# Sectoral Perspectives on Corruption {#sectoral-perspectives-on-corruption .unnumbered}

*November 2002*

# Corruption and Public Finance {#corruption-and-public-finance .unnumbered}

Michael Schaeffer

The views and interpretations represented in this paper belong solely to
its author and should not be attributed to USAID or to MSI.

![](media/image1.png)

# Abstract {#abstract .unnumbered}

The phenomenon of corruption should not be viewed in isolation, but as
part of the broader issue of governance and public management. The
international community's recognition in the late 1990s of the corrosive
effect of corruption is a logical extension of the link between
governance and development created earlier in the decade. Corruption has
occurred from the earliest of time and in all societies. Virtually every
aspect of public administration, and public finance, can be a source of
corruption -- large procurements and major public works projects, tax
administration, debt management, customs and ill-designed privatization
of state owned enterprises.

Definitions of corruption can be extremely complex. The simplest
definition is, "Corruption is the misuse of public or private office for
personal gain."[^1] In particular, it is widely believed that weaknesses
in information and control systems in developing country bureaucracies,
and lack of transparency and accountability within the legal and
political systems have given rise to cost padding, service diversions
and corruption. Aside from the moral and legal considerations, there is
now solid evidence that corruption harms operational effectiveness,
distorts resource allocation, and invariably hurts the poor the most.

In contrast to just a few years ago, corruption is increasingly seen as
neither beneficial ('grease for the machine'), nor inevitable ('it's
always worked this way'), nor respectable ('everybody does it').[^2] The
emerging consensus with respect to corruption is being translated into
actual policies of international organizations and governments around
the world. This desk study will address the above topics through a
selective review of some of the issues dealing with corruption in public
finance and service delivery. Specifically, this note will review
factors that are likely to influence, or corrupt, public finances and
assess their impact on resource allocation and public good finance. This
desk study will also provide some recommendations with respect to
improving governance and public financial management.

# I. Introduction {#i.-introduction .unnumbered}

Good governance and effective public finance are the two most important
vehicles for establishing a country's economic and social priorities
within the scarce resources that are available to government. Good
governance is an essential part of a framework for economic and
financial management including: macroeconomic stability, promotion of
efficient institutions responsive to the public interest, and social and
economic equity. Poor governance and inefficient, or inadequate, public
financial management may result from a number of factors including:
civil service incompetence, lack of efficient institutions, and
pervasive institutional corruption. Corruption, itself, is not identical
to poor governance. Poor governance includes issues that extend well
beyond corruption. Nevertheless, poor governance often fails to prevent
corruption.

Two simple relationships emerge from international experience:
corruption is generally less frequent in richer countries; and, there is
a negative correlation between the rate of growth and corruption.[^3] In
effect, more corrupt countries tend to be poorer and grow at a rate that
is significantly lower than less corrupt countries. This desk study will
address the issues of governance and corruption issues vis-à-vis public
revenue and expenditures. Specifically, this note will review factors
that are likely to influence, or corrupt, public finances and assess
their impact on resource allocation and public good finance. This desk
study proceeds as follows. Factors that are likely to influence public
good finance and investment are discussed in Sections 2 and 3. Sections
4 and 5 briefly provide some policy considerations and opportunities for
formulating or enhancing additional anti-corruption polices with respect
to finance of public goods and briefly look at a few of USAID's
anti-corruption projects.

# II. Corruption and Public Finance  {#ii.-corruption-and-public-finance .unnumbered}

The past few years have seen growing public recognition and discussion
of the problem of corruption in public finance. The World Bank, OECD,
USAID, and UNDP have all established internal task forces on corruption.
Equally telling is the willingness of many public officials in emerging
economies to discuss the challenges of corruption in their respective
countries. In a recent survey of more than 150 ranking public officials
and key members of civil society from more the 60 developing countries,
the respondents ranked public sector corruption as the most severe
impediment to development.[^4]

What is corruption as applied to public finance? There are many
different definitions of this concept. The simplest, and broadest,
definition of corruption is "the misuse of public or private position
for direct or indirect personal gain."[^5] Various factors contribute to
corruption (see Tanzi 1998). Some of these factors have a direct impact
while others only an indirect impact. The factors which have a direct
impact include: regulations and authorizations; complex tax systems;
government spending decisions; public provision of goods and services at
below market prices[^6]; and situations in which public employees have
discretionary power over economic decisions.[^7] Among the indirect
causes of corruption must be included: the professionalism of the civil
service, the level of public wages, institutional controls, the
transparency of rules, laws, and process, and the severity of the
penalty system if caught.[^8] The following sections will discuss in
some detail the relationship between public revenue and public
expenditure and governance in general and corruption in particular.

## The Fiscal Dimension {#the-fiscal-dimension .unnumbered}

In order to perform the roles assigned to it by its citizens, the
government (national and subnational) needs to collect resources from
the economy in an efficient and appropriate manner, and allocate those
resources responsively, and efficiently. An important dimension in
assessing the extent and efficiency of public good finance is how the
authority to tax and spend is distributed between the central (national)
and local government. This raises a complicated set of issues because
there are many different types of taxes, different types of
expenditures, and many different ways in which (economic) jurisdictions
can be defined. In addition, tax expenditure assignments can be divided
among different jurisdictions.

Particular types of governmental activities often create fertile ground
for corruption. In this section, the fiscal aspects of governmental
function are reviewed, specifically: incentive effects of fiscal
decentralization, taxation, public expenditures and the general
provision of goods and services.

### 1. Incentive Effects of Fiscal Decentralization {#incentive-effects-of-fiscal-decentralization .unnumbered}

The governance outcomes of decentralization efforts largely depend on
the design of the fiscal transfers from the central government. These
fiscal transfers take many forms, including: block, conditional and
matching grants; and the assignment of shares of taxes collected by the
central government (revenue sharing taxes). The variety of central
government transfers and tax sharing schemes brings with it an equally
wide array of incentive effects. Discretionary transfers frequently may
depend on the loyalty of lower-level government officials. As a result,
discretionary transfers may tend to strengthen the patronage networks of
national political systems.

In many developing countries, grants and political mandates arise from
centrally (or nationally) determined policy priorities. The centrally
determined priorities may advance national priorities equally across the
country. Sometimes these centrally driven priorities may deviate from,
conflict with, or distort the political and fiscal initiatives that are
being driven at the local level. Fiscal policy distortions between
central and locally driven priorities usually create incentives for
corruption.

