Diagnosing Corruption and its Costs

Friday, July 9

Presenters
Mr. Olivier Basdevant, Senior Economist, Fiscal Affairs Department, International Monetary Fund 
Mr. Mihaly Fazekas, Assistant Professor, Central European University & Scientific Director, Government Transparency Institute  

Moderator
Ms. Barbara Dutzler, Senior Economist, Joint Vienna Institute


Bad governance and corruption have long been recognized as impediments to growth, peaceful social orders, and good environmental standards at the national level. Corruption is also a global phenomenon. It not only thrives domestically from vulnerabilities in governance system; it can also be transnational. For example, foreign companies can bribe local officials to gain advantages on specific markets, while perpetrators can conceal the proceeds of corrupt acts in foreign countries. International financial institutions, including the IMF, have put good governance and the fight against corruption at the core of their work to promote global economic stability. Nevertheless, the lack of data and actionable indicators have long made it difficult to fight corruption effectively and to monitor results. This has started to change with the increasing availability of large-scale datasets on government activities such as contract-level public procurement datasets.  

Olivier Basdevant, IMF, offered an overview of the IMF’s approach to governance and anti-corruption in country diagnostics. He outlined the long involvement of the IMF with good governance practices in its member countries since the late 1990s, when Michel Camdessus, then Managing Director, publicly stressed the importance of good governance for macroeconomic policies. Since poor governance is clearly detrimental to economic activity and welfare, the Fund works with its member countries to promote good governance and combat corruption. The 2018 revised Framework for Enhanced Engagement on governance and corruption, aims to promote a more systematic, evenhanded, effective, and candid engagement. This includes surveillance, lending and capacity development assistance to help countries fight corruption and strengthen governance in areas including fiscal governance, central bank governance, anti-money laundering, and rule of law.  

Figure 1: IMF Framework for Enhanced Engagement on Governance and Corruption:

Source: Basdevant, Fazekas (2021), Diagnosing Corruption and its Costs, Presentation at JVI, July 9, 2021

This new modality of engagement laid the foundation for the Fund’s COVID-19 policy and lending response, where stronger governance matters even more. Governance measures commonly committed to by countries authorities in using IMF emergency financing include: 

  • Undertaking and publishing on the government’s website an audit of crisis-related spending, usually by the country’s supreme audit institution. 
  • Publishing crisis-related procurement contracts on the government’s website, identifying the companies awarded with the contract, their beneficial owners, as well as recording ex-post validation of delivery of the services and products specified in the contract.  

Finally, governance diagnostic reports are a key tool in the IMF’s capacity development efforts. They are in-depth, country-tailored assessments of corruption and governance vulnerabilities, providing prioritized and sequenced policy recommendations. These reports are expected to be published in line with the Fund’s transparency policy. Their cross-cutting, comprehensive approach enables special attention to linkages and synergies. For instance, the fight against corruption in procurement systems may not only require typical fiscal management measures (digitalization and automation of processes) but also improved anti-money laundering rules to deal with the proceeds of corruption and wider reforms geared to strengthening the rule of law. Basdevant concluded by underscoring that the complexity of corruption required stakeholders to coordinate their responses across different categories and subject fields.  

Mihaly Fazekas, CEU and GTI, continued with insights into cutting-edge methods of measuring corruption risks in public spending, and showcasing selected applications of new methodologies in policy analysis. He started with a brief overview over various methodologies of measuring corruption, from expert scoring over perceptions and experiences or enforcement-based indicators to proxy measures. The latter are innovative in that they combine individual, micro-level data with administrative records, allowing the construction of macro-relevant indices for a variety of sectors. Public procurement is particularly relevant, given that approximately 15 percent of global gross domestic product flows through public procurement systems. Rooted in a thorough qualitative understanding of what behavior constitutes corruption in public procurement – avoiding competition to favor a certain bidder – objective, de-facto, individual-level risk indicators can be formulated for buyers, suppliers, tendering process as well as political connections.  

Using a new near real-time database which comprises and standardizes official government contracting datasets (currently over 45 million public contracts from 38 countries with over 6 million government suppliers and 1 million public organisations), the Corruption Cost Tracker builds an evidence base about where corruption risks lie in public procurement, their costs, and the benefits of reform in terms of savings. The harnessing of big data allows identifying and statistically testing widely applicable red flags such as short bid submission period (tendering risk) or suppliers registered in tax havens (supplier risk), amongst others. While parameters differ between countries, the indicators capture the same underlying risky behaviors.  

Figure 2: Corruption Risk Index components for each country 

Source: Basdevant, Fazekas (2021), Diagnosing Corruption and its Costs, Presentation at JVI, July 9, 2021

How much lower would public spending be if the level of corruption or specific red flags were reduced or eliminated? The detailed analysis of public spending on procurement by sector, region, year and public organization type as well as econometric modeling of the price sensitivity of awarded contracts to corruption risks allows for a comparison of potential efficiency gains. This enables targeted policy interventions that can lower corruption risks while simultaneously lifting economic efficiency. As a further application of the database, Fazekas presented a forthcoming study1 how COVID-19 affected procurement in non-healthcare, non-COVID related markets in Romania, and how different risk categories of buyers responded to the relaxation of spending controls.  

A rich discussion ensued, with participants enquiring about the application of the cost tracker tool to different countries, feasibility for tax and customs authorities, or relationship between the value of the contracts and corruption risk indicators. In line with the panelists’ call for partnerships, even a potential future cooperation may result from this successful webinar.   

Barbara Dutzler, Senior Economist, JVI

Presentation

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