The IMF’s (Non-)Engagement with Corruption in Military Spending

In a move that has been hailed by the anticorruption community as a “major step forward,” the International Monetary Fund (IMF) has declared that it will address corruption in its member states, insofar as that corruption is “macro-critical” – that is, when corruption “affects, or has the potential to affect, domestic or external [macroeconomic] stability.” As I stressed in a previous post, the focus on “macro-criticality” is the IMF’s solution to a persistent problem with how to distinguish economic policy (which the IMF may influence) from matters that are outside the IMF’s mandate—because, after all, the IMF is a “monetary agency, not a development agency.” Grounding anticorruption in the Fund’s mission to support the international financial system allows IMF staff to discuss anticorruption strategies frankly with country authorities.

Yet certain corruption-related topics still seem off limits, notwithstanding their arguably macro-critical characteristics. For instance, although the IMF has touted its comprehensive framework for reviewing corruption risks, the IMF’s strategy leaves out certain key channels that facilitate corruption, such as the corrosive effect of corruption on, and in, military spending. The wholesale omission of military spending from the IMF’s anticorruption strategy demonstrates that the IMF’s attention to macro-critical corruption problems is tempered by understandable concerns about the reputational blowback that might result from intervention into politically sensitive areas. Understandable as it may be, the IMF’s decision to exclude military spending from its anticorruption strategy deprives member countries of the broader benefits that are provided when the IMF acknowledges a concern as macro-critical.

Understandable as it may be, the IMF’s decision to exclude military spending from its anticorruption strategy deprives member countries of the broader benefits that are provided when the IMF acknowledges a concern as macro-critical.

Corruption in military spending has long been identified as a problem not only for national security, but also for economic stability (see here, here, and here). In many respects, corruption in military spending is not unlike corruption in other areas: corruption tends to skew contracting and procurement processes, increase rates of bribery and accounting fraud, and inflate defense budgets at the expense of social welfare programs. (Indeed, these dimensions are remarkably similar to the types of channels identified in the fiscal governance section of the IMF’s anticorruption strategy.) Addressing corruption in military spending is harder given the difficulties in obtaining information on individual countries’ practices—but when data is available, the risk of corruption is apparent. Strikingly, Transparency International’s Global Defence Integrity Index (GDI) issued a report in 2020 that examined defense sector corruption in 21 countries and found that over half of them faced “critical” risks of corruption, and in all the surveyed countries the risk was at least “high.”

Given the consensus that corruption in military spending has the potential to affect macroeconomic stability, often through inflating the overall level of military spending, it is odd that the IMF’s principal documents on the macro-criticality of corruption (see here and here) do not so much as mention the topic. And it’s not like the IMF is blind to the issue. In fact, the opposite is true. Twenty years ago the IMF’s Fiscal Affairs Department published a working paper that found empirical evidence of the macroeconomic implications of corruption in military spending. At the time, the IMF had just unveiled its first foray into anticorruption. The paper concluded that the evidence of the macroeconomic influence of corruption in military spending was important enough that it ought to be considered under that first anticorruption framework. (It never was.) This was no obscure paper. Not only was it published in an external journal, but the lead author later served as the assistant director of the Fiscal Affairs Department until his retirement in 2017.

It is likely that corruption in military spending was left out of the IMF’s 2018 anticorruption framework because of its sensitive nature. Multilateral institutions rely on their reputation with investors and member states to exert soft power (see here and here). Put plainly, the IMF’s effectiveness depends on the goodwill of its members, and for the IMF to address corruption in military spending—or military spending more generally—might put that goodwill at risk. For one thing, to ensure an appropriate and evenhanded approach, the IMF would need to collect more data on military spending, and although the IMF could press countries to provide such information (the IMF, after all, is one of the biggest generators of country-level data on Earth), doing so could strain the IMF’s relationship with member states. Furthermore, the IMF might worry that incorporating military spending into its anticorruption agenda could require the IMF to make judgment calls about the “appropriate” level of military expenditures, a politically fraught enterprise, especially given that assessing the “appropriateness” of military expenditures may imply a position on the morality of a given conflict. So although the IMF does intervene in military spending occasionally, it does so only in the most extreme circumstances (as, for example, in 1996-1997, when Pakistan’s military expenditures pushed the country’s budget deficit to 6.1% of GDP, putting the country’s fiscal viability at risk). Short of an existential threat, the IMF generally avoids the topic of military outlays entirely.

But while it might make good sense for the IMF to refrain from engaging individual countries on corruption in military spending (except for extreme cases where corruption-induced defense spending threatens imminent economic collapse), the IMF still can and should develop and provide advice on best practices in limiting corruption in this sector, as it does with respect to other sectors. The IMF should work with member-countries to collect data, design and advise on institutional best practices, and facilitate staff research into the best ways to promote integrity in the defense sector. This approach, which the IMF has employed in other contexts, is not nearly as threatening or politically sensitive, but experience in other sectors has demonstrated its potential efficacy. The IMF’s advice has become a core function in the day-to-day operations, with nearly 50 countries having voluntarily availed themselves of the IMF’s consultations on various topics in 2020 alone. The IMF should not exclude the topic of corruption in the defense sector from the topics on which in consults and advises, even though the sensitivity of this topic may properly lead the IMF to abstain from making it the subject of IMF surveillance or loan conditionalities.

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