### 2. Taxation {#taxation .unnumbered}

Good governance and public financial management requires taxes that are
based on clearly written laws and do not require frequent contacts
between taxpayers and tax administrators. The decentralization of fiscal
responsibilities may create coordination problems with respect to tax
rates and overlapping tax bases. One problem with respect to overlapping
tax bases is that the tax rate set by each layer of government creates
vertical externalities by reducing the tax base of the other layer.[^9]
Competition between the two layers may lead to tax rates that are too
high. In this instance, the vertical externality may lead to increases
in tax avoidance schemes.[^10]

#### *a. Tax Assignment: Revenue Sharing* {#a.-tax-assignment-revenue-sharing .unnumbered}

It is generally recognized that assigning all or most taxing powers to
subnational governments with upward revenue sharing is not advisable,
since such an arrangement does not allow the central government to
perform its redistributive and macroeconomic roles. This arrangement
however is carried out in a few countries, such as China. Upward revenue
sharing is considered viable in loose confederations where stabilization
and redistribution policies lie with the member states, as well as in
countries where subnational jurisdictions have homogenous economic
conditions and close tax policy coordination and harmonization (i.e.,
Germany).

On the other hand, assigning all taxing powers to the central government
and relying entirely on downward transfers to local governments is
equally undesirable. The arrangement inhibits local governments from
matching spending authority with revenue-raising power, hence reducing
their fiscal accountability. Some countries completely separate the tax
bases for each level of subnational governments, while others allow
certain overlaps. Tiers of government in Australia and India have
separate tax bases, while Canada and the U.S. have a certain degree of
overlap.

#### *b. Criteria for Tax Assignment* {#b.-criteria-for-tax-assignment .unnumbered}

In decentralized tax systems, tax policies must be coordinated between
jurisdictions to avoid distortion in the free movement of economic
resources from one region to another. Such migration would cause
jurisdictions to compete with one another through lower taxes or other
inducements, and thus create an inefficient (possibly corrupt) fiscal
system.

There should be rules for allocating tax revenues among jurisdictions to
avoid double taxation or no taxation at all. Where tax bases are
relatively mobile, decentralized tax assignment opens opportunities for
tax avoidance and evasion. Taxes assigned to central government should
cover mobile tax bases, be sensitive to changes in income, and cover tax
bases that are unevenly distributed across regions. Correspondingly,
local taxes require a relatively immobile tax base, a stable and
predictable tax yield, relatively easy administration, and an adequate
tax yield to meet local needs and the buoyancy to grow at the same rate
as expenditures.

##### Value Added Tax

Local administration of value added tax is problematic, as each local
government could set its own standard tax rates and methods of
administration. There are also opportunities for local protectionism.
Even if the VAT rate and base structure are determined by the central
government, VAT proceeds should not be shared between levels of
government; otherwise, some resource rich areas would benefit great,
while others would collect little or no revenues. Nonetheless, the VAT
is a subnational tax in Brazil (and, in China) where central and
provincial governments share VAT proceeds on a derivation basis. Still,
protectionist measures have been taken in some Chinese provinces (with
the potential for increase in corruption). In Brazil, the decision to
allow VAT as a subnational tax has lead to administrative problems and
economic distortions. Overall, one useful way to funnel VAT proceeds to
subnational governments is for the central government to administer and
collect VAT and earmark a share of it for a distributable pool.

##### Corporate Income Tax

The corporate income tax must be levied by the central government since
it fails all the tests of a good local tax; it imposes high compliance
costs, generates incentives for tax avoidance and offers the opportunity
to export the tax burden to other regions. Corporate income taxes are
still levied at the subnational government level in many developing and
transitional economies. Problems have not arisen because many businesses
tend to operate in a single province, but problems (corruption) will
become more apparent once businesses begin to operate in more than one
province.

#### *c. Primary Areas of Tax Corruption* {#c.-primary-areas-of-tax-corruption .unnumbered}

Taxes based on clear laws and not requiring contacts between taxpayers
and tax inspectors are less likely to lead to acts of corruption.[^11]
Tanzi (1998) writes that corruption is likely to be a major problem in
tax and customs administration, when laws are difficult to understand
and can be interpreted differently so that taxpayers need assistance in
complying with them. In addition, when the administrative procedures
(e.g., the criteria for the selection of taxpayer audits) lack
transparency and are not closely monitored within the tax or customs
administrations the potential for corruption is likely to increase. Most
importantly, public sector corruption will be pervasive when acts of
fraud on the part of the tax administrators are ignored, not easily
discovered, or when discovered -- penalized only mildly.

#### *d. Tax and Customs Administrations* {#d.-tax-and-customs-administrations .unnumbered}

Tax and customs departments are often the locus of major fraud and
corruption and thus are potential candidates for inclusion in national
strategies to control corruption. Malfeasance in the tax and customs
department can be addressed by potentially providing greater managerial
freedom to the revenue agency (hiring and firing of personnel) and to
establish decent pay levels while at the same time subjecting the
agency's performance to close scrutiny. By controlling theft, good
financial management systems change the economics of bribery.[^12]

Organizational restructuring of tax departments[^13] and staff rotation
can also help reduce the opportunities for corruption. Furthermore,
supervisory oversight, and control, within the tax administration should
be increased.[^14] In other words, tax management supervisors should
attest that they have scrutinized the work of their subordinates.

### 3. Computerization of Tax and Customs Administration {#computerization-of-tax-and-customs-administration .unnumbered}

According to World Bank analysis (WB Prem Note 44, 2000) computerization
of tax and customs administration is an important element of capacity
building and revenue administration. The most obvious benefit of
computerization is more effective revenue collection due to better audit
selection, easier detection of non-filers, and faster payment and refund
processing. Information technology can also increase the transparency of
tax and customs administration, and thereby reduce corruption.

Tax computerization projects are effectively tax administration
projects. Their timing depends on the status of legal and administrative
reforms of the tax system. As a result, tax policy reforms during the
installation of an information technology system could negatively affect
the potential positive impacts of developing a computerized system.
Ideally, tax computerization should follow and support tax policy
reform.[^15]

#### *a. Tax Avoidance* {#a.-tax-avoidance .unnumbered}

The impact of corruption and of tax evasion on tax collection is not new
in the public finance literature. In a series of papers, Tanzi and
Davoodi (1997) have provided evidence that countries with high levels of
corruption tend to have lower collection of tax revenues in relation to
GDP. The implication is that some of the taxes paid by taxpayers are
diverted (to tax administrators). Tanzi (1999) argues that a distinction
needs to be made between taxes collected by the tax administrators and
taxes received by the treasury.

Low level of taxation may lead to a high sub-optimal level of public
spending (which may lead to higher fiscal deficits). In effect, tax
corruption and tax avoidance may negatively impact economic growth
through its effect on fiscal deficits.[^16] Simplifying tax and tariff
schedules, and keeping rates at moderate levels, thereby reduces the
discretion of tax (and customs) staff and narrows the scope for corrupt
payments.

### 4. Public Expenditures {#public-expenditures .unnumbered}

Public expenditure management is instrumental to effective public
service delivery and reducing the extent of public sector corruption.
Access to information on the actions and performance of government
expenditures is critical to achieving government accountability. Unless
the public knows what goods and services are provided, how well they are
provided, who the beneficiaries are, and how much they cost, it cannot
demand (nor expect) effective government. To promote government
accountability, government budgets and expenditure programs need to be
disclosed to the public. However, many developing countries have weak or
inadequate mechanisms for citizens to monitor actions of government.

