Corruption: Costs and Mitigation Strategies

Transcription

1 Corruption: Costs and Mitigation Strategies Presented by Sanjeev Gupta Deputy Director Fiscal Affairs Department INTERNATIONAL MONETARY FUND APRIL 12, 2017

2 Outline Definitions and Manifestations The economic and social costs of corruption Corruption and Fiscal Policy Strategies for addressing corruption based on IMF experience Conclusions 2

3 Definitions and Manifestations Abuse of public office for private gain Limited to public sector corruption (not private sector corruption) Corruption can: Involve non-financial gain (e.g., conflicts of interest arising from family interests) Pervert the law making process (state capture/privatization of public policy) If corruption becomes systemic (i.e. the norm), in the extreme it can affect all state functions and lead to a breakdown 3

4 The Economic and Social Costs of Corruption

5 Corruption State Functions Fiscal Market Regulation Monetary Policy Financial Sector Oversight Public Order & Enforcement Macro-Financial Stability Banking crises External sector imbalances Inflation Fiscal unsustainability Financial inclusion Public & Private Physical Capital Inefficient public investment Costly investment and production Distorted composition of projects Uncertainty Distorted asset prices Human Capital Insufficient spending on education/health Poverty and inequality Disincentives for skill acquisition TFP Insufficient investment (R&D) Inefficiency Distorted capital allocation Skills mismatch Political Instability and Conflict Potential Inclusive Growth 5

6 and can hinder sound monetary policy Corruption Perception Index 2/ CPI Inflation and Corruption Perception Index 1/ (Average for ) Correlation= 0.426*** CPI Inflation 1/ Variables presented are deviations from values predicted by income level. 2/ Larger numbers indicate lower perceived levels of public sector corruption. Asterisks from the correlation equation imply significance at 1%. Because of lower public revenues, countries tend to rely more on seigniorage finance Fiscal dominance Inflation bias as shown in the figure Corruption further weakens financial oversight and stability Poor lending and regulatory practices Weak banking supervision 6

7 Corruption hampers market access Emerging Market Sovereign Spreads and Corruption Perception Index 1/ (Average for ) Corruption Perception Index 2/ Correlation = 0.488** Even market participants appear to factor in corruption into their lending decisions EM Yield Spread (Basis Points) 1/ Variables presented are deviations from values predicted by income level. 2/ Larger numbers indicate lower perceived levels of public sector corruption. Asterisks from the correlation equation imply significance at 5%. 7

8 and negatively impacts the private sector by: Corruption and the Ease of Starting a Business 1/ Raising uncertainty Acting as a barrier to entry (see figure) Distorting resource allocation from productive to rent-seeking activities Corruption Perception Index (avg ) 2/ Correlation= 0.466*** Number of procedures to register a business (avg ) 1/ Variables presented are deviations from values predicted by income level. 2/ Larger numbers indicate lower perceived levels of public sector corruption. Asterisks from the correlation equation imply significance at 1%. 8

9 Corruption is linked to poor social and environmental outcomes Limits build-up of human capital Through reduced allocations for social programs Compounded by leakages With potential consequences for equality and poverty Studies show that child mortality rates are about one-third higher in countries with high corruption. Infant mortality rates and percent of low-birthweight babies are almost twice as high. More pollution due to Weaker, poorly enforced environmental regulations Over extraction of natural resources 9

10 Political instability and conflict In the extreme, systemic corruption can lead to political instability and conflict It has been argued that natural resource abundance can accentuate the situation 10

11 Corruption and Fiscal Policy

12 Corruption and Expenditure: It undermines quantity and quality of public spending through Public Investment Efficiency and Corruption Perception Index Inflated public procurement costs Siphoning of funds through off-budget transactions Weak payroll controls and Weaknesses in computerized PFM systems Distorts budget allocations Lower public investment and other priority spending Public Investment Efficiency Index (larger numbers mean higher efficiency, 0-1) High Corruption Medium Corruption Low Corruption Lower efficiency of public investment (see figure) Corruption Perception Index (avg ) Note: The samples are grouped into high, medium and low corruption in equal numbers based on the Corruption Perception Index. The lines show the range of efficiency for each group. The green and red boxes are the second and third quartile (from the bottom) of the samples, thus the boxes cover 50 percent of the countries. 12

