The Culture of Corruption and its Macroeconomic Implications

04  November 2010    4:00 pm

Alex Mourmouras, Chief of the European Division of the IMF Institute

Venue

wiiw, Rahlgasse 3, 1060 Vienna, lecture hall (entrance from the ground floor)

Description

This presentation will describe the macroeconomic implications of 'cultures of corruption', defined as situations in which private individuals intensify their tax evasion activities in response to higher levels of corruption in public investment projects. It is based on two papers (jointly written with Maksym Ivanyna and Peter Rangazas) that use simple growth models of fiscal policy to examine quantitatively the detrimental effect of corruption on levels of taxation, economic growth and debt sustainability - a key concern in many over-indebted, slow-growing countries.

The presentation will first review evidence from the IMF, the World Bank and other sources that link corruption in public investment ('bridges to nowhere' and other white elephants) to higher taxes, increased public debt, lower productivity and slower economic growth. The basic structure of the politico-economic growth model used in the calibration will then be presented. Its main ingredients are corruption in public investment, tax evasion and fiscal policy that is determined endogenously by selfish public officials. It will be argued that a 'culture of corruption' effect is needed if estimated levels of tax evasion in developing countries are to match observed correlations between corruption and tax revenue. It will be also be demonstrated that when compared to a corruption- and evasion-free economy, taxes are significantly higher, government revenues are significantly lower, less private and public capital is accumulated, and economic growth is reduced. The presentation will then turn to consider interactions between corruption, fiscal policy and government debt. We will argue that corrupt governments tend to borrow more, that capital accumulation and growth suffer, and that boom-bust cycles of indebtedness can result. Regarding policy implications, the main one is that tax evasion and corruption must be addressed jointly. A coordinated effort is required to simultaneously break the private and public sector’s bad habits; treating either in isolation will not suffice and may even be counterproductive. For example, tackling tax evasion without cleaning up corruption in government investment first will likely result in higher taxes, more corruption, higher public debt and lower welfare. Moreover, public officials must be paid decent wages in order to ensure that they are not tempted by corruption. Lastly, fiscal rules - in particular, public debt rules - reduce debt, corruption and volatility and improve welfare.


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