016e) as well as video interview on CNN (2016).