July 14, 2017
Corruption can lead to pervasive distrust in government, generating violence, civil strife, and conflict. And the results are devastating for people.
Another problem is that corruption is costly—particularly for those who are already worse off. IMF research shows that in countries with greater levels of corruption, infant mortality and dropout rates are especially high, partly due to less spending on health and education. Reduced investment in these areas tends to hurt poor people the most, and contributes to higher inequality.
In addition to eroding the public’s trust in government and fueling unrest, corruption can hurt economic growth in other ways. As IMF legal counsellor Sean Hagan explains in a new video, corruption also impedes a government’s ability to carry out two of its main duties:
First, corruption can undermine fiscal policy—taxes and spending.
“When a significant portion of the population does not pay taxes, the entire tax system can be delegitimized,” Hagan says.
This can leave countries unable to service their debts, which leads to financial instability.
On the spending side, corrupt officials are less likely to invest in things that promote inclusive growth and benefit society—like health and education services. Instead they may choose wasteful construction projects for their ability to generate kickbacks.
Second, corruption can limit the government’s ability to encourage foreign investment. Bribery, one form of corruption, effectively creates a tax on investment, making it more expensive and less appealing to potential investors.
“Bribes can also create significant uncertainty for an investor, and may dissuade the investor from making the investment decision in the first place,” says Hagan.
In fact, an IMF study estimates that bribery costs roughly $1.5 to $2 trillion annually, or approximately 2 percent of global GDP.
With such dire social and economic consequences at stake, the fight against corruption is a priority for the IMF and our member countries.