Governments could save $1 trillion in taxes by curbing corruption, new IMF research saysBY

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BY Elizabeth Schulze

Among advanced economies, countries with the lowest levels of corruption collected nearly 5 percent of GDP more in tax revenues on average than countries
with the highest levels of corruption, the IMF found.
A 2018 survey by the OECD found 42 percent of state-owned enterprises reported corrupt acts or other irregular practices in their company during the
past three years.

(CNBC) Cracking down on corruption would reap big economic rewards for governments around the world, according to new analysis by the International Monetary Fund (IMF).

In a chapter published Thursday as part of the IMF’s April 2019 Fiscal Monitor report, researchers found reducing corruption across all countries would increase total tax revenues by $1 trillion, or roughly 1.25 percent of global GDP (gross domestic product).

“The gains would be greater considering that lower corruption would raise economic growth, further boosting revenues,” the report added.
In addition to increasing government revenue, fighting corruption can also reduce waste and even help to lift test scores among public school students, the IMF said. It also improves overall public trust in the government.

“Less corruption means lower revenue leakage and less waste in expenditures, and higher quality of public education and infrastructure,” said the report.

The pattern of lower corruption perception and higher revenues is maintained across developed, emerging and low-income countries, the data showed.

“Among advanced economies, a country in the top 25% in terms of control of corruption collects 4.5% of GDP more in revenues, on average, than a country in the lowest 25%. The gap in revenue collection is 2.75% of GDP among emerging market economies and 4% of GDP among low-income countries,” said the report.

For a graphic on Bribe expectations for particular purposes – tmsnrt.rs/2HX4Uwk
TRANSPARENCY, STRONG PRESS ARE KEY

Previous studies showed that extractive industries like mining and oil drilling are hotbeds for corruption, as are procurement and the administration of state-owned enterprises. The Fund focuses on transparency and oversight as key elements in curbing corruption in these areas, with a strong, free press as catalyst.

“We expected transparency would go together with good fiscal outcomes, but what surprised us is that the effect of transparency is much stronger in countries that have a free press or a (strong) civil society,” said Paolo Mauro, deputy director in the IMF’s Fiscal Affairs department.

“And when you have those two together the effect is even stronger.”

Mauro and Paulo Medas, a deputy division chief in the same IMF department, co-authored the study, a chapter of the Fund’s Fiscal Monitor, which is being published in parts this week ahead of the IMF’s spring meetings scheduled next week in Washington.

Among other recommendations to curb corruption, the Fund calls for the professionalization of civil service, including merit-based hiring, as well as the need for simple tax rules and business codes to avoid the temptation of bribes to navigate them.

The report recommended technology that can fight corruption. For instance, it said, taking procurement on line is seen as a rapid and inexpensive part of the anti-corruption puzzle.

So-called e-procurement “is a relatively cheap initiative that can open competition, so you can have bidders from any place in the country or the world and it makes it very cheap and transparent for companies to bid,” said Medas.

Chile and South Korea are cited as examples in the effectiveness of e-procurement, while Rwanda and Georgia show some of the highest increases in revenue collection relative to GDP.

Emerging countries’ dependence on extraction of raw materials for economic development gives them an added incentive to curb corruption and makes success even more important.

“You want to invest in very good institutions, extremely high levels of transparency and very intrusive external oversight,” said Medas.

The trillion in added tax revenues comes on top of a previous study that stated that corruption in the public sector costs between $1.5 trillion and $2 trillion annually in bribes alone.

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