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Helping Countries Combat Corruption: The Role of the World Bank

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6. Helping Countries Strengthen Institutions

Building strong institutions is a central challenge of development and is key to controlling corruption. Well-functioning public management systems, accountable organizations, a strong legal framework, an independent judiciary, and a vigilant civil society protect a country against corruption. Institutional strengthening is thus expected to form a key part of country anticorruption strategies.

In strengthening institutions to control corruption, countries have moved forward in three areas:

  • Building traditional systems of well-performing government: a professional civil service, sound financial management, disciplined policymaking, and a balance of responsibilities among central, state, and local governments.
  • Strengthening the legal framework, including the judicial system.
  • Increasing transparency and introducing other measures that strengthen the role of civil society in demanding better government.

Although some aspects of the third category lie beyond the Bank's mandate, the Bank can do a great deal to help countries strengthen the capacity of institutions inside and outside government to control corruption. For many years the Bank has been helping countries build well-performing public institutions, and it has increasingly recognized the important role played by civil society. But institution building is hard work. Continued efforts are needed both within and outside the Bank to understand how successful institutional reforms are designed and implemented.

Public management reform

Civil service reform.   One of a country's most important institutions is a professional and well-motivated civil service, with selection and promotion based on merit rather than patronage. A well-performing civil service resists petty corruption and provides the staff for many of the institutions that protect integrity in government: finance and personnel ministries, government tender boards, technical departments that evaluate bids, bodies that implement regulatory policy, accounting units, and internal and external audit departments. However, the Bank's experience in assisting with civil service reform in more than sixty countries has shown that progress in this area tends to be slow.35 Mere downsizing in the absence of an integrated reform program has not worked well and has been subject to reversal.

Better approaches to civil service reform need to be developed by the Bank in partnership with other agencies and governments if countries are to make headway in controlling corruption. Personnel policy, including recruitment, promotion, and pay, is clearly a vital issue.36 Public sector pay in some countries collapsed in the 1980s and has yet to recover. The longer pay remains grossly inadequate, the more bureaucratic corruption becomes entrenched. Defining what is meant by the civil service and differentiating more clearly between a core civil service and other public employees is also important. So are mechanisms to protect the civil service from unwarranted political interference, such as public service commissions. Ethics codes and institutional values, once established, help protect a civil service's integrity and professionalism, but require continual nurturing. And if civil services are overstaffed, governments are trying to carry out too many tasks, or some functions are best contracted out, staff reductions may be needed. The Bank will therefore consider afresh the direct financing of severance pay as a component of civil service reform. Finally, the links between civil service reform and the labor market need to be better understood.

Budget reform.   Government should undertake only what it can do well within its resource constraints. In many countries matching policy and affordability means changing assumptions about the role and optimal size of government.37 The Bank can help governments develop well-functioning budget processes that achieve the government's macroeconomic targets, allocate resources strategically, and enable programs and projects to be implemented efficiently and effectively.38

Financial management.  Good financial management systems are powerful instruments for preventing, discovering, or facilitating the punishment of fraud and corruption. They allocate clear responsibility for managing resources, reveal improper action and unauthorized expenditures, facilitate audit by creating audit "trails," and protect honest staff. By reducing opportunities for corruption and increasing the risks of detection, good financial management systems help change corrupt conduct from "high profit/low risk" to "high risk/low profit." Yet many of the Bank's borrowers have weak government financial management systems. Inoperative control systems permit widescale fraud, and in many cases auditing is impossible.39

The Bank has helped strengthen financial management systems and audit institutions in a number of countries, often using systems that better integrate budgeting, cash management, accounting, and auditing.40 But in many countries the Bank's emphasis has been on measures to improve financial management in Bank projects. This does not necessarily create a capacity for better financial management outside the confines of the project. While the Bank will always have a fiduciary responsibility for its projects, it will pay greater attention to broader financial management systems, especially in countries in which standards are low. It has already carried out a number of Country Financial Accountability Assessments (CFAAs) to help identify institutional capacity weaknesses. The Bank can help governments install and operate modernized systems where appropriate, and will give more weight to financial management as a factor in country assistance strategies.

Tax and revenue departments.   Tax and customs departments are often the locus of major fraud and corruption and thus are candidates for inclusion in national strategies to control corruption. Such malfeasance can often be meaningfully addressed—assuming strong commitment from the top—by giving revenue agencies greater managerial freedom (relative to normal civil service rules) to hire and fire staff and to set pay levels while subjecting their performance to close scrutiny. By controlling theft, good financial management systems change the economics of bribery, and businesses no longer have an incentive to collude with a corrupt official to avoid taxes. Rather, their incentive is to report extortion.41 Organizational restructuring (for example, separating the tax assessment function from the collection function) and staff rotation can also help reduce opportunities for corruption, as can control systems that require supervisors to attest that they have checked the work of subordinates. Tax policy may also affect anticorruption goals. Simplifying tax and tariff schedules and keeping rates at moderate levels reduces the discretion of tax and customs staff and narrows the scope for corrupt payments. Sound macroeconomic policy also plays a role by reducing the risks of distorted valuations. How governments spend the revenues they collect also matters. If taxpayers do not see their taxes put to good use, evasion and corruption may become socially acceptable.

The Bank has provided policy advice and technical assistance on tax and revenue reform and is supporting tax modernization projects in a number of countries. The IMF is also active in this area, and coordination between the two institutions is important. Intrinsic to Bank efforts to help countries improve their tax and customs agencies are reforms that help governments control corruption.

Government procurement.  Government procurement and contract management systems in both rich and poor countries are highly vulnerable to fraud and corruption. These risks are exacerbated when budgets come under pressure. Payments are delayed and incentives to bribe increase. Institutional capacity weakens if civil service pay and conditions are inadequate and the processes that ensure transparency and good record keeping are eroded. In terms of size, governmentwide procurement far outweighs procurement under Bank projects.

