Costing Corruption and Other Efficiency Losses from Weak Public Finance Systems: Viewing corruption through a public finance lens

Why is it difficult for policy makers to weed out corruption through the budget process? One reason is the lack of robust estimates of the cost of corruption. Having such estimates can help frame the budget debate. A novel approach is presented for estimating the costs and systemic locations of corruption and other efficiency losses in financial terms by public finance system, level of government and by sector. The method can help create fiscal space for government priorities and deepen policy discussion on fiscal performance and the problems of corruption. The conceptual framework is based on the idea that the quality of public finance systems are a key determinant of levels of inefficiency and corruption. Hence, the systems within the system, such as revenue collection, budgeting, commitment control, accounting, audit, payroll and balance sheet management, are all vulnerable to exploitation for corrupt intent. The model is based on a "follow-the-money corruption cycle", which was developed as a practical way to demonstrate the underbelly of public finance systems. The cycle reveals a systemic nature of corruption and how it can work at each stage of a government’s public finance cycle. The costing equation used in its simplest form is C = R x F. Where C is the costs of corruption and other efficiency losses, R is the systemic risk in a public finance system, and F is the level of funds flowing through the system. This equation differs from other corruption measurement formulas such as the Kiltgaard Equation. The benefit of a risk-based equation is that it provides a different range of policy options– by focusing on systemic risk, and using the annual budget process to tackle the problems. Given the costing equation uses systemic risk data, the policy and institutional problems to be solved – and the solutions - are already embedded in the data. A challenge faced is securing access to sufficient data. The current model uses publicly available risk data (e.g. PEFA, CPI, and OBI) and fiscal data (i.e. IMF GFS databases) to produce estimates for 95 countries at the general government level and 127 countries at the central budgetary government level. Estimates for the global costs of corruption and efficiency losses are cUS$4.5 trillion at the general government level (c5% of world GDP). The model also estimates losses by country at system, government and sector levels. The methodology can also be applied in more granular way at the country level by using fiscal and risk data imbedded in a government’s accounting, statistical and performance management systems, which can then be then be used routinely to feed into the annual budget process. By providing estimates of such costs over time and from different perspectives allows budget policy makers, researchers and the public to better target the weakness in government institutions over time. A major challenge with the approach recognized is the testability of the parameters and the results, though this is considered not insurmountable. The work also contributes to the literature on systemic, institutional, bureaucratic, and political corruption.