13 Corruption and taxation Corruption weakens the state s capacity to raise revenue Harms the culture of compliance, increasing tax evasion As a result, lower revenue limits the ability of the state to provide public services with consequences for growth More empirical evidence needed Several papers document the negative effect of corruption on tax revenues (Friedman, Johnson, Kaufman, and Zoido- Lobaton (2000, JPE), Fjeldstad and Tungodden (2001), Fisman and Svenson (2002), Imam and Jacobs (2007, IMFWP), Besley and Persson (2014, JEP)). Limited evidence on the transmission mechanisms and the composition effects ((Tanzi and Davoodi (1997), Imam and Jacobs (2007, IMFWP)) Here we report work on taxation and corruption Using recently compiled comprehensive dataset of 152 countries covering Assess the effects of corruption on tax revenues using disaggregated tax data. Assess the effects of corruption on specific taxes using micro data derived from new IMF tools 13

14 Total Tax Revenue Total Tax: All Countries Total Tax: Advanced vs. Developing Tax Revenue(% of GDP) Correlation *** Tax Revenue (% of GDP) Advanced Developing Correlation *** Correlation *** TI Transparency Index TI Transparency Index Note: Larger numbers on the x-axis indicate higher perceived levels of public sector corruption. Asterisks from the correlation equation imply significance at 1%. 14

15 Taxes on Goods and Services VAT Revenue VAT C-Efficiency Tax Revenue(% of GDP) Correlation *** C-Efficiency Ratio Correlation *** TI Perception Index TI Perception Index Note: 1. Larger numbers on the x-axis indicate higher perceived levels of public sector corruption. 2. Asterisks from the correlation equation imply significance at 1%. 3. Data sourced from IMF s FAD WoRLD Tax Database and Transparency International 15

16 VAT Policy and compliance gaps Compliance Gap VAT Refunds Correlation *** Correlation *** 70 Compliance Gap VAT Refund/VAT Gross (%) TI Perception Index TI Perception Index Note: 1. Data sourced from IMF Revenue Administration s Fiscal Information Tool (RA-FIT) and Gap program (RA-GAP), and Transparency International 2. Asterisks from the correlation equation imply significance at 1%. 16

17 Income Tax Revenue 16 Individual Income Tax 8 Corporate Income Tax Tax Revenue(% of GDP) Correlation *** Correlation Tax Revenue (% of GDP) TI Perception Index TI Perception Index Note: 1. Larger numbers on the x-axis indicate higher perceived levels of public sector corruption. 2. Asterisks from the correlation equation imply significance at 1%. 3. Data sourced from IMF s FAD WoRLD Tax Database and Transparency International 17

18 Other taxes: social security contributions and Trade Tax Tax Revenue (% of GDP) Social Security Contributions Correlation *** TI Perception Index TI Perception Index Note: 1. Larger numbers on the x-axis indicate higher perceived levels of public sector corruption. 2. Asterisks from the correlation equation imply significance at 1%. 3. Data sourced from IMF s FAD WoRLD Tax Database and Transparency International Tax Revenue (% of GDP) Trade Tax Correlation *** 18

19 Trade Efficiency Days To Clear Imports Through Customs All Entry Points Without Inspection With Inspection Number of Days Correlation *** TI Perception Index Note: 1. Larger numbers on the x-axis indicate higher perceived levels of public sector corruption. 2. Asterisks from the correlation equation imply significance at 1%. 3. Data sourced from IMF revenue Administration s Fiscal Information Tool and Transparency International 0 Air Land Sea Low Corruption High Corruption Air Land Sea Low Corruption High Corruption 19

20 Empirical methodology Usual regression: yy iiii = αα + ββ CCCCCC iiii + kk nn θθ kk XX kk iiii + εε iiii Data Tax data from IMF databases (WOrLD) Corruption Perception Index (CPI) from Transparency International Identification IV pool estimates (more data) Instrumental variables: Index of ethnolinguistic fractionalization and religion fragmentation. 20