Another mechanism that promotes transparency and accountability with
respect to public good finance is the periodic public sector audit. The
public sector audit has proved to be effective in many developed
countries (U.S., Germany, France, etc.,). Despite the effectiveness of
this mechanism, many developing countries fail to utilize an independent
public sector audit as a benchmark standard for enhancing public sector
accountability.

A commonly used practice in many developing countries is a paper audit.
In other words, there are no spot checks to verify the audit information
and there may be blanket prohibitions imposed on releasing public sector
audit information. As a result, audits in many developing countries
become subject to bribes. The creation, and existence, in audit systems
of physical audit requirements, sanctions for late submission or data
manipulation, and making audit reports available to the public are
critical pre-conditions for restraining corruption.[^17]

Extra-budgetary accounts are common in many countries. Some of the
extra-budgetary accounts have legitimate uses and are established for
specific purposes such as pension or road funds. However, many
extra-budgetary funds are established to reduce the political and
administrative controls that are more likely to accompany spending that
goes through a normal budget process.

Government contracting and procurement procedures play a significant
role in public service provision, and also account for a significant
share of resource leakage and corruption. The provision of goods and
services to local communities poses special problems of information and
monitoring. These challenges include, but are not limited to:
bid-rigging and collusion; manipulation of engineering specifications;
over-invoicing or undersupply of materials; and the wholesale diversion
of funds. Administrative oversight and audit can help in restraining
procurement corruption. However, sometimes the administrative oversight
itself can be compromised.

Large capital investment projects have frequently lent themselves to
acts of high-level corruption. Oftentimes, high-level public officials
have a significant degree of discretion in influencing the scope and
magnitude of public investment projects such that the type of public
spending can become distorted. Public investment projects have
frequently been developed to provide opportunities for some individuals
or political groups to gain concessions. In general, this form of public
good finance corruption has resulted in projects and expenditures that
may not have been justified by objective investment selection criteria.

### 5. Provision of Goods and Services {#provision-of-goods-and-services .unnumbered}

I n many countries, the government (central, subnational) engages in the
provision of goods and services, and resources at below market
prices[^18]. In other words, various services such as electricity,
water, public housing, health and education may be subsidized.
Substantial economic and financial analysis indicates that many goods
and services are provided to the local citizens without consideration
for cost recovery (including amortization/depreciation). Even access to
some forms of pensions (i.e., disability) may fall into this category.
In some countries, disability pensions have proven to be fertile ground
for corruption.

Because many of these 'subsidized' goods and services are provided at
below market prices, supply may be limited. Rationing becomes
unavoidable. In this instance, excess demand for those goods and
services is created. Decisions have to be made to apportion the limited
supply. These decisions to ration the supply are often made by public
employees (civil servants). In effect, the public employee may demand
bribes in order to provide the citizen with the good or service.

## Good Budget Formulation {#good-budget-formulation .unnumbered}

\`In keeping with the three primary objectives of public expenditure
management, the budget preparation process should aim at: 1) ensuring
that the budget fits macroeconomic policies and resource constraints; 2)
allocating resources in conformity with government policies; and, 3)
providing conditions for good operational management. In minimizing the
corrosive influence of public financial management corruption, it is
essential that these three items for effective budget preparation be
improved.

The coverage of the budget should be comprehensive. The budget should
include all revenues and expenditures of the government, whatever the
arrangements may be for managing some particular programs. Operational
efficiency requires taking into account the specific characteristics of
different expenditure programs when designing budget management rules
(e.g., rules concerning transfers of resources from one budget item to
another). When there is a strong link between revenue and benefit,
earmarking arrangements maybe considered thereby enhancing performance
in public service delivery.

Weaknesses in the budgeting process depend in large part on political
factors and on the organization of the government (e.g., lack of
coordination, unclear lines of accountability, and overlaps in the
distribution of responsibility). Unclear lines of accountability and
overlaps in the distribution of responsibility all contribute to
increases in public financial management corruption. Mechanisms for
budgeting and policy formulation should be explicitly designed to
reinforce coordination and cohesion in decision-making. Strengthening
the budget preparation process requires improvements in the following
directions:

-   Decisions that have a fiscal impact should be scrutinized together
    with direct expenditure programs.

-   Spending limits must be built into the start of the budget
    formulation process, consistent with policy priorities and resource
    availability.

-   Operational efficiency requires line ministries to be held
    accountable for implementing their programs. However, they can be
    held accountable only if they have participated in designing the
    programs and have authority for managing them. This requires a
    number of developing countries to review and revise the distribution
    of responsibilities in budget preparation.

Is program based budgeting or performance based budgeting appropriate in
many developing countries? Injecting formal performance related elements
into public management in developing countries requires extreme care
because better performance orientation is critical for improving public
administration and because there are many incorrect (wrong) ways of
pushing it (and, only a few ways of doing it correctly). The suitability
of performance budgeting (and, performance measurement) and the specific
indicators themselves depend among other things on the sector in
question. The lessons on international experience include:

-   Robust monitoring of performance should include swift and
    predictable consequences.

-   Performance based budgeting (and programs) should consider the
    probable impact of introducing performance indicators on
    individuals' behavior and take compensatory measures (if needed)

-   In order to install performance-based systems, it is essential to
    understand the different limitations of input, output, outcome and
    process indictors of performance, and tailor the use of each to the
    specific sector in question.

-   It is essential to build in provisions for the systematic assessment
    of performance of the performance system itself. In other words, the
    performance management system must be subject to a reality check.

Beyond the above caveats, it is important to constantly be on the look
out for any possibility to expand the service awareness of government
administration, and raise the rewards and sanctions for good and poor
performance, respectively.

## Transparency and Accountability of Government Actions {#transparency-and-accountability-of-government-actions .unnumbered}

Access to information on government performance is critical for the
promotion of government accountability and minimizing corruption with
respect to public finance. This section expressly reviews institutional
controls and rules, laws and public sector accountability issues.

### 1. Institutional Controls  {#institutional-controls .unnumbered}

Corruption within the civil service (bureaucracy) can be minimized with
the installation of institutional controls. The most effective controls
generally reside inside institutions. This implies that there is honest
and effective supervision, auditing oversight and control, and an
awareness and internalization of the standards of ethical behavior.
Supervisors and their civil servant employees should be held accountable
for acts of corruption in their office.

Several countries and cities, including Singapore, Hong Kong, and
Argentina, have created anticorruption or ethics offices. To be
effective, these offices must be independent from the political
establishment, have ample personnel and financial resources, and have
high ethical standards. Ethics offices must also have to power to
enforce penalties. However, several of these offices must report to the
President (or Prime Minister), which may reduce their effectiveness and
politicize the process thereby reducing overall effectiveness.

