Cut corruption, not social protection during COVID-19

This blog is part of our series, Tracking the Trillions, which takes a closer look at how the International Monetary Fund (IMF) can tackle corruption, while promoting transparency and accountability.

Before the coronavirus or COVID-19 pandemic began its deadly spread, global attention was focused on the staggering rise in economic inequality across many countries.

Inequality accelerated following the 2008 economic crisis, when many governments responded by cutting government spending and hollowing out programs crucial to human rights such as health, housing, food support, and unemployment.

The pandemic we now face has exposed the heavy price of inequality and threatens to exacerbate it. Gutting of public health systems and social protection programs, combined with greater job fragility and stagnating wages, has meant that poor and low-income families have been hit much harder with deaths and job losses due to the virus than wealthier households.

Many economists and global financial institutions, like the International Monetary Fund (IMF) are urging governments to improve social protections, through steps such as taxing the wealthy.

But many governments are already responding to soaring debt by doubling down on austerity, which would further hurt those most affected by the pandemic. Even before the pandemic hit, austerity was projected to affect 5.8 billion people by 2021.

Governments should resist the temptation of cutting social protection, and cut corruption instead.

Corruption is estimated to cost around 5 percent of global GDP – with US$1 trillion paid in bribes alone.

According to the IMF, corruption leads to another US$1 trillion in lost tax revenues. But these numbers don’t capture the full loss of resources from the myriad channels, licit and illicit, through which the political and business elite enrich themselves at the public’s expense.

Unsurprisingly, an increase in corruption is linked to decreased spending on health and education.

In other words, research has shown that corruption drives inequality by depleting government funds for social programs, and creating opportunities for the transfer of precious public resources into the pockets of the connected elite.

While tackling corruption is most urgent during economic crises, research has shown that crises can make corruption worse while diminishing attention to it. Officials are more likely to demand bribes, and emergency spending can be ripe for abuse while oversight mechanisms are distracted, overwhelmed, or sidelined.

Despite this, economists and policymakers often approach the fight against corruption as a luxury rather than as part of the solution to the crisis. Instead, they look for solutions in the immediate savings from reducing government spending, which disproportionately hurts the poor and exacerbates inequality.

Tackling corruption is complex and requires deep reservoirs of political will. But cutting government spending on social programs is not only devastating to human rights, research indicates that it can also be counterproductive to its purported goal of economic recovery.

In 2012, the IMF, which committed US$1 trillion to support governments through the COVID-19 crisis, issued a striking mea culpa stating that its own research had found that the austerity measures it imposed on Greece, Portugal and other countries, following the 2008 recession had actually harmed economic growth.

Research published by the Fund and conducted by its then-chief economist states that every dollar governments cut from their budgets actually reduced economic output by US$1.50; while governments that increased spending did better than expected.

At the same time, a 2019 Human Rights Watch analysis found a marked decrease in references to corruption and related terms in IMF surveillance and programs in the aftermath of the 2008 recession.

Since then, the IMF has made progress in its commitments to better tackle corruption and protect social spending, but significant gaps remain and the current crisis will put those commitments under enormous strain.

The IMF and governments should learn the lessons of 2008 and fight corruption as a way to increase resources for social protections as part of a path to a more just recovery.