IMF arrangements help Baltic and CIS countries to strengthen their economic governance

• Pages: 57-60

Page 57

Among transition economies, the need to reduce corruption and improve governance was perhaps nowhere greater than in the 15 countries that emerged from the former Soviet Union. The IMF has been fully engaged with the Baltic countries and Commonwealth of Independent States (CIS) to achieve macroeconomic stability and pursue critical structural reforms. In fulfilling its mandate to provide economic policy advice to its members, the IMF has also played an indirect role in strengthening governance and battling corruption in the region.

In a new IMF Working Paper, Thomas Wolf and Emine Gürgen briefly review the relationship between governance and corruption and the high economic costs corruption exacts. Their paper, Improving Governance and Fighting Corruption in the Baltic and CIS Countries: The Role of the IMF, summarizes the related steps the IMF has taken to date. Much remains to be done, and the authors outline an agenda for the IMF in the coming years.

Poor governance breeds corruption

While there will be opportunities for corruption in any society, the quality of governance can make an enormous difference. Appropriate strictures and proper enforcement are critical, but according to Wolf and Gürgen, it is even more essential that authorities address underlying governance problems that can give rise to corruption. Indeed, the authors argue, a fundamental assumption underlying IMF conditionality in the Baltic and CIS countries is that improving governance in economic policy areas will help reduce corruption.

The study explains that poor economic governance has three broad dimensions:

• Excessive government intervention and discretion (notably, the regulation of private entities and the adoption of preferential schemes). Foreign exchange and trade restrictions, price controls, directed credits, and tax exemptions, for example, offer tempting opportunities to officials to elicit bribes or kickbacks. Although most countries in the Baltic-CIS region have liberalized, excessive state intervention remains a problem, especially in many CIS countries, and foreign firms have often either been barred to protect local interests or have found themselves the target of demands for bribes. Officials have also awarded exclusive licenses or sold utilities to well-connected individuals.

• Lack of government transparency and accountability and poor management. It is important for governments to maintain arm’s-length relations with the economy, avoid conflicts of interest, establish an efficient and well-paid civil service, develop an open budgetary process and impose strong expenditure controls, establish an efficient tax system...