Background:

Renewed Focus on Governance and Corruption

More recently, the issue of corruption has received renewed global attention. There are concerns about corruption leading to misuse of aid flows and, in the worst cases, global spillovers from failed states. Others are concerned about the leakage of fiscal revenues and investable funds from developing countries to advanced economies. Further, the recent Panama Papers underscore how opaque corporate vehicles can be used to hide the profits of illicit behavior, including tax evasion, corruption and sanctions evasion. The IMF has responded to members' interest through high-level IMF seminars on private sector and public sector corruption in the 2014 and 2015 IMF-World Bank Annual Meetings and through publication of the Staff Discussion Note “Corruption: Costs and Mitigating Strategies†. The IMF’s Managing Director also recently participated in the May 2016 London Anti-Corruption Summit and contributed to a compilation of essays from global leaders, journalists and academics. During the 2016 Spring Meetings, the international community called on the IMF to review its role in governance issues.

Why Does Governance/Corruption Matter for the IMF?

Governance is a broad concept covering all aspects of the way a country is governed including its economic policies and regulatory framework, as well as adherence to the rule of law. However, the IMF’s involvement is limited to the economic aspects of governance. Good governance is key to good economics. From the perspective of the IMF, countries with good governance have strong legal and regulatory frameworks in place, are able to use their human and financial resources more efficiently, attract more foreign and domestic investments and grow more rapidly. These countries are also better able to channel public resources to the poor and to provide citizens with voice and protection to make progress sustainable. The IMF has long taken the position that good governance in the public sector—including the avoidance of corruption—has a positive impact on economic efficiency, macroeconomic stability, and sustainable growth in its member countries.

Corruption—for this survey defined as the abuse of public office for private gain—is closely linked to governance: a poor governance environment offers greater incentives and more opportunities for corruption, which undermine the public’s trust in government. Aside from the direct cost of bribery, the indirect economic costs of corruption may be substantial and debilitating because the public’s distrust in government weakens the state’s capacity to raise revenue and provide public goods and services, leading to low growth and greater income inequality.

For more on the IMF staff views on corruption please see Corruption: Costs and Mitigating Strategies.

Role of the IMF in Good Governance

The importance of good governance has been long recognized by the IMF. In 1997, the IMF conducted a diagnostic assessment of its role in governance issues and adopted a policy on the IMF’s involvement, embodied in a Guidance Note (GN).

The 1997 GN highlighted the need for: (i) more comprehensive treatment of governance issues within the IMF’s expertise in the IMF’s surveillance and financing work with its member countries; (ii) more proactive advocacy of policies that eliminate corruption and fraudulent activities in public resource management and promote development of a conducive environment for private-sector activities; (iii) evenhanded treatment of governance issues in all member countries; and (iv) enhanced collaboration with other multilateral institutions, in particular the World Bank.

The IMF’s experience with governance issues was reviewed again in 2001 and 2004.

• The 2001 review found that the 1997 GN remained generally appropriate as the guiding framework for the IMF’s approach in this area.
• The 2004 review found that implementation of the 1997 GN was broadly satisfactory.

Subsequently, the IMF has developed new approaches and tools for engaging in governance and transparency issues. Following the events of September 11, 2001, the IMF has been actively engaged in the global anti-money laundering and combating the financing of terrorism (AML/CFT) effort. Further, drawing on the lessons from the Mexican peso crisis and the Asian crisis, the IMF’s data standards initiatives were launched to promote data transparency, and Reports on Standards and Codes were introduced to promote fiscal and monetary policy transparency. At the same time, the IMF also specifically addressed governance issues with member countries where corruption was a persistent drag on macroeconomic performance and/or where grand corruption undermined member country’s relations with donors.

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