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Helping Countries Combat Corruption: The Role of the World Bank

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3. A Bank Strategy for Tackling Corruption

Given the mounting evidence of the costs of corruption and the need for more coordinated approaches at both country and international levels, the Bank requires a broad framework to address the issue. This chapter outlines the emerging strategy for the Bank, which has four channels:

  • Preventing fraud and corruption within Bank-financed projects.
  • Helping countries that request Bank support in their efforts to reduce corruption.
  • Taking corruption more explicitly into account in country assistance strategies, country lending considerations, the policy dialogue, analytical work, and the choice and design of projects.
  • Adding voice and support to international efforts to reduce corruption.

The ultimate goal of a Bank strategy to help countries address corruption is not to eliminate corruption completely, which is an unrealistic aim, but to help those countries move from systemic corruption to an environment of well-performing government that minimizes corruption's negative effect on development.

The Bank's legal mandate

Although corruption is a politically sensitive issue in many countries, the Articles of Agreement authorize the Bank to address corruption, within certain limits. In a recent paper on the subject, the General Counsel pointed out that

the World Bank can hardly insulate itself from major issues of international development policy. Corruption has become such an issue. Its prevalence in a given country increasingly influences the flow of public and private funds for investment in that country. The Bank's lending programs and in particular its adjustment lending take into account factors which determine the size and pace of such flows. From a legal viewpoint, what matters is that the Bank's involvement must always be consistent with its Articles of Agreement. The Bank can, in my view, take many actions to help the fight against corruption. It can conduct research on the causes and effects of this worldwide phenomenon. It can provide assistance, by mutual agreement, to enable its borrowing countries to curb corruption. It may take up the level of corruption as a subject of discussion in the dialogue with its borrowing members. And, if the level of corruption is high so as to have an adverse impact on the effectiveness of Bank assistance, according to factual and objective analysis, and the government is not taking serious measures to combat it, the Bank can take this as a factor in its lending strategy towards the country. The only legal barrier in this respect is that in doing so the Bank and its staff must be concerned only with the economic causes and effects and should refrain from intervening in the country's political affairs. While the task may be difficult in borderline cases, its limits have been prescribed in detail in legal opinions endorsed by the Bank's Board.22

According to one such legal opinion, the concept of governance in the sense of the overall management of a country's resources cannot be irrelevant to an international financial institution which at present not only finances projects but also is deeply involved in the process of economic reform carried out by its borrowing members.23 Clearly, the concern here is not with the exercise of state powers in the broad sense but specifically with the appropriate management of the public sector and the creation of an enabling environment for the private sector. It is a concern for rules which are actually applied and institutions which ensure the appropriate application of these rules, to the extent that such rules and institutions are required for the economic development of the country and in particular for the sound management of its resources.24

No doubt the Bank has to address issues of corruption in this context with great caution, acting on the basis of established facts and only to the extent that the issues clearly affect the economic development of the country. It cannot, however, ignore such issues at a time when they have become a major concern, not only to the sources of international financial flows but also to business organizations and indeed to the governments and peoples of most of its member countries.25

Thus corruption can be addressed by Bank staff as an economic concern within the framework already approved by the Board for governance issues. This framework provides scope for the Bank to help countries by advising on economic policy reform and strengthening institutional capacity. However, the Bank's mandate does not extend to the political aspects of controlling corruption. And though the engagement of civil society is crucial for the long-run control of corruption, there are obvious limits on the extent to which the Bank, as a lender to governments, can directly support civil society's efforts to control corruption. So while the Bank's mandate provides scope for the institution to help countries control corruption, it shapes the way in which the Bank may respond.

The Bank's fiduciary responsibility

The Bank has long recognized its fiduciary responsibility to ensure that fraud and corruption are minimized in the projects it finances. This is enshrined in the Bank's Articles, and was emphasized again by President James D. Wolfensohn in his speech at the Annual Meetings in October 1996. Procurement, disbursement, financial reporting, supervision, and auditing procedures have evolved to ensure that this responsibility is met, as discussed in chapter 4. The Bank's procurement guidelines were further amended in 1996 to make explicit what the Bank would do if it determined that fraud and corruption had occurred within a Bank-financed project.

The emphasis on controlling fraud and corruption within Bank-financed projects will continue to be a central part of the Bank's strategy. However, the strategy needs to reconcile a tension that all external aid agencies confront to some extent. In the short run, fraud and corruption within an aid-funded project can be controlled by tightening project management systems. In the long run, sustained reduction will come about only if government (or agency) control systems are strengthened.26 A strategy for protecting Bank-financed projects from fraud and corruption needs to address this tension and try to ensure that whatever means are used, borrower accountability is enhanced.