21 Total Tax Revenue Total Tax Revenue Change in Revenue after 5 *** points increase *** *** in corruption index *** 1.70 Overall Grouping by Time Period Corruption Index Over Time Note: 1. Data sourced from IMF s FAD WoRLD Tax Database and Transparency International 2. Asterisks from the correlation equation imply significance at 1%. 3. The line graph shows the change in average corruption perception index over time on the secondary axis

22 Revenue composition Change in Tax Revenue Change in Revenue after 5 points increase in Corruption index *** 2.10 *** *** *** *** VAT Individual Income Tax Corporate Income Tax Tax Type Social Security Contributions Note: 1. Data sourced from IMF s FAD WoRLD Tax Database and Transparency International 2. Asterisks from the correlation equation imply significance at 1%. Trade Tax 22

23 Key messages on taxation and corruption Corruption is associated with weak revenue performance The impact is felt more on VAT the tax with most revenue potential. Corruption seems to be having a negative impact on its compliance and implementation Personal income tax affected more than CIT this has implications for the progressivity and the design of the tax system. Surprisingly, social security contributions are strongly affected. More digging is needed to understand this result. This might be related to the extent of informality in the economy. Trade taxes continue to be affected as reflected in the delays at clearance points. While the importance of these taxes is declining for many developing countries, there are others such as fragile states where they will remain crucial sources of revenue. 23

24 Strategies for Addressing Corruption Transparency, Rule of Law, Economic Reform and Regulation, Building Institutions

25 Fund Experience: four main areas 1. Transparency: providing public with access to information 2. Rule of Law: having a credible threat of prosecution 3. Economic Reform: eliminating excessive regulation 4. Building institutions: all depends on effective institutions 25

26 Transparency General Transparency is a pre-requisite for the proper functioning of the market It can also be targeted on corruption Development of international standards on fiscal and financial transparency Transparency in extractive industries these are important because of their relative share in many economies Supporting international standards on transparent corporate ownership 26

27 Enhancing the Rule of Law There must be a credible threat of prosecution Sometimes new specialized institutions must be set up where existing ones are themselves corrupt An effective anti-money laundering framework must be in place to minimize the laundering of proceeds of corruption Enforcement must also target the private sector 27

28 Economic Reform Eliminating Excessive Regulation Excessive regulation is an important source of corruption (Anne Krueger: rent seeking ) Elimination of excessive regulation and simplification are a cornerstone of anti-corruption strategy (i.e., Ukraine Caribbean, MENA countries). However, it is important to have an adequate institutional framework in place first when transitioning from state controlled monopolistic markets. (i.e., emerging economies in Eastern Europe) 28

29 Building Institutions The key issue is implementation, for which institutions are critical. Four building blocks for effective institutions. A clear legal framework is required For example: an independent central bank (mandate, oversight, operational and financial autonomy, appointment criteria, dismissal rules, legal protection of staff) With adequate technical expertise Institutions cannot be effective without requisite technical competence And the right incentive package for non-corrupt behavior For example: securing wage adequacy in combination with effective dismissal procedures With a critical role of leadership For example: both setting a personal example and ensuring decisive action 29

30 Conclusion Public sector corruption substantially impairs key channels influencing inclusive growth. Fighting corruption calls for a long term and holistic strategy, albeit appropriately sequenced based on country-specific circumstances. A crisis can be a catalyst for change; but a crisis setting generally does not permit for full resolution. Determined leadership over time is a key underlying factor. 30

31 Appendix Tables 31

32 First stage Dpdt var. Corr. percep. index All (1) (2) Ethno. Fraction *** *** (1.690) (1.421) Religion Fragm *** *** (1.988) (1.320) Openness (0.590) Log. of Inflation *** (0.310) Share of Agric *** (3.660) Log. GDPpc PPP *** (3.947) Log. GDPpc PPP^ *** (0.226) Constant *** *** (1.123) (17.705) Observations 1,934 1,934 R-squared Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 32

