Corruption Costs Nations Trillions

The International Monetary Fund recently released a report detailing how much corruption impacts governments worldwide. This report, titled “Corruption: Costs and Mitigating Strategies”, follows Managing Director Christine Lagarde’s warning to Ukraine in February that the IMF would halt its bailout unless stronger action to fight against corruption occurred. According to the report, corruption in the public services sector takes out an estimated $1.5 to 2 trillion each year from the global economy due to stunted bribes and costs, lost tax revenue, and sustained poverty.

The paper extrapolates data from 2005 World Bank research, and estimates that about 2% of GDP is now paid via bribes each year, globally. Corruption’s indirect costs, however, are much higher. These costs reduce government revenue by encouraging tax evasion and reducing incentives to pay, leaving less money to be invested in infrastructure, healthcare, and education. Although bribes are sometimes considered “grease for the wheels of commerce”, the IMF reports that corruption drives investment away from countries and boosts the costs of lending.

Consequently, the IMF considers addressing corruption to be increasingly urgent around the world. This sense of urgency becomes evident in an environment where we see growth and employment opportunities being unfulfilled in countries where numerous high profile corruption cases have taken place. The consensus is also growing that corruption is macro-critical and is undermining inclusive economic growth. Corruption affects both developed and underdeveloped countries, often times in places where economies are dependent on nonrenewable natural resources. Combatting this corruption will help to achieve one of the institute’s core mandates of macroeconomic stability, however, strategies in doing so must utilize transparency, clear legal frameworks, credible threats of prosecution, and a strong drive to deregulate economies.

Although often times corruption is understood as being transactional, such as a bribe, it can also be created through substantial networks between business and government, ultimately causing a privatization of public policy. This type of corruption can undermine the state’s ability to deliver economic growth inclusively. When government functions are impaired, it can negatively impact macro financial stability, investment, human capital accumulation, and total factor productivity. In addition, when systemic corruption affects almost all state functions, the distrust of government by its citizens and investors can become so pervasive that it can cause violence and conflict.

Change on many levels is required to design and implement an anti-corruption strategy, but there are numerous elements that should be given priority. These include transparency, rule of law, and economic reform policies designed to eliminate excessive regulation. Effective institutions, on the other hand, are probably the greatest requirement for addressing corruption. Building these institutions can be complex and time consuming, but the objective of developing a competent civil service independent of private influence and public interference is clear. This Thursday, Lagarde is set to participate in a British government-sponsored anti-corruption summit in London that will also include U.S. Secretary of State John Kerry. Other senior officials, including presidents of Afghanistan and Nigeria will be present to conduct discussions on how to prevent corruption in the future.