Chapter 6

Corruption and Public

Expenditure Management
10.1 An overview of corruption
Corruption defined
 the abuse of public power to promote private
benefits.
 Therefore, a public employee who abuses
his/her public position to derive benefits for
oneself or friends, relatives or political
associates is engaging in an act of corruption.
6.1 An overview of corruption
Types of corruption
 Bribery: Involves the promise, offering or giving
of a benefit that improperly affects the actions
or decisions of a public servant, political party or
government agency.
 Embezzlement: Involves the theft of resources
by persons entrusted with the authority and
control of such resources.
6.1 An overview of corruption
Types of corruption…
 Abuse of power: Involves a person using his/her
vested authority to improperly benefit another
public servant or other person or using the vested
authority to improperly discriminate against another
public servant or other person.
 Conflict of interest: Acting or failing to act on a
matter where he/she has an interest or another
person that stands in a relationship with him/her has
an interest.
6.1 An overview of corruption
Types of corruption…
 Abuse of privileged information: Involves the use of
privileged information and knowledge that a person
possesses as a result of his/her position to provide unfair
advantage to another person to obtain a benefit or to
accrue a benefit for himself/herself.
 Favoritism: involves the provision of services or resources
according to personal affiliations (i.e. ethnic, religious,
political party affiliation etc.) to a public servant.
 Nepotism: Involves a public servant ensuring that family
members are appointed to public service positions or that
family members receive contracts from State sources.
6.2 Factors affecting corruption
(1) Factors with a direct impact
 regulations and authorizations;
 complex tax systems;
 government spending decisions;
 public provision of goods and services at below market
prices;
 situations in which public employees have discretionary
power over economic decisions; and
 need to finance political parties.
6.2 Factors affecting corruption
(2) Factors with indirect impact
 the quality of the bureaucracy;
 the level of public wages;
 institutional controls, both internal and external;
 the severity of the penalty system;
 the transparency of rules, laws, and processes; and
 the example provided by the leadership of the country.
6.2 Factors affecting corruption
Corruption and taxation
Corruption is likely to be a major problem to tax and
customs administrations in the following situations:
 The laws have many exemptions and special treatments.
 The laws are difficult to understand and are subject to
different interpretations so that taxpayers need
assistance in complying with them.
 Frequent contacts between taxpayers and tax
administrators are required to determine tax liabilities
and pay taxes.
 Tax administrators are paid low wages.
6.2 Factors affecting corruption
Corruption and the taxation…
 Acts of corruption on the part of tax administrators are ignored,
not easily discovered, or, when discovered, are not penalized or
penalized only mildly.
 Administrative procedures (e.g., the selection of tax payers or
audits) lack transparency and are not closely monitored within
the tax or customs administration.
 Tax administrators have discretion over important decisions,
such as those related to the provision of tax incentives, the
determination of tax liabilities, the selection of audits, and
litigations.
 More broadly, the state (the principal) exercises weak control
over the agents that carry out its functions.
6.2 Factors affecting corruption
Corruption and Public Expenditure
 Public investment projects-receive commission
 Public procurement
 Ghost workers and dead pensioners
6.3 Consequences of corruption in PE
 Corruption discourages investment-both local
and foreign direct investment
A study by Shang Jin Wei(1997) revealed that while a
1% increase in tax decreases FDI by 3.3%, a 1%
increase in corruption decreases FDI by 11%.
 It increases public investment due to a higher
commission payment.
 Lower investment in education and health
 Lower tax revenue
6.4 Mitigation of corruption
 Ethics offices;
 Anticorruption commissions;
 Tighter controls on public officials
 Higher penalties for those who are caught
in acts of corruption;
 higher wages for public-sector employees;
6.4 Mitigation of corruption…
 reduction in the right to privacy of government
employees and those who deal with them (for
example, by requiring employees to report on
the value of their assets);
 anticorruption efforts undertaken at the
international level, such as those sponsored by
the OECD, the ADB, the World Bank, and other
regional or international organizations, or at the
national level by active civil society and a free
press.
End of Chapter 6