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March 02, 2020

How Corruption Works in the Public Sector—One Easy Lesson

Corruptionblog
Posted by Andrew Laing[1]

A recent paper published by the Washington-based Institute for State Effectiveness argues that a consequence of systemic failure in national accountability may be catastrophic corruption. The paper presents a singular view of corruption by looking at the problem through a public finance lens. A “follow-the-money corruption cycle” is used to demonstrate how corruption works at each stage of the public finance management system.

Democracy is presented as a foundation for national accountability where citizens can hold government to account for its promises through the election system every few years. The paper argues that the primary national accountability mechanism that operates in the space between elections is the budget cycle. When the budget cycle is broken, national accountability is likewise. Moreover, the ability of the public finance system to learn and self-clean may be critically compromised.

Examples of such budget cycle failures are numerous. When the budget is more like an auction, without policies being subjected to a rigorous evaluation process, the whole public finance system can be jeopardized. People with power and influence, such as politicians, public officials, and business owners pay for budget allocations and allotments, pay for contracts, pay to vary a contract, pay to verify that a road was built (when it wasn’t), and pay to get paid. They pay to clear audit irregularities whether those are real or otherwise. They pay for positions in government and public corporations, pay to cover tracks in the accounting system, pay for access to lucrative government assets or for favorable treatments on debts. They bribe public officials for low assessments of tax liabilities, low valuation of goods at customs, and favorable concessions and royalty treatments in extractive industries.

The paper similarly describes how, if any evidence of malfeasance gets referred to accountability bodies, such as the police, public prosecutors or an anti-corruption commission, people with political power or influence just pay to clear the referrals.

Clearly if corruption is exploiting weaknesses at all points of the public finance system to this degree, there isn’t much public money left over for key services such as health and education, let alone an inclusive and sustainable growth strategy.

The paper argues that looking at the corruption problem through a broad public finance lens allows reformers to understand why some reforms fall victim to the “whack a mole” problem. One reform is used to stamp out corruption in the area of public procurement, for example, only to see it pop up somewhere else, for instance during contract management.

Another danger is that donor resources are often misdirected into costly investments in IT systems (for example, FMIS and procurement systems) that are much less effective in mitigating corruption than measures designed to disrupt corruption networks in budget and audit systems. Examples of such measures include a requirement for agencies to prepare financial statements that comply with international accounting and classification standard, or amnesties combined with follow-on targeted sting operations. The paper warns, however, that while such reform measures might be far more cost-effective in reducing corruption, the political challenges of overcoming vested interests can be huge.

The paper also cautions of risks with peace deals that are agreed based on a “spoils of war” approach, where power is the reward and gets distributed through agreements on who gets unfettered access to resources within specified budgets or infrastructure projects – the bounty from winning. In spoils of war deals, some government agencies are fought over harder than others. Examples are tax and customs authorities – as they raise revenue – and health, education and infrastructure ministries as they typically finance many large projects.

The paper argues that peace deals might be better served by pursuing a “rules of the game” approach, which explicitly considers how the whole public finance system should operate under a negotiated peace deal. It is argued that a “follow-the-money corruption cycle” is a useful tool for considering how the public finance system should operate under a negotiated peace deal and the extent to which rampant corruption can be dealt with. Even if “spoils of war” methods are adopted, negotiators and the public would be well served if they had information on the value of rents that accompany allocating government positions in a spoils system, and the likely impact on corruption, service delivery, and the additional aid required to meet service delivery needs if public funds are diverted.

The paper highlights busting corrupt auction systems in both budget and audit processes as priority areas for reform. Such reforms provide a foundation for both national accountability, where citizens have enough information to hold government to account for its promises and results, and institutional learning, where officials and decision makers have access to good fiscal information that helps them learn from successes and failures and continuously improve public sector operations.

 

[1] Institute for State Effectiveness, Washington DC.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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