### 2. Transparency of Rules, Regulations, Laws and Processes {#transparency-of-rules-regulations-laws-and-processes .unnumbered}

In many countries, the lack of transparency in rules, laws, and process
creates abundant areas for corruption. Rules dealing with government
procurement process, financial management and accounting are often
confusing. Even if an individual exercises some initiative and tries to
understand the rules, the documents specifying these rules may not be
publicly available. Furthermore, many organizational rules may be
changed without public announcements to that effect.

In many instances, regulations and laws are written so that only trained
lawyers can understand their true impact. Many laws are often
conceptually opaque, thus leaving grounds for different interpretation.
In the United States, the judiciary may be called into discern the true
nature of the law. In many developing countries, the judicial process is
not as efficient. This may lead to additional corruption with respect to
trying to obtain an effective interpretation of the regulation or law.

One of the ways to reduce the corruption inherent in opaque regulations
and laws is to establish more efficient regulation processes. The
establishment of independent regulatory agencies, both at the national
and local government level can be effective in promoting efficiency and
limiting opportunities for corruption. These regulatory institutions
however, must operate with transparency (hold public meetings),
simplicity (rules-based principles), and accountability (election of
regulators or term based regulators).

### 3. The Audit Function {#the-audit-function .unnumbered}

Management controls are the policies and procedures put in place by the
managers of an (government) entity to ensure its proper and effective
operation. Developing an effective system of controls requires, first, a
careful assessment of the risks confronting the organization. Policies
and procedures can then be selected to control those risks effectively
and at reasonable cost. No system of controls can provide an absolute
guarantee against the occurrence of fraud, abuse, inefficiency, and
human error. However, a well-designed system of controls can give
reasonable assurance that significant irregularities can be detected.
There are effectively two types of audit procedures, including:

-   Internal Audit is part of an organization's management control
    structure. The internal audit office on behalf of management audits
    lower level units. Among its most important functions, internal
    audits test the management controls themselves and assists senior
    management in assessing risks and in developing more cost-effective
    controls.

-   External Audit of government operations is typically performed by a
    supreme audit institution (SAI) or an independent external auditing
    firm. External auditors typically perform compliance/regulatory
    audits, financial assurance audits, and value-for-money (efficiency)
    audits.

To be effective, the external audit staff must have the professional
skills required for the audits being performed. For an external auditor
to move from ex-ante and regulatory audits to financial assurance and
value-for-money (performance) audits, its present staff will have to be
more extensively trained in the more complex audits. In order for the
external audit function to be effective, especially when pursuing the
strategic objective of improved management controls or undertaking more
advanced type of audits, an effective means of communicating audit
results and a sound approach for encouraging effective appropriate
corrective action must also be developed.

Given the limited capacity to absorb change in most developing
countries, anticorruption strategies need to focus on a few crucial
elements rooted in the specific characteristics of each country. The
World Bank's Prem Notes (Number 33, 1999) illustrates that Latvia's
anticorruption strategy for revenue administration was part of a broader
national strategy guided by a Vigilance Unit. The organizational
structure of the State Revenue Service was improved to integrate tax
customs, social securities, and to create internal control and
anticorruption functions. The Vigilance Unit operated independently of
the financial police to: monitor and educate staff on a code of ethics,
conduct disciplinary hearings, develop incentives to foster integrity
and good conduct, and monitor declarations of income and assets by
public servants. The importance of citizen engagement and oversight
(and, social audits) is crucial to maintaining the integrity of public
financial management.

# III Corruption and Investment {#iii-corruption-and-investment .unnumbered}

Public finance corruption may affect investment in a number of ways
including:

-   Adversely affecting the total amount of investment;

-   Adversely impacting the amount of foreign direct investment; and,

-   Adversely impacting the size and quality of public investment.

In several papers, Paulo Mauro (1997, 1998) of the IMF has shown that
corruption can have a significant negative impact on the ratio of total
investment to GDP.[^19] Regressing the investment ratio in relation to
the corruption index, GDP per capita income, secondary education, and
population growth, Mauro shows that a reduction in corruption could
significantly increase the investment/GDP ratio. On the other hand, a
drop in the investment/GDP ratio as a result of corruption was shown to
have an important effect on growth. Mauro (1997) estimated that a
reduction in corruption equivalent to 2 points in the corruption index
would raise the annual growth rate by about 0.5 percent through its
positive effect on the investment/GDP ratio.

In a paper focusing on foreign direct investment (FDI), Shang Jin Wei
(1997a) showed that while a one percent increase in the marginal tax
rate on FDI by about 3.3 percent, an increase in the corruption index by
a single point reduces the inflow of FDI by 11 percent. In a related
work, Wei (1997b) showed that the unpredictability of corruption (as
measured by the dispersion of individual ratings of corruption) has a
further negative impact on FDI. Wei concluded that '"the effect of
uncertainty on FDI is negative, statistically significant and large."

Does corruption affect operation and maintenance expenditures? Despite
substantial difficulties in obtaining good data, Tanzi and Davoodi
(1998) have provided evidence that high levels of corruption are
associated with low operation and maintenance expenditure and a
generally poor quality of infrastructure. Tanzi and Davoodi show that in
terms of statistical significance the impact of corruption is strongest
on the quality of roads, and power outages.

In summary, Tanzi, Davoodi, Wei and Mauro have shown that corruption
reduces total investment, distorts the composition of public sector
investment, and generally reduces the quality of a country's
infrastructure. The combined impact of these changes on economic growth
is bound to be negative and substantial.

# IV Policy Considerations  {#iv-policy-considerations .unnumbered}

In 1998, the World Bank engaged in a cross-country analysis of data
based on perceptions of corruption against institutional and other
factors to better understand its causes and consequences. Detailed
surveys of corruption were conducted in Albania, Georgia and Latvia.
Preliminary results provide a picture of systemic corruption that hurts
public welfare, taxes private sector activity, and is deeply
institutionalized.[^20] The results of the survey indicate:

1.  There are many types of corruption, and each country's pattern of
    corruption is distinct.

2.  Institutional causes of corruption differ, suggesting different
    priorities for reform.

3.  Enterprises would pay higher taxes if corruption were eliminated.
    And,

4.  Corruption disproportionately hurts the poor.[^21]

Confronting corruption in developing economies requires a complex
approach that recognizes the diverse factors underlying the persistence
of corruption. Creating interventions that combat corruption generally
requires a tailor made strategy that takes into consideration the
particular contours of the problem in different countries.

## IMF "Code of Good Practices and Fiscal Transparency" {#imf-code-of-good-practices-and-fiscal-transparency .unnumbered}

In the context of the architecture of the international financial
system, the IMF in 1998 developed a Code of Good Practices on Fiscal
Transparency aimed at increasing transparency in fiscal policy. The IMF
code contains a number of principles that could be followed by countries
to increase fiscal transparency. In effect, the application of these
principles would make fiscal policy more transparent and enhance public
sector governance. Among the principles are the following:[^22]

1.  The government sector should be clearly distinguished from the rest
    of the economy, and policy and management roles within government
    should be well defined.

