IMF boss, Lagarde addresses corruption and the trust divide
Christine Lagarde, Managing Director of the International Monetary Fund, provided the keynote address on Sunday 18 September at the Opening Ceremony of the International Bar Association Annual Conference in Washington DC. Below Are Excerpts From Her Address.
ON CORRUPTION IN THE PUBLIC SECTOR – COSTS AND MITIGATING STRATEGIES
“Public corruption – defined as the abuse of public office for private gain – afflicts economies at all stages of development. It is hard to measure; yet its economic and social costs are substantial. The annual costs of bribery alone – a subset of corruption – is estimated at a massive US$1.5–2.0 trillion– roughly 2 percent of global GDP. And the impact goes well beyond these direct costs. Corruption undercuts countries’ efforts to deliver sustainable and inclusive growth. How? Think about the following three channels.
First, by weakening fiscal capacity. When citizens feel that wealthy individuals are able to avoid paying taxes through bribes, it delegitimizes the whole system. And not surprisingly, other people decide not to comply, which undermines the ability of the state to raise revenue
At the same time, government spending becomes skewed toward areas with greater opportunity for graft – such as public procurement for construction projects. One study has found that in eight European countries, public projects were on average 13 percent higher because of corruption.
In extreme situations, the combination of depressed tax revenues and inefficient public spending can result in large fiscal deficits and critical debt situations.
Second channel: corruption discourages investment and perpetuates inefficiency. Uncertainty and the cost of doing business increase with corruption, which acts as a tax on investment. Government borrowing costs can also be affected. For example, evidence of corruption in Petrobras contributed to a series of credit downgrades for Brazil in the past year and a widening in market spreads.
Third channel: corruption entrenches poverty and inequality . By lowering spending on sectors like education and health, corruption disproportionately affects the poor who rely more on social services. The consequences are grave and long-lasting. By some estimates, child mortality rates are one third higher in countries with high corruption, and infant mortality rates are almost twice as high.
MITIGATING STRATEGIES
First, legislative reforms to strengthen the laws on procurement, anti-corruption, asset disclosure by public officials, and anti-money laundering.
Second, establishing a new anti-corruption agency with the active support of civil society.
Third, strengthening the business climate by streamlining and simplifying the regulatory framework; and
(iv) Last but not least, judicial reform, to enhance its independence and integrity.
The process has not always been easy and the implementation record is mixed. But the key point here is that the authorities’ willingness to expose the extent of the problem allowed the IMF to work with them to make fighting corruption a key component of the reform program.
As well as the rule of law, a second strategy to combat corruption is increased fiscal transparency. After all, sunshine is the best disinfectant!
In this area, we have established international standards through a revised Fiscal Transparency Code. We use the code as the basis for evaluating practices of member countries against these standards upon request. For example, in Albania, the assessment found that over 250 public corporations with liabilities equivalent to 30 percent of GDP were not included in published fiscal reports.
Another area of transparency is in the area of anti-money laundering. For almost 15 years now, the IMF has provided advice to our members on the design of frameworks and institutions to combat money laundering. It has also helped to assess countries’ compliance with anti-money laundering standards issued by the Financial Action Task Force (FATF).
These standards have taken on added significance given recent incidents such as the “Panama Papers.” These leaks gave us a window into the scale of global financial secrecy and the opportunities for illicit behavior.
They also reinforce the need to follow through on international initiatives to ensure adequate transparency on the beneficial ownership of accounts held in offshore jurisdictions. We have been recommending greater transparency in this area in a wide range of countries – including Belize, Cyprus, and the United States.
BEYOND CORRUPTION – ADDRESSING UNETHICAL BEHAVIOR IN THE PRIVATE SECTOR
“Clearly, the private sector plays an important role in public sector corruption. After all, for every bribe taken by a public official, there is a bribe given by the private sector.
“However, even when the public sector is not involved, unethical behavior in the private sector can have devastating consequences. This is particularly the case for the financial industry. Few would disagree that unethical behavior and excessive risk-taking in the financial sector played a major role in precipitating the global financial crisis – from which many countries are still recovering.
“It is not just a matter of fraud. As was emphasized by the Archbishop of Canterbury during a recent panel hosted by the IMF on the subject, because of the impact that the financial services industry can have on the economy, excessive risk taking is unethical even if it does not involve fraudulent behavior.
The goal of the financial industry must be not only to maximize the wealth of its shareholders, but also to serve society by supporting sustainable – and stable – economic activity. When the financial sector subordinates this core responsibility to its own self-interest, there is clearly high risk of ethical violation.
MITIGATING STRATEGIES
As with corruption in the public sector, addressing unethical behavior in the financial industry requires mutually reinforcing strategies.
“A good place to start is better regulation and supervision. The Fund has been actively calling for more intrusive supervision following the crisis [9]– and we support the excellent work done to improve both supervision and regulation internationally.
“Our own work has also shown that changing incentives related to compensation practices can help realign financial rewards with long-term performance of the firm. [10] For example, financial authorities in the United Kingdom have issued regulations allowing remuneration to be clawed back in cases of misconduct by senior executives.
“So in both areas – public corruption and unethical behavior – the rule of law plays a key role in creating incentives. A credible threat of prosecution is critical.”
In conclusion, Lagarde commended the IBA for its interest in the issue of corruption, stating that its standing Anti-Corruption Committee and the Judicial Integrity Initiative are critical in upholding integrity within the legal profession.