Governance and Fighting Corruption: An IMF Perspective
Washington, March 31,
Deputy Divison Chief
International Monetary Fund
Fiscal Affairs Department
Governance and corruption are words that have come to the
forefront in the current discussion of macroeconomic and financial policies. They are now
clearly seen as issues to be addressed as an integral part of economic analysis and policy
discussion, be it by the Fund and other International Organizations or by national
The Relationship Between Governance and Corruption
- As commonly used, the term governance refers to the manner
in which governments discharge their responsibility. That is to say, are they effective,
are their operations transparent and are they accountable? Governance thus covers a whole
range of government activities. It is a broader concept than that of corruption.
- The most popular and simplest definition of corruption is
that it is the abuse of public power for private benefit. From this definition, however,
it should not be concluded that corruption cannot exist within private sector activities.
Corruption clearly exists both in the private and public sectors. It is not just a
temptation to be indulged in by public officialsthose in positions of trust or
authority in private enterprises or non-profit organizations may encounter the same
temptation. In a broader sense, corruption may be thought of the abuse of authority or
trust for private benefit.
- While corruption is a much narrower concept that poor
governance, it is clear that poor governance generally creates incentives and
possibilities for corruption. And while toughening the legal structures against and
punishments for corruption is important, it is nevertheless essential to tackle the
underlying governance problems that may encourage corruption.
- Indeed, a fundamental assumption underlying Fund programs,
Fund policy advice and Fund technical assistance has been that by seeking to improve
governanceparticularly in areas of economic policythe Fund can also contribute
to the fight against corruption.
What promotes corruption?
- In his paper "Corruption Around the World: Causes,
Consequences, Scope, and Cures" Vito Tanzi has listed particular activities of the
state that provide fertile ground for corruption.
- Regulations and Authorizations: In many countries,
licenses, permits and so on are required to engage in such activities as opening a shop,
investing or engaging in foreign trade. These regulations and authorizations give the
officials a monopoly power and require frequent and protracted contact between citizens
and bureaucrats. The sometimes enormous time spent dealing with the officials can be
reduced through payment of bribes.
- Taxation: Unclear tax laws that require contacts
between taxpayers and tax inspectors are more likely to lead to corruption than clear tax
- Spending decisions: Lack of transparency and effective
institutional controls can invite corruption in public spending through several channels,
including investment projects, government purchases of goods and services, and
extrabudgetary accounts set up to reduce the political and administrative controls more
likely to accompany spending that goes through the budget.
- Goods and services: Provision for goods and services at
below market pricesfor example, foreign exchange at a special rate, credit at soft
terms, electricity and water at subsidized rates, and public housing at subsidized
rentsis another government activity that can breed corruption. In some cases,
limited supply makes rationing and queuing unavoidable. Public employees often have to
decide how to apportion this limited supply, while those who want such goods may be
willing to pay a bribe to gain access.
- Other discretionary decisions: In may countries, some
public officials may have discretion over important decisions. In these situations,
corruption, including high-level political corruption, can play a major role. It is
natural that some individuals and enterprises to whom these decisions mean a lot will
attempt to get favorable decisions either by paying bribes or exploiting close personal
relations with public officials. Important areas include decisions regarding: the use of
private land (zoning laws); authorizing major foreign investments; privatization of
A final area listed by Vito Tanzi in his
paper is bureaucracy. The quality of the bureaucracy varies greatly among countries and
bears on the degree of corruption. Politically motivated hiring, patronage, nepotism, and
the absence of clear rules on promotions and hiring all undermine the quality of a
bureaucracy and help create conditions for corrupt behavior.
Negative effects of corruption
- Aside from reducing the moral authority of and confidence
in government, and tending to create an environment which is generally disillusioning for
productive activity, corruption has other, more concrete negative effects on resources
allocation and growth. Tanzi points out that the recent fairly broad consensus seems to be
that corruption is bad.
- In the past years, several studies, using cross-sectional
analysis and the available corruption indexes, have reported important quantitative
results on the effects of corruption on economic variables. These results suggest that
corruption has a negative impact on the rate of growth of countries. Let me mention a few
- Paolo Mauro from the Fund found that an improvement in a
countrys corruption index by 2 points out of 10 points is associated with an
increase in the investment ratio of 4 percentage points and an increase in the rate of
growth of 0.5 percent of GDP.
- Paolo Mauro also found that corruption reduces expenditures
on education and health. An increase in the corruption index by 2 points reduces public
spending on education by 0.5 percent of GDP.
- Vito Tanzi and Hamid Davoodi found that corruption tends to
be associated with higher, but lower quality spending on capital projects and it reduces
expenditures for operation and maintenance for reasons similar to those that reduce
expenditure on education and health.
- Professor Wei from Harvard who has been a frequent visiting
scholar at the Fund found that corruption reduces foreign direct investment because
corruption has the same effect as a tax. An increase of 1 point in the corruption index is
equivalent to an increase of the tax rate by 5 percent and will result in a reduction in
foreign investment by 8 percent.