2.  There should be a clear legal and administrative framework for
    fiscal management.

3.  The public should be provided with full information on the past,
    current, and projected activity of government.

4.  A public commitment should be made regarding the timely publication
    of fiscal information.

5.  Budget documentation should specify fiscal policy objectives, the
    macroeconomic framework, the policy basis for the budget, and
    identifiable major fiscal risks.

6.  Budget data should be classified and presented in a way that
    facilitates policy analysis and promotes accountability.

7.  Procedures for the execution and monitoring of approved expenditures
    should be clearly specified.

8.  The integrity of fiscal information should be subject to public and
    independent scrutiny.

What are the lessons that can be drawn from the discussion above?
Actions to improve governance, public financial management, and to fight
corruption need to be taken on numerous fronts.

## Reform Priorities for Public Financial Management[^23]  {#reform-priorities-for-public-financial-management .unnumbered}

Improvements in the public financial management system are largely a
function of creating the political will to develop reforms and make (and
sustain) institutional change. However, it is the distinction between
institution and organization and the interplay between the two, which is
the key to understanding how the public financial management system can
be improved. In other words, budgeting and public financial management
organizations can be improved, but economic, social and political
behavior will not change unless the rules and procedures change (and are
internalized) as well. The reverse is also true: rule modification is
unlikely to produce results in an operationally meaningful time frame
unless organizational improvements proceed apace.[^24] In other words,
improving public expenditure management requires both institutional
(regulatory and procedural) reform and organizational development.

### 1. Operational Approach {#operational-approach .unnumbered}

Reforming public sector management and public finance requires:
instilling meritocracy and adequate pay in public administration;
clarifying government priorities, institutional goals and strategies,
and institutional structures; enhancing transparency and accountability
in fiscal management; and, stimulating policy reforms in service
delivery (See Table 1, below).

A general review of governance and functional structures in ministries
should be given high priority. Some governments have moved central
government functions into quasi-private sector structures. These
structures blur the lines of policy direction and accountability. In
addition, these types of organizational structures create a large number
of highly paid supervisory jobs that can serve to increase the political
for corruption and opportunities for payoffs. Off-budget agency funding
also contributes to budget fragmentation and lack of transparency.

To improve transparency and accountability in fiscal management, it is
necessary to ensure full budget control and coverage. Latvia, for
example, diverts substantial resources into off-budget accounts. These
accounts typically lack oversight and transparency. These off-budget
transactions take different forms, from extra budgetary funds to the
lack of integration of investment planning. A further challenge is to
eliminate (or reduce) contingent liabilities (off-balance sheet
guarantees) stemming from non-transparent off-budget commitments.
Argentina and Brazil are classic examples of the moral hazard that is
created with these off-balance sheet liabilities

In many developing countries, the budget formulation is often flawed by
the ambiguity between the executive and legislative branch of
government, poor parliamentary processes, lack of policy coordination,
and the inability to impose trade-offs at the executive level. In
Bosnia, for example, expenditure projections lack a medium term
perspective and revenue forecasts are often extremely unrealistic. The
inability to develop realistic forecasts leads to non-transparent
adjustments during budget execution. The potential for public sector
finance mismanagement increases dramatically. In addition, unclear
budget appropriations and unreliable disbursements leave budget managers
unable to deliver reliable services.

Reforms to promote greater accountability and control over budgetary
expenditures require strong accounting and auditing systems. In order to
be effective, treasury systems must be strengthened. Investment in
information technology seen in USAID funded treasury, accounting, and
audit systems in Russia, for example, needs to be grounded in broader
institutional reforms. Furthermore, transparent competitive procurement
is necessary to prevent corruption from inflating public expenditures.

The effectiveness of external and internal audit entities varies greatly
by country. In Kazakhstan, for example, the external audit function is
dominated by the executive thus limiting its credibility. To be
effective in reducing public sector corruption, the external audit must
be independent and equipped with strong auditing and diagnostic skills.
In addition, an internal audit oversight must be strengthened with
public dissemination of audit findings.

### 2. The Multi-Pronged Approach {#the-multi-pronged-approach .unnumbered}

Stand-alone efforts to tackle administrative corruption in public
administration and public finance are likely to have limited impact.
Table 1, below, details some elements that can be applied to developing
countries with respect to reducing corruption in public financial
management.

Each country however, must be diagnosed individually, and associated
interventions must be country specific. In addition, there is no simple
formula for the proper sequencing of these anti-corruption activities.
Nevertheless, the sequencing of reforms should be designed to enhance
the credibility of the leadership, and the program, to ensure early
tangible results. This type of approach effectively strengthens the
constituency for reform.

Table 1. Four Column Approach to Financial Management

  ------------------- --------------- -------------------- --------------------
  **Macroeconomic     **Efficiency    **Technical          **Accountability**
  stability**         Improvement**   Infrastructure**     

  Identification and  Measurement and Establishment of an  Specific costs and
  assessment of the   publicizing of  information system,  expected
  future implications the costs of    which makes relevant performance, as an
  of current          important       operation data       integrated part of
  policies.           activities.     available to all     the overall
                                      policymakers and     framework of
                                      program managers.    accountability.

  Recognition of the  Factors or      Focus on core tasks  Avenues for people
  resource constraint areas           by central agencies  to secure
                      contributing to responsible for      information on
                      expenditure     financial            historical series
                      increase should management. These    such as government
                      be identified   tasks include        accounts.
                      and addressed.  policies, costs, and 
                                      the specification of 
                                      the desired          
                                      performance levels.  

  Maintenance of an   Pursuit of      Managerial autonomy  Establish oversight
  extensive database  alternative     for spending         bodies (where none
  and profile of all  strategies for  agencies in the use  may currently
  agency              the delivery of of allotted          exist).
  expenditures.       services when   resources.           
                      costs tend to                        
                      increase.                            

  Maintain cost data                  Selective conversion Disseminate
  where services                      of accounting        information.
  funded by public                    systems to an        
  agencies are                        accrual basis        
  provided by private                 particularly in      
  and                                 agencies with large  
  non-governmental                    inventories.         
  sector.                                                  

                                      Eliminate patronage  
                                      for public service   
                                      appointment.         

