Public Financial Management and Anti-corruption: prevention through stronger PFM systems

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September 27, 2007

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Corruption is a hot  topic in international circles these days, and particularly with respect to country public finance systems. The IMF Fiscal Affairs Department has made a contribution to understanding how improvements in  public financial management systems can help fight corruption.

While  not an 'idiots guide to corruption',  a recent FAD staff paper (Dorotinsky,  William and Shilpa Pradhan), published in "The  Many Faces of Corruption: Tracking Vulnerabilities in the Sectors" (World Bank, 2007), explores the conditions of PFM systems that enable corruption to flourish, the ways corruption commonly manifests itself, and  develops a model for assessing the vulnerability of country PFM systems to  corruption.

The authors find that "Countries with better-performing  PFM systems have lower corruption perception indexes," and  that "Countries with stronger participation of external stakeholders in the  public spending have lower corruption perception indexes."

The  paper argues there are five systemic factors that increase the risk of  corruption in PFM (four of which are internal to the executive branch). These  factors are:

The five-point model  offers a structured way of analyzing country PFM systems, identifying the  weakest link, and developing strategies for improving PFM systems to minimize  opportunities for corruption. The model is applied to Ghana,  with suggestions for a reform path. In developing reforms, the authors caution that "In identifying entry points for participation of  external stakeholders in the budget process, it is essential to balance  external demand-side pressures for increased accountability with supply-side  measures to improve PFM."

As  the paper notes, "The challenge is  creating a robust public finance system that maximizes detection and  remediation of corruption, thereby minimizing opportunities for corruption."  This has high relevance for government officials wanting to tackle the issue,  for agencies providing technical assistance, and for country  PFM reform strategy development.

Posted  by Bill Dorotinsky

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