Helping countries combat corruption

Experience with economic reform suggests that progress cannot be achieved merely through conditionality imposed by external actors like the Bank. Reform programs must be driven from within, and this is no less true for anticorruption ones. Furthermore, tackling corruption requires the engagement of those outside government—parliamentarians, civil society, households, the private sector, and the media. As a provider of development finance and policy advice to governments, the Bank is an important ally in the fight against corruption.

The main thrust of the Bank's support for countries' anticorruption efforts will be in helping to design and implement government programs. In some cases the Bank may be asked to help with specific anticorruption efforts, in areas within its mandate and expertise. It will respond to such requests in partnership with other international institutions and bilateral aid donors as appropriate. In other cases, the Bank may provide assistance in economic policy reform and institutional strengthening that, while aimed primarily at improving government performance, also helps reduce corruption. In addition, the Bank, and in particular the Economic Development Institute, can support government efforts by facilitating workshops for parliamentarians or journalists on these issues. These areas of assistance are discussed in detail in chapters 5 and 6.

As a practical matter, the Bank's advice to a particular country will depend on that country's circumstances. In some countries, economic policy reform will be the priority. In others the immediate need may be targeted interventions in tax or customs agencies, or procurement reform. Circumstances will also determine whether the strategy should be comprehensive or incremental. Comprehensive strategies can be developed where national leadership is committed to change and the political will exists to undertake in-depth economic and institutional reforms. Opportunities for in-depth reform may exist at the local level or in particular agencies or departments even if those opportunities are missing at the national level. In some cases there may be more political will for economic policy reform than for in-depth work at the institutional level. And even when the possibility for economic policy reform is limited, there may still be scope for activities, such as public education or dialogue with leaders in government and civil society, that can lay the foundation for more substantial action later.

Developing countries range from those in which dynamic forces are working for more transparent and accountable government to those caught in a vicious circle of systemic corruption and no growth. In some countries historical forces are helping to modernize the state, working in much the same way they did in industrial countries a century ago. In Latin America, the civil society is engaged, and policymakers see the control of corruption as an integral part of public sector modernization. Privatization has been substantial, and economies are now much more open to market forces. In a number of East Asian countries the private sector is especially dynamic, and policymakers recognize the challenges and opportunities of the global economy and the need for a change in the role of the state. The Bank's role in such circumstances is to be ready to help governments improve performance by providing policy advice and assisting with institutional strengthening while at the same time ensuring that Bank-financed projects are free of corruption.

Poorer countries, particularly some in Africa, cannot wait for historical processes, particularly if the preconditions for change are absent. Africa's modern private sector remains small and operates by informal rules in its relations with government. In some of these countries high levels of corruption may be a stable equilibrium, with political elites, bureaucratic functionaries, entrepreneurs, and ordinary people all bound by its rules. Although the context is quite different, similar forces exist in some transition economies, where the institutions of a command economy are no longer relevant and there is a vacuum in government capacity. Efforts to combat systemic corruption and build strong institutions in such countries need to be more deliberate, focusing not just on building the various components of the "integrity system" but also on economic policy reform and on how policy reform and institution building can reinforce one another. Success will depend on the roles played by national leaders, public officials, and civil society; on the design and implementation of economic policies; and on the condition of public management systems. External agents like the Bank and bilateral donors also have an important role to play, both because significant external support is needed to help build capacity and because aid plays a major role in shaping and maintaining the state.

Contributing to international efforts

Finally, a central part of the Bank's strategy involves lending its voice and support to international efforts to control corruption. Corruption has important international dimensions, as many bribes flow across international boundaries. Governments in both capital-exporting and capital-importing countries have a responsibility to promote ethical and law-abiding behavior by companies and individuals within their jurisdictions. International initiatives to control corruption are growing, as outlined in chapter 8, and the Bank can play an active role.


Notes

22. See "Issues of Governance in Borrowing Members—The Extent of Their Relevance under the Bank's Articles of Agreement, Legal Memorandum of the General Counsel," December 21, 1990 (SecM91-131, February 5, 1991); "Prohibition of Political Activities in the Bank's Work, Legal Opinion of the General Counsel," July 11, 1995 (SecM95-707, July 12, 1995).

23. "Issues of Governance in Borrowing Members" (Sec M91-131, February 5, 1991).

24. For details, see Ibrahim Shihata, "The World Bank in a Changing World," 1991, 1, 53-96.

25. See Ibrahim Shihata, "Corruption—A General Review with an Emphasis on the Role of the World Bank." Paper based on a keynote address delivered at the International Symposium on International Crime, Jesus College, Cambridge, England, September 9, 1996.

26. For example, a bilateral donor may ensure the proper use of aid funds by procuring goods directly and delivering them "in kind" to project beneficiaries. While this may ensure bribe-free procurement, it does nothing for (and may undermine) borrower accountability.

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