Globalisation is double-edged sword, IMF admits

World ‘bribery’ estimate tops $1.5tr

After several years of playing the script of globalization, which was premised on mutual benefit, but eventually solidified the foundation of global inequality, the International Monetary Fund has admitted that it is a double-edged sword.

Besides, with the institution working to achieve its mandate of promoting economic prosperity and financial stability – through international cooperation and an open system for the free flow of goods and investments, there is a self-acclamation of success “for the most part.”

The Managing Director of IMF, Christine Lagarde, made the observation while delivering a lecture titled “Mending the Trust Divide” at the International Bar Association Conference, Washington, DC, United States of America.

She said that globalisation brought large welfare gains to developing and emerging economies, but generally has been a double-edged sword, as the shift in global production, which it brought meant job losses or environmental damage for millions of people.

“In fact, while inequality across countries has fallen in recent years, it has generally increased within countries. We have recently seen some good news in the United States – an uptick in median household incomes in 2015.“Longer term trends, however, have been less favorable, especially for middle-income families, who have seen their income shares in total income shrink – from 47 percent in 1970 to 35 percent in 2014. The loss in income share was almost fully offset by the increase in the share of high-income families.

“In these circumstances, it is not surprising to see a growing backlash against globalization, especially in industrialized economies. Coming on the heels of the financial crisis, this backlash has evolved into a deeper problem – a growing gap in trust in institutions,” Lagarde said.

Quoting the 2016 Edelman Trust Barometer, she said that trust among the broader public in institutions is well below 50 per cent– hardly budging from its lows in 2008. It is also lowest for government institutions and the financial services industry.

According to her, the key factor fueling this distrust is corrupt and unethical behavior, actual or perceived and prevalent in both the public and private sectors.

“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,” she said.

While speaking on the solution, she said that 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.

The IMF chief said that while corruption in public sector is hard to measure, its economic and social costs are substantial, with the yearly costs of bribery alone- a subset of corruption, estimated at a massive $1.5–$2 trillion, roughly two per cent of global Gross Domestic Product (GDP).

“And the impact goes well beyond these direct costs. Corruption undercuts countries’ efforts to deliver sustainable and inclusive growth. First, by weakening fiscal capacity, discourages investment and perpetuates inefficiency and entrenches poverty and inequality.

“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;

“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.

“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,” she said.She pointed out that in the last 20 years, IMF has been actively engaged with member countries in addressing corruption, but experience has shown that mitigating corruption requires a holistic and multifaceted approach, tailored to the specifics of each country.

Outlining the mitigating strategy, she said the starting point is to strengthen the rule of law, followed by increased fiscal transparency.“In this area, we have established international standards through a revised Fiscal Transparency Code. We use the code as the basis for evaluating practices of member countries against these standards upon request.

Another area of transparency is in the area of anti-money laundering. For almost 15 years now, the IMF has provided advice to our members on the design of frameworks and institutions to combat money laundering. It has also helped to assess countries’ compliance with anti-money laundering standards issued by the Financial Action Task Force (FATF).