                                      Eliminate off        
                                      budget/off-balance   
                                      organizations /      
                                      accounts.            
                                      Independent audit    
                                      functions, and       
                                      strong budget        
                                      execution            
  ------------------- --------------- -------------------- --------------------

### 3. A Diagnostic Questionnaire: An Example {#a-diagnostic-questionnaire-an-example .unnumbered}

To improve the effectiveness and efficiency of programs, the first
essential steps are to implement sound budget process, and effective
management (internal, external) control systems. Although it is beyond
the cope of this brief desk study to design a multi-pronged public
finance anti-corruption program with full diagnostics, the following
section provides a brief questionnaire with respect to some of the
necessary diagnostic tools. This would be a one-step approach. A more
rigorous two-stage approach could be used: the first stage would be to
fully document the existing system and the second stage would assess
each element of the system, and design improvements according to
national priorities.

The brief questionnaire below is believed to be faithful to the
principles of public finance and government budget. A diagnostic
questionnaire should include: comprehensiveness (the budget should
include all revenue and expenditure); accuracy; authoritativeness
(public funds should be spent as authorized by law); and transparency
(the government should publish timely information etc.,). A program
which implemented improvements based on the use of the questionnaire
would have all the technical tools needed to improve its public
financial management performance and enforce disciplined financial
management. Technical tools alone do not guarantee public financial
management improvement; the other key ingredients include well-trained
and highly motivated staff and, above all, political will and strong
focused leadership.

As stated above, the intention of this desk study is not to design
diagnostic tools with respect to public finance anti-corruption
programs. The limited questionnaire is provided as an example of the
type and manner of diagnostic tools available. This diagnostic
questionnaire is not intended to be an exhaustive (or comprehensive
list) but merely an example of some of the tools available. The
questionnaire can (and should) be expanded to include a broader range of
diagnostic tools.

Table 2. Example of a Diagnostic Questionnaire

+-----------------+--------------------------------------+------+-----+
| **Diagnostic    | **Question**                         | **Y  | **N |
| Area**          |                                      | es** | o** |
+=================+======================================+======+=====+
| A. Budget       | Provide a clear and comprehensive    |      |     |
| Legislation     | definition of public money?          |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Establish the following elements of  |      |     |
|                 | intergovernmental fiscal relations?  |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | 1.  Basic principles of supervision, |      |     |
|                 |     intervention and audit           |      |     |
|                 |     responsibilities;                |      |     |
|                 |                                      |      |     |
|                 | 2.  That budget accounting           |      |     |
|                 |     classifications are coherent and |      |     |
|                 |     common to all levels of          |      |     |
|                 |     government?                      |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Establish the definition of budget   |      |     |
|                 | deficit and surplus, which excludes  |      |     |
|                 | borrowings from receipts and         |      |     |
|                 | excludes repayments for principal    |      |     |
|                 | from expenditure?                    |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Provide a legal basis for management |      |     |
|                 | (internal) control and internal      |      |     |
|                 | audit?                               |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Defines the authorities and          |      |     |
|                 | responsibilities for issuing and     |      |     |
|                 | reporting on government guarantees?  |      |     |
+-----------------+--------------------------------------+------+-----+
| B. Scope of the | Clearly defines appropriation and    |      |     |
| Budget          | spending authority?                  |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | All transactions of statutory        |      |     |
|                 | extra-budgetary funds with the       |      |     |
|                 | budget?                              |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | All fiscal transfers to sub national |      |     |
|                 | governments for general and special  |      |     |
|                 | purposes are defined?                |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Does the budget document include:    |      |     |
|                 |                                      |      |     |
|                 | 1.  Fiscal policy objections         |      |     |
|                 |                                      |      |     |
|                 | 2.  Complete information on past and |      |     |
|                 |     projected spending               |      |     |
|                 |                                      |      |     |
|                 | 3.  Complete information on          |      |     |
|                 |     financial plans and operations   |      |     |
|                 |     of statutory extra-budgetary     |      |     |
|                 |     funds                            |      |     |
|                 |                                      |      |     |
|                 | 4.  A statement of contingent        |      |     |
|                 |     liabilities                      |      |     |
+-----------------+--------------------------------------+------+-----+
| D. Measuring    | 1.  Are there figures released for   |      |     |
| and Monitoring  |     different fiscal balance         |      |     |
| the Government  |     definitions?                     |      |     |
| Deficit and     |                                      |      |     |
| Debt            | 2.  Are the fiscal definitions       |      |     |
|                 |     calculated on a cash or accrual  |      |     |
|                 |     basis?                           |      |     |
|                 |                                      |      |     |
|                 | 3.  Do government data allow a clear |      |     |
|                 |     distinction to be made between   |      |     |
|                 |     domestic and external debt?      |      |     |
|                 |                                      |      |     |
|                 | 4.  Which ministry is responsible    |      |     |
|                 |     for contracting and managing     |      |     |
|                 |     debt?                            |      |     |
|                 |                                      |      |     |
|                 | 5.  Is it the same ministry that is  |      |     |
|                 |     in charge of guarantee debt?     |      |     |
+-----------------+--------------------------------------+------+-----+
| E. Budget       | Are there laws, regulations and      |      |     |
| Execution and   | procedures that:                     |      |     |
| Monitoring      |                                      |      |     |
|                 | 1.  Ensure that all public revenues  |      |     |
|                 |     are directly deposited;          |      |     |
|                 |                                      |      |     |
|                 | 2.  If separate bank accounts are    |      |     |
|                 |     permitted, who is responsible    |      |     |
|                 |     for opening, monitoring the      |      |     |
|                 |     banking operations?              |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | The ministry of finance/treasury     |      |     |
|                 | controls cash balances daily         |      |     |
|                 | relative to borrowings?              |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | There are procedures to report and   |      |     |
|                 | correct overspending?                |      |     |
+-----------------+--------------------------------------+------+-----+
| F. Legal and    | Are there laws, regulations or       |      |     |
| Policy          | policies which:                      |      |     |
| Framework       |                                      |      |     |
|                 | 1.  Limit and define the authorities |      |     |
|                 |     at each level of the             |      |     |
|                 |     administration for transferring  |      |     |
|                 |     funds within the approved        |      |     |
|                 |     budget?                          |      |     |
|                 |                                      |      |     |
|                 | 2.  Prevent transfers between        |      |     |
|                 |     personnel costs and other        |      |     |
|                 |     subheads of the budget?          |      |     |
|                 |                                      |      |     |
|                 | 3.  Specify how budget funds that    |      |     |
|                 |     are unspent at the end of the    |      |     |
|                 |     fiscal year should be treated?   |      |     |
|                 |                                      |      |     |
|                 | 4.  Establish sanctions for          |      |     |
|                 |     overspending?                    |      |     |
|                 |                                      |      |     |
|                 | 5.  Bind all persons responsible for |      |     |
|                 |     spending money to implement      |      |     |
|                 |     management control practices?    |      |     |
+-----------------+--------------------------------------+------+-----+
| G. Performance  | Does the government foster an        |      |     |
| Monitoring      | environment that supports and        |      |     |
|                 | demands improved performance by      |      |     |
|                 | organizations and individuals?       |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Is performance information on easily |      |     |
|                 | measured activities collected and    |      |     |
|                 | used by spending units? By the       |      |     |
|                 | ministry of finance?                 |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Are managers who are responsible for |      |     |
|                 | government programs and projects     |      |     |
|                 | given clear short / long term        |      |     |
|                 | operational goals and targets?       |      |     |
+-----------------+--------------------------------------+------+-----+
| H. Evaluation   | Is there an evaluation capacity      |      |     |
|                 | sufficient to respond to the demands |      |     |
|                 | of the public sector/accountability? |      |     |
+-----------------+--------------------------------------+------+-----+
| I. Accounting   | Is there a unified accounting and    |      |     |
| and Reporting   | budgeting classification system      |      |     |
|                 | regulated by the ministry of         |      |     |
|                 | finance/treasury?                    |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Are the final accounts produced,     |      |     |
|                 | audited and tabled in parliament     |      |     |
|                 | shortly after the end of the fiscal  |      |     |
|                 | year?                                |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Does the system provide for          |      |     |
|                 | recording commitments (obligations)  |      |     |
|                 | as well as cash transactions?        |      |     |
+-----------------+--------------------------------------+------+-----+
| J. Internal     | Are internal audit units established |      |     |
| Audits          | in line ministries?                  |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Does the mandate for these units     |      |     |
|                 | include:                             |      |     |
|                 |                                      |      |     |
|                 | 1.  Financial audit?                 |      |     |
|                 |                                      |      |     |
|                 | 2.  System audit?                    |      |     |
|                 |                                      |      |     |
|                 | 3.  Procurement audit process?       |      |     |
|                 |                                      |      |     |
|                 | 4.  Review of management internal    |      |     |
|                 |     control arrangements?            |      |     |
+-----------------+--------------------------------------+------+-----+
| K. External     | Is there an external auditor         |      |     |
| Audit?          | established by law with independence |      |     |
|                 | from government?                     |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Does the external auditor have       |      |     |
|                 | authority to audit/clear all public  |      |     |
|                 | and statutory funds and resources?   |      |     |
+-----------------+--------------------------------------+------+-----+
| L. Organization | 1.  Is there a coherent written      |      |     |
| and Capacity    |     strategy for bringing public     |      |     |
| for Reform?     |     financial management systems     |      |     |
|                 |     into line with general accepted  |      |     |
|                 |     standards?                       |      |     |
|                 |                                      |      |     |
|                 | 2.  Does this strategy have the      |      |     |
|                 |     support of the ministry of       |      |     |
|                 |     finance?                         |      |     |
+-----------------+--------------------------------------+------+-----+
|                 | Are there training programs to       |      |     |
|                 | complement any reform process?       |      |     |
+-----------------+--------------------------------------+------+-----+

