Cost of corruption

According to a research carried out by the International Monetary Fund, curbing corruption could generate about dollar one trillion in tax revenues annually across the world. In addition to increasing government revenues, fighting corruption could also reduce waste, improve overall public trust in the government and even help lift test scores among public school students. "Less corruption means lower revenue leakage and less waste in expenditures and higher quality of public education and infrastructure," the IMF report said. The data shows that the pattern of lower corruption perception and higher revenues is also maintained across developed, emerging and low income countries. Among advanced economies, a country in the top 25 percent in terms of control of corruption collects 4.5 percent of GDP more in revenues than a country in the lowest 25 percent. The gap in revenue collection is 2.75 percent of GDP among emerging market economies and 4 percent of GDP among low income countries. The extractive industries like mining and oil drilling are hotbeds for corruption, as are the procurement and the administration of state-owned enterprises. It is expected that transparency would go together with good fiscal outcomes but what is surprising is that the effect of transparency is much stronger in countries those have a free press or a strong civil society. And when you have those two together -- free press and strong civil society -- the effect is even stronger.
We feel that this is probably for the first time that a comprehensive study has been undertaken by a renowned institution like the IMF to quantify the impact of corruption on government revenues in various categories of countries. One is obviously wonder-struck to know that if corruption could be eradicated from the system from all the countries, dollar one trillion more could be collected in tax revenues which could productively be used in building or improving the infrastructure within various countries or could go a long way in reducing fiscal deficits. Reduction in waste or improving public trust in the government are of course other advantages of curbing corruption. The claim that removing corruption could also help lift test scores among public school students, however, appears to be somewhat absurd. How corruption and test scores could relate to each other is difficult to understand. A country in the top 25 percent in terms of control of corruption could collect 4.5 percent of GDP more in tax revenues and the gap in revenue collection is as high as 4 percent of GDP among low income countries gives a good idea about the loss of revenue collection among various categories of countries. The IMF has focused on transparency and oversight as key elements in fighting corruption, with a strong free press and civil society, as the catalysts. While this is true, we are of the view that exemplary punishments and constant monitoring of living standards and assets of the relevant officials are also needed to be investigated to curb corruption. Besides, the related procedures and laws are also needed to be simplified for taxpayers and investors so that they are less inclined to pay tainted money to relevant officials.
The findings of the study are all the more relevant for Pakistan where corruption is rampant and the tax authorities are known for such unhealthy practices. Although there could be many reasons for a very low rate of tax revenues to GDP, the element of corruption is certainly a factor in suppressing revenue receipts and forcing the government to borrow heavily from all kinds of sources to meet its current and development expenditures. The situation during the current year is particularly appalling because the budget deficit is likely to be much higher than the target. We are, however, happy to note that curbing all kinds of corruption is the top priority of the present government. If the government is successful in effectively dealing with this menace, the fiscal position of the country could be greatly improved and the tax officials could be persuaded to live within their means.