How does the IMF address governance and corruption
- The IMFs role in governance and corruption issues has
been evolving over the years. Let me be clear: The IMF is a monetary institution and has a
macroeconomic mandate. Traditionally, the IMFs main focus has been on encouraging
countries to correct macroeconomic imbalances, reduce inflation, and undertake key
structural reforms in the trade, exchange, and other areas in support of macroeconomic
stabilization and sustainable growth.
- While these monetary and macroeconomic concerns remain the
Funds first order of business in all its member countries, increasingly the Fund has
found that a much broader range of institutional reforms is needed if countries are to
establish and maintain private sector confidence and thereby lay the basis for sustained
- Mirroring the greater importance the membership of the IMF
places on this matter, the declaration "Partnership for Sustainable Global
Growth" that was adopted by the IMFs Interim Committee in 1996, identified
"promoting good governance in all aspects, including ensuring the rule of law,
improving the efficiency and accountability of the public sector, and tackling
corruption" as an essential element of a framework within which economies can
prosper. The IMFs Executive Board then met a number of times to develop guidance for
the IMF regarding governance issues.
- The Guidance Note was adopted by the Board in July 1997. It
reflects the strong consensus among Executive Directors on the significance of good
governance for economic efficiency and growth.
- So, how does the IMF go about promoting good governance?
Let me now discuss some of the more specific aspects of the Funds work which relate
to the promotion of good governance and the elimination of corruption.
Specific aspects of the Funds work which relate
to promoting good governance and fighting corruption
- First, as part of its adjustment programs and policy
advise, the Fund has generally encouraged price decontrol, liberalization of the exchange
rate and trade systems, the creation of systems for market determined interest rates, the
abolition of direct credit allocation based on ad hoc nonfinancial decisions. Such
measures that are intended to liberalize the economy and increase efficiency, have also
helped curtail that fertile ground for rent seeking that I mentioned earlier.
- Fund technical assistance has assisted countries in
enhancing their capacity to design and implement sound economic policies and in improving
public sector accountability. Such assistance has covered a wide range of issues including
the compilation and dissemination of timely data on government financial operations,
establishing appropriate controls over government expenditures, reforming tax and tariff
- Second, and that is a more recent development, the Fund has
promoted transparency in financial transactions and standards. The Funds work on
promoting transparency and standards focuses on 4 areas regarded as core areas of interest
to Fund operations. These are:
- Data dissemination:
The Fund has sought to promote good
practices of statistical reporting for some time. From early 1995, work began on
development of explicit data dissemination standards to guide countries on the provision
of comprehensive, timely, and publicly accessible economic and financial statistics.
Recently, the focus of this work has shifted to reporting on international reserves and
- Fiscal transparency: The Fund has developed a
"Code of Good Fiscal Practice", which is based on four general principles: (1)
Roles and responsibilities of and within government should be clear; (2) comprehensive
reliable information on fiscal activities should be available to the public; (3) the
process of budget preparation, execution and reporting should be open; and (4) there
should be independent assurance of integrity of information.
- Monetary and financial policies: In a similar way,
transparency aspects of traditional Fund technical assistance and policy advice in the
areas of monetary and financial policies, have been formalized in the Code of Good
Practice in Monetary and Financial Policies, which was endorsed by the Interim Committee
in September 1999.
- Banking system soundness: On banking supervision, the
IMF is working closely with other international organizations on the implementation of the
Basle Core Principles for Effective Banking Supervision.
Criteria for IMF involvement
- The guidance note I mentioned earlier makes it clear that
the IMFs mandate and resources do not allow the institution to adopt the role of an
investigative agency or guardian of financial integrity in member countries. Also, the
guidance note emphasizes that the IMFs involvement in governance should be limited
to its economic aspects.
- In considering whether IMF involvement in a governance
issue is appropriate, the guidance note is clear that the staff should be guided by an
assessment of whether poor governance would have significant current or potential effects
on macroeconomic performance in the short and medium term and the ability of the
government to credibly pursue policies aimed at external viability and sustainable growth.
Thus, the Funds concern for the quality of governance and limiting corruption
springs from the fact that poor governance and corruption may have an actual or potential
negative impact on macroeconomic performance.
- As regards possible individual instances of corruption, the
guidance note says that the IMF staff should continue raising these with the authorities
in cases where there is a reason to believe they could have significant macroeconomic
implications, even if these effects are not precisely measurable.
- Instances of corruption that do not meet the threshold of
having significant macroeconomic implications are best addressed through the IMFs
efforts to promote transparency and support policy reform that remove opportunities for
rent seeking activities.
- In the case of a country that seeks a financial arrangement
with the IMF, the need to safeguard the Funds resources must also be taken into
account. Financial assistance from the Fund could be suspended or delayed on account of
poor governance, if there is reason to believe it could have significant macroeconomic
implications that threaten the successful implementation of the adjustment program.
Corrective measures that at least begin to address the governance issue should be prior
actions for resumption of IMF support and, if necessary, certain key measures could be
structural benchmarks or performance criteria.