*Source: For additional information, see "Managing Public Expenditure: A
Reference Book For Transition Countries" edited by Richard Allen and
Daniel Tommasi.*

In brief, the primary criteria for judging the effectiveness of public
financial management systems are the extent to which:

-   It includes a priori controls;

-   Exiting laws and secondary legislation enable the recovery of
    amounts lost; And,

-   Structures are in place to fight fraud and/or corruption.

# V. USAID and Anti-Corruption[^25]  {#v.-usaid-and-anti-corruption .unnumbered}

USAID has undertaken a number of projects and initiatives with respect
to improving public financial management. A substantial number of these
projects were not specifically designed to fit under an anti-corruption
umbrella. Many USAID programs are designed to attack the lack of
transparency in public financial accounts, to increase public sector
accountability, and enhance fiscal reform. These projects have had
varying degrees of success in stemming the corrosive influence of public
financial management corruption.

An illustrative example is in its Russian Fiscal Reform projects during
the 1990s. Russia's tax system's failure included the inability to
collect adequate revenues, the tax code placed excessive tax burden on
enterprises, and encouraged citizens and enterprises to evade taxes.
This was compounded by widespread political interference in the
enforcement or non-enforcement of tax liabilities.

USAID financed several programs in Russia in the late 1990s in which
technical assistance was provided in five key areas: tax policy and
legislation, tax administration, economic analysis, intergovernmental
fiscal relations and real estate taxes. USAID's ambitious benchmarks
included the enactment of new legislation for intergovernmental fiscal
relations.

Underlying the five principal areas of technical assistance in Russian
intergovernmental finance was the goal to increase financial
transparency, to enhance government revenues, to establish a less
onerous tax code, and to improve government accountability in revenue
collection and public financial expenditure. To a significant extent
these goals were not reached owing largely to adverse environmental
factors among which were frequent changes in political leadership, and
coordination problems within the Federation government.

Does the varying degree(s) of success of the Russian Fiscal Reform
program mean that USAID's technical assistance with respect to fiscal
reform and stemming corruption was a failure? No. Some progress on
reforms has been realized. Many of the key obstacles to public financial
management reform in Russia, for example, were the inability of the
Russian Government to adopt and implement reform. Under this context,
perhaps the most that can reasonably be expected is that donor
assistance gradually increases the level of understanding on the part of
the civil service and political officials of the need for reform and to
generate the right types of requests for reform.

Taking the Russian fiscal reform project as an example, providing advice
to Russian regions on how to raise incentives for municipalities to
improve their tax transfers to the regions could be regarded as a waste
of resources if set within an overall national tax environment that runs
counter to the goals of transparency, accountability and consistent
revenue and expenditure assignments. In effect, the goals of
decentralization of revenue assignments ran counter to the goals of the
tax environment. Corruption with respect to public sector financial
management may actually increase. Hence, this example may serve as a red
flag to USAID program designers that in providing technical assistance,
more attention should be given to determining whether programs actually
contradict each other with the unintended effect of potentially
increasing public finance corruption.

USAID's public finance programs could be improved by directly
incorporating the notion(s) that prudent public financial management
(budgeting, transparency, accountability etc.,) are 'effective'
anti-corruption tools. In enhancing its public finance anti-corruption
programs, USAID should continue to strengthen the following
non-exclusive areas:

-   Comprehensiveness (the budget should include all revenue and
    expenditure); accuracy;

-   Authoritativeness (public funds should be spent as authorized by
    law); and,

-   Transparency (the government should publish timely information
    etc.,)

# V Conclusion {#v-conclusion .unnumbered}

The approach of this desk study note has been to review adverse impacts
upon public financial management. The general conclusion is that
programs to stem corruption with respect to public financial management
need to consider carefully the country specific context. Pragmatic
anti-corruption programs may deteriorate in their effectiveness if they
are not guided by coherent and universal principles: strengthening
governance (accountability, transparency, predictability, and
participation); reinforce the foundation of civil society; and, engage
in improvements in public expenditure management programs to reduce
opportunities for corruption.

