The International Monetary Fund (IMF) released a report Wednesday finding that annual cost of bribes paid in both developing countries and advanced economies amounts to $1.5 to $2 trillion globally.
World GDP is estimated at $78.28 trillion in nominal basis, and $107.5 trillion on the more inclusive terms of purchasing power parity. Although annual bribes amount to about two percent of global GDP, the total cost of corruption is multiple times larger because bribes constitute only one aspect of the possible forms of corruption.
The paper focuses on “corruption that arises from the abuse of public office for private gain.” Although most people tend to view corruption as a transactional bribe, the IMF suggests “it can also be manifested by powerful networks between business and government that effectively result in the privatization of public policy.”
The IMF report focuses on the five “state functions” that drive international corruption”
- Fiscal policy associated with corruption in taxation and government spending;
- Market regulation that is corruptly used to reward friends and limit competition;
- Monetary policy corruption in central banks that steal wealth through inflation;
- Financial sector oversight that allows corrupt lending practices; and
- Public order and enforcement that shakes down the public and businesses.
Although most politicians like to deflect discussions of corruption to developing nations that do not have sophisticated bureaucracies, the IMF previously found in a 2013 PricewaterhouseCoopers study that corruption inflated the cost of public projects by 13 percent on average in the eight advanced European countries of France, Hungary, Italy, Netherlands, Poland, Romania, Spain and Liechtenstein.
The IMF also noted that corruption creates disincentives for taxpayers to pay taxes. When political lobbying results in certain tax code “exemptions” that tend to be only available to clients of the lobbyists, the public becomes far less willing to comply with the tax laws, which are perceived as unfair.
The IMF commented that the second installment of the “Panama Papers,” which covered 200,000 offshore entities, “bring into focus the scope of global financial secrecy and the potential it creates for tax evasion and other criminal activities.” Such tax evasion “contributes to inequality and to perceptions of unfairness—undermining citizens’ trust in their governments” and “discourages entrepreneurs from starting new businesses in the formal economy”, further eroding the state’s revenue base.
Given its role as often the “lender of last resort” for bankrupt nations, the IMF suggests that transparency, rule of law, and economic reform policies designed to eliminate excessive regulation are the key to reigning in corruption.
In addition, marking the same week a second installment of the “Panama Papers” has been published, detailing massive international corruption, IMF Managing Director Christine Lagarde also published an essay that warns that in addition to the known economic and social costs of corruption, “the indirect costs may be even more substantial and debilitating, leading to low growth and greater income inequality.”
The essay is an introductory chapter to a book by British Prime Minister David Cameron about corruption. Cameron’s own family has been reported to have ties to offshore investments implicated in the Panama Papers scandal and has established a taskforce to investigate.