Public corruption, defined as an abuse of public office for private gain, afflicts economies at all stages of development. Governments around the world face the challenge of addressing citizens’ increased concerns over high corruption as evidenced by recent scandals in many countries.
“While the direct economic costs of corruption are well known, the indirect costs may be even more substantial and debilitating, leading to low growth and greater income inequality. Corruption also has a broader corrosive impact on society. It undermines trust in government and erodes the ethical standards of private citizens,” said IMF Managing Director Christine Lagarde.
“Given the potential impact of corruption on macroeconomic stability and sustainable economic growth, the IMF has been actively engaged in helping our members design and implement anti-corruption strategies,” she added.
Corruption impedes the conduct of budgetary and monetary policy and weakens financial oversight, ultimately hurting inclusive growth, says the paper, Corruption: Costs and Mitigating Strategies, released today. The analysis presented in the paper draws on extensive literature on the topic as well as on IMF experience gained in many countries. The paper shows that the topic is “macro-critical”—that is, critical to the achievement of macroeconomic stability, which is at the core of the IMF’s mandate.
While hard to measure properly, the economic costs of corruption could be substantial. A recent estimate put the annual cost of bribery at around $1.5 to $2 trillion (roughly 2 percent of global GDP). The economic and social costs of corruption could potentially be even larger.
How corruption hampers economic growth
The paper observes that corruption affects economic development in several ways.
First, it weakens the state’s capacity to raise revenue and perform its core functions. By harming the culture of compliance, corruption increases tax evasion. For instance, when tax exemptions are viewed as arbitrary, citizens’ have less incentives to pay taxes. As a result, the state collects less revenue and is unable to provide public services, with potential negative consequences for growth.
Second, by inflating costs in the public procurement process, corruption undermines the quantity and quality of public spending...