According to the 2016 Edelman Trust Barometer, trust among the broader public in institutions is well below 50 percent – hardly budging from its lows in 2008. It is also lowest for government institutions and the financial services industry. Trust among the elites in all institutions, on the other hand, is at an all-time high, at 60 percent.
A key factor fueling this distrust is corrupt and unethical behavior, actual or perceived – and in both the public and private sector. Think not only of Bernie Madoff or the Libor rigging. But also the FIFA scandal that shook the sports world, or the travails of Petrobras that almost engulfed a whole political system.
Both the actual behavior and the perception that there is corruption can be highly corrosive to society. This has contributed to the growing support for populist policies.
Addressing corruption and unethical behavior involves not only improving the quality of the legal framework but also the quality of the individuals who implement this framework.
Indeed, more than 2000 years ago, Aristotle believed that the central preoccupation of political science should be about “ forming its citizens to be of good character and capable of noble acts.”
The annual costs of bribery alone stands at 2% of global GDP
Corruption afflicts economies at all stages of development. It is hard to measure; yet its economic and social costs are substantial. The annual costs of bribery alone – a subset of corruption – is estimated at a massive US$1.5–2.0 trillion– roughly 2 percent of global GDP.
And the impact goes well beyond these direct costs. Corruption undercuts countries’ efforts to deliver sustainable and inclusive growth. How?
First, by weakening fiscal capacity . When citizens feel that wealthy individuals are able to avoid paying taxes through bribes, it delegitimizes the whole system. And not surprisingly, other people decide not to comply, which undermines the ability of the state to raise revenue
At the same time, government spending becomes skewed toward areas with greater opportunity for graft – such as public procurement for construction projects. One study has found that in eight European countries, public projects were on average 13 percent higher because of corruption.
In extreme situations, the combination of depressed tax revenues and inefficient public spending can result in large fiscal deficits and critical debt situations.
Corruption discourages investment and perpetuates inefficiency. Uncertainty and the cost of doing business increase with corruption, which acts as a tax on investment. Government borrowing costs can also be affected. For example, evidence of corruption in Petrobras contributed to a series of credit downgrades for Brazil in the past year and a widening in market spreads.
Corruption entrenches poverty and inequality. By lowering spending on sectors like education and health, corruption disproportionately affects the poor who rely more on social services. The consequences are grave and long-lasting. By some estimates, child mortality rates are one third higher in countries with high corruption, and infant mortality rates are almost twice as high.
Clearly, as Pope Francis has said: “corruption is a cancer on society.”
Editor’s note: A heavily edited version of the speech By Christine Lagarde, IMF Managing Director at the 2016 International Bar Association Conference, Washington, DC