The Culture of Corruption and its Macroeconomic Implications

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.

As chief of the European Division of the IMF Institute, Alex Mourmouras is in charge of formulating and carrying out training programmes for officials from Central, Eastern, Southeastern Europe, the Baltics, Russia, Ukraine, the Caucasus, Central Asia and selected other transition countries. In 2007, he served as Acting Director and Chief Training Economist of the Joint Africa Institute (JAI) in Tunis, Tunisia. From 1999 to 2003 he was economist and senior economist in the IMF's Policy Development and Review Department (PDR), contributing to reviews of the conditionality attached to IMF programmes, to the revamping of the IMF's frameworks for assessing external and public debt sustainability and to the formulation of policies to prevent and manage the misreporting of information. From 1992-94 and 1996-99, Alex Mourmouras was an economist in the IMF's Fiscal Affairs Department (FAD). While in PDR and FAD, he was a member of several IMF country teams that performed Article IV surveillance and negotiated Fund programmes in Belarus, Kazakhstan, Latvia, Poland and Zimbabwe. He also participated in numerous FAD Technical Assistance missions to several countries. Specific tasks included the analysis of balance of payments and exchange rate policies, monetary policies and the implementation of inflation targeting in emerging market countries, macro-fiscal policy formulation, tax policy and tax administration and expenditure policy (including health, education, pensions, and the strengthening of social safety nets).


Countries covered: European Union

Research Areas: Macroeconomic Analysis and Policy