# Annex I -- USAID Public Finance and Anti-Corruption: Current Activities {#annex-i-usaid-public-finance-and-anti-corruption-current-activities .unnumbered}

  ------------- ---------------------------------------------------------
  **Country**   **Program**

  Armenia       USAID/Armenia provides technical assistance to the
                Ministry of Finance and Economy (MFE) to improve the
                preparation of sound annual budgets and introduce more
                disciplined and transparent financial management,
                including budget formulation and execution, public
                accounting and treasury functions. While the budget
                process has greatly improved, most line ministries still
                do not prepare budget proposals. The program will also
                address the proper handling of off-budget government
                liabilities, such as energy debts; these liabilities are
                not part of budget planning and cannot be controlled by
                MFE, yet are government obligations for which MFE is
                ultimately responsible.

  Moldova       USAID/Moldova has supported fiscal policy since 1995.
                Following initial work on the legal framework, current
                efforts focus on capacity building and training in its
                assistance to the Ministry of Finance's Budget and
                Treasury offices, local governments, and the Parliament's
                Center for Financial and Budgetary Analysis (CBFA) which
                is regarded as producing credible information. Technical
                assistance focuses on revenue and expenditure
                forecasting, budget planning and execution, treasury
                systems and debt management, intergovernmental fiscal
                relations, and computerization.

  Ukraine       USAID has supported programs that helped to ensure that
                budget proposals for 2001 incorporated extra-budgetary
                funds into the budget, and eliminated most tax
                exemptions. USAID has also supported the Fiscal Analysis
                Office that works closely with the parliament and
                provides good publications analyzing budget execution.
                Improving the efficiency and transparency of
                intergovernmental finance is also an important focus of
                USAID efforts.

  Kyrgyzstan    With USAID assistance, Kyrgyzstan has begun program
                budgeting, and has started to focus on issues of
                intergovernmental finance. In 2000, Kyrgyzstan adopted
                International Accounting Standards.

  Macedonia     USAID provides two resident advisors and works in close
                collaboration between USAID and the WB on funding the MOF
                Treasury software, training and accounting standards.
                USAID also finances an economist to support the budget
                forecasting function. One focus of the program is to
                bring ministry "special revenue funds" -- which account
                for 20% of the total budget \-- into the general revenue
                process and, thereby, improve accountability for their
                use.

  Croatia       USAID/Croatia will work with the Government of Croatia to
                improve budget and fiscal policies to avoid undue deficit
                spending or the buildup of budgetary arrears. An
                overarching concern for potential investors in a
                transitional economy is corruption, and clearly
                inappropriate rent-seeking by Government officials is an
                aspect of any inefficient public sector system.
                USAID-assisted programs in this area will emphasize the
                creation of systems that maximize transparency and
                accountability.

  Georgia       Corruption remains Georgia's greatest impediment to
                reform. With USAID assistance, Georgia's annual budgets
                have become more realistic and transparent but additional
                work is needed. An USAID-supported macroeconomist
                undertook a public expenditure review in several
                ministries to identify needs and priorities.

  Russia        The primary USAID fiscal activity focused on
                intergovernmental relations. This activity works with
                Russian policy-makers at the national level to improve
                revenue and expenditure assignments through the use of
                objective criteria. It also works with five pilot regions
                to improve revenue and expenditure projections based on
                tax capacity and client-based expenditure norms and in
                this way, reduce incentives to submit inflated requests
                for transfers.
  ------------- ---------------------------------------------------------

Source: USAID, 2002.

#  {#section .unnumbered}

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[^1]: OECD. "Managing Public Expenditure: A Reference Book For
    Transition Countries". Pg. 447.

[^2]: ADB. 2001 "Improving Public Administration in a Competitive
    World". Pg 14.

[^3]: ADB. 1999 "Governance, Corruption and Public Financial
    Management". Page2.

[^4]: See Cheryl Grey and and Daniel Kaufman. 2000. "Corruption and
    Development". The World Bank.

[^5]: OECD. Pg. 447.

[^6]: In addition, some state protected monopolies may provide goods and
    services at exploitative prices. Or, these protected state
    monopolies may provide shoddy or poor quality goods.

[^7]: ADB. 1999. Page 6.

[^8]: Ibid. Pg. 6.

[^9]: Roger Gordan, "An Optimal Tax Approach to Fiscal Federalism".
    Quarterly Journal of Economics. Pg 321.

[^10]: A simple remedy for reducing tax avoidance schemes in the
    instance(s) where tax rates are considered to be too high (i.e.,
    Russia in the mid-1990s, India) is to reduce overall tax levels
    (rates). Reducing tax rates has proved effective in increasing
    government tax revenues. However, steps to improve overall tax
    compliance by reducing tax rates should be undertaken in conjunction
    with increasing tax enforcement and compliance measures (penalties,
    etc.,).

[^11]: Vito Tanzi. 1998 "Corruption Around the World". IMF Staff Papers.
    Vol. 45. No. 4. Page 567.

[^12]: Businesses' may no longer have the incentive to collude with
    corrupt officials to avoid taxes. The incentive maybe changed, such
    that businesses may now have the incentive to report corruption.

[^13]: For example, separating the tax assessment function from the
    collection function.

[^14]: For a more detailed discussion of tax administration reform see
    David Meyer and R. Hester. 2001. "Combating Corruption in Economic
    Growth Activities: The Case of Tax Administration Reform".

[^15]: The computerization of the tax and customs administration systems
    could (possibly) allow for on-line filing of tax and customs forms
    in the most advanced countries. This would potentially eliminate
    many opportunities for corruption. Further, computerizing the tax
    system would enhance the adequacy of administrative procedures
    including: compliance, tax audit, taxpayer services, sanctions and
    appeals, customs clearance procedures, pre-shipment inspection, and
    information sharing.

[^16]: Ibid. Pg. 16.

[^17]: In addition, establishing an oversight board to ensure the
    integrity of independent auditors may also be warranted. Due to the
    perceived lack of independent auditing functions with respect to
    publicly held corporations in the U.S. an oversight monitoring board
    is being established with the expressed intent to verify (validate)
    the integrity of the independent audit system.

[^18]: For a more thorough discussion see Vito Tanzi "Corruption Around
    the World". IMF Staff Paper. Vol. No. 45. No. 4. 1998.

[^19]: See Paulo Mauro. 1997.

[^20]: World Bank. 1998. PREM Notes No.7. "Frontiers in Diagnosing and
    Combating Corruption." Page 2.

[^21]: Ibid Pages 3 -- 5.

[^22]: See IMF. 1998. "Code of Good Practices on Fiscal Transparency".

[^23]: For an exceptionally thorough discussion with respect to reform
    priorities for public financial management see Shiavo-Campo and
    Tommasi, "Managing Government Expenditure", ADB. April, 1999,
    Manila.

[^24]: Schiavo-Campo and Tommasi, 1999. "Managing Government
    Expenditure" Pg 103.

[^25]: Please see Annex I. "USAID Public Finance and Anti-Corruption:
    Current Activities" for brief description of additional USAID
    program activities.