33 Corruption and Taxation Dpdt var. Total Tax Revenue All IV Pool FE (1) (2) (3) (4) Corr. percep. index *** *** ** * (0.000) (0.001) (0.000) (0.000) Corr. percep. indexae *** (0.001) (0.000) Openness *** *** (0.006) (0.007) (0.008) (0.008) Log. of Inflation *** *** (0.003) (0.004) (0.001) (0.001) Share of Agric *** (0.032) (0.051) (0.044) (0.044) Log. GDPpc PPP *** *** *** *** (0.031) (0.050) (0.040) (0.041) Log. GDPpc PPP^ *** *** *** *** (0.002) (0.003) (0.002) (0.002) Constant *** * *** *** (0.116) (0.166) (0.189) (0.192) Observations 1,934 1,934 1,952 1,952 R-squared AP PvalAP 0 0 CD Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 33

34 Income and Geographical differences Dpdt var. Total Tax Revenue All (1) (2) (3) (4) (5) (6) Corr. percep. index *** *** *** *** *** *** (0.001) (0.001) (0.000) (0.000) (0.000) (0.000) Corr. percep. Index*AE *** (0.001) Corr. percep. Index*DC *** (0.001) Corr. percep. Index*CIS *** (0.000) Corr. percep. Index*LAC *** (0.000) Corr. percep. Index*MENA * (0.000) Corr. percep. Index*SSA (0.000) Constant * *** *** *** *** *** (0.166) (0.176) (0.106) (0.114) (0.128) (0.115) Observations 1,934 1,934 1,934 1,934 1,934 1,934 AP PvalAP CD Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 34

35 Corruption and Taxation Dpdt var. Total Tax Revenue All (1) (2) (3) Corr. percep. index *** *** *** (0.001) (0.001) (0.001) Openness * (0.009) (0.010) (0.008) Log. of Inflation *** *** ** (0.006) (0.004) (0.004) Share of Agric * *** (0.141) (0.050) (0.047) Log. GDPpc PPP *** *** (0.099) (0.047) (0.056) Log. GDPpc PPP^ *** *** (0.006) (0.003) (0.003) Constant *** *** (0.448) (0.169) (0.195) Observations AP PvalAP 9.37e CD Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 35

36 Corruption and Goods and Services taxes Dpdt var. Goods and Services Tax VAT Excise Tax VAT C-efficiency (1) (2) (3) (4) Corr. percep. index *** *** * (0.000) (0.000) (0.000) (0.002) Openness *** *** (0.002) (0.002) (0.001) (0.011) Log. of Inflation * ** (0.001) (0.001) (0.001) (0.007) Share of Agric *** (0.014) (0.016) (0.006) (0.106) Log. GDPpc PPP *** *** ** * (0.021) (0.023) (0.012) (0.204) Log. GDPpc PPP^ *** *** * (0.001) (0.001) (0.001) (0.012) Constant *** *** *** ** (0.078) (0.086) (0.040) (0.748) Observations 1,654 1,388 1,574 1,091 AP PvalAP CD Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 36

37 Corruption and Income Tax Dpdt var. Income Tax Individual Income Tax Corporate Income Tax (2) (3) (4) Corr. percep. index *** *** *** (0.000) (0.000) (0.000) Openness *** *** *** (0.002) (0.002) (0.001) Log. of Inflation ** * (0.001) (0.001) (0.001) Share of Agric *** *** (0.018) (0.013) (0.017) Log. GDPpc PPP *** *** ** (0.026) (0.029) (0.021) Log. GDPpc PPP^ *** ** *** (0.002) (0.002) (0.001) Constant *** *** (0.094) (0.094) (0.083) Observations 1,684 1,432 1,508 AP PvalAP e e-05 CD Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 37

38 Corruption, Social Contributions, Property Tax, and Trade Tax Dpdt var. Social Security Property Tax Trade Tax Contributions (1) (2) (3) Corr. percep. index *** *** (0.001) (0.000) (0.000) Openness *** *** *** (0.004) (0.000) (0.003) Log. of Inflation *** *** (0.003) (0.000) (0.002) Share of Agric ** *** (0.056) (0.004) (0.031) Log. GDPpc PPP *** *** *** (0.069) (0.008) (0.025) Log. GDPpc PPP^ *** *** *** (0.004) (0.000) (0.002) Constant *** *** (0.255) (0.028) (0.091) Observations 1,158 1,465 1,469 AP PvalAP e-08 CD Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 38