Reducing fraud and corruption requires a willingness to install or reestablish sound systems and the capacity to operate them as intended. The basic principles of sound procurement are well known and are reflected in the Bank's approach to its projects. The Bank also has provided procurement training and has helped a number of countries (mostly transitional) enact procurement legislation that specifies open, competitive bidding for public contracts.42 Although these efforts have been valuable, there has not been enough systematic effort to assess governmentwide systems and to incorporate the findings in country assistance strategies.

An increased effort is needed to help interested borrowers build capacity to procure goods and services and manage contracts. The Bank intends that country procurement assessment reviews be developed into a more effective vehicle for improving public procurement. The Bank's public sector management and procurement specialists will work to integrate the development of sound public procurement into country strategies for public sector reform and continue to search for new techniques and approaches that help minimize opportunities for corruption and improve value for money.

Decentralization.  Decentralization involves the shifting of power to lower tiers of government or the granting of greater authority to line managers. Its effect on performance and corruption depends on the setting. Decentralization can help reduce corruption if it improves government's ability to handle tasks while increasing transparency and accountability to local beneficiaries.43 But decentralization can also increase corruption if local and regional governments have stronger incentives (because of lower formal pay levels, for example) or more opportunities to carry out fraudulent activities and are less constrained by financial management and auditing systems (which are often in even shorter supply in regions than in the center). In many countries, industrial and developing, more corruption is thought to exist in state and, in particular, local governments than in the national government. This is not an argument against decentralization, which for many other reasons may still have a positive economic impact. Rather, decentralization initiatives must take into account the relative accountability and capacity of national and subnational levels of government when considering the structure of power sharing and must work to develop the capacity of decentralized entities alongside the devolution of functions.

Legal and judicial reform

A country's legal system—its laws and regulations as well as the processes and institutions through which they are applied—is vital for addressing corruption, just as it is for resolving civil conflicts, enforcing property rights, and defining the limits of state power. Laws and regulations that delineate market-friendly policies are powerful anticorruption tools (see chapter 4). The Bank has long been involved in helping to design macroeconomic and sector policies, and the laws through which they are implemented, in many countries.

Judicial reform.   Enforcement of anticorruption legislation requires an efficient, predictable, and accountable judiciary. In recent years the Bank has gained experience in judicial reform, especially in Latin America and Africa, and there is scope for similar efforts in other regions. Bank-supported judicial reform has focused on judicial independence (including proper criteria for the selection and removal of judges, pay scales, training, and judicial ethics); improved court administration and case-flow management; procedural reform, including reducing ex parte communication between judge and litigants; better access to justice (through small claims courts, alternative dispute resolution mechanisms, and legal aid); and legal education and bar entrance requirements. Steps also need to be taken in many countries to counter corruption by court staff who, as gatekeepers to the adjudication system, may extract bribes.

Assessing the effectiveness of the judicial system should be part of the diagnostic framework that Bank staff apply when asked to help a country strengthen its capacity to combat corruption. But because this is a relatively new area for the Bank, like many of the institutional topics discussed in this chapter, we still have much to learn about how to judge effectiveness and which approaches to judicial reform work best. We need to build evaluation into our activities, debate new approaches, draw in outside expertise, and gather lessons from experiences elsewhere.

Special anticorruption bodies.   There is now extensive experience worldwide with independent bodies, typically set up by statute, to increase integrity in public life. These include ombudsman offices, inspectors general, and independent corruption commissions. Experience in developing countries with ombudsman offices, which pursue allegations of abuse of official power, is mixed. In Sub-Saharan Africa and other regions the prevailing model has been an "executive" ombudsman, reporting to the head of the government rather than to the legislature and thus lacking the independent status a true ombudsman should have. Inspectors general can be powerful agents for controlling fraud and corruption within departments and agencies, depending on how they are established and operate, but they can also work at cross-purposes to accountability and performance.

Corruption commissions and special fraud units have been highly successful in Chile, the former territory of Hong Kong, and New South Wales (Australia). In a number of developing countries, however, they have been used as instruments of partisan politics, undermining their effectiveness and public support.44 In the wrong hands powerful anticorruption legislation can be abused. In some Latin American countries independent attorneys general have proven effective in bringing charges against those at the highest level of government (Brazil, Colombia, and Venezuela). Had they been part of the executive branch, they would not have had the independence necessary to act decisively against high-level corruption.

Anticorruption bodies appear to be a promising option if they can be made truly independent of the executive and if there is a strong and independent judiciary. However, we need to better understand the experiences of these bodies—where they have been effective and where they have failed—before recommending them to governments.

Civil society and the media

Civil society and the media are crucial to creating and maintaining an atmosphere in public life that discourages fraud and corruption. Indeed, they are arguably the two most important factors in eliminating systemic corruption in public institutions. Corruption is controlled only when citizens no longer tolerate it. Private organizations, professional organizations, religious leaders, and civil groups all have a stake in the outcome of anticorruption initiatives and an interest in the process. They also may play an important role as watchdogs of public sector integrity, and there is scope for expanding this role and sharing the experiences among countries. The Bank, as a lender to governments, can play only a limited role in supporting civil society in the fight against corruption. But within its mandate and with the full support of governments, the Bank has undertaken, mostly through EDI, activities such as integrity workshops and the training of journalists. More participatory approaches to project design and implementation also make a contribution, as do Bank efforts to help countries improve the legal framework for NGOs. And as our understanding of what can be done grows, there may be scope for further activities involving partnerships with civil society, such as public education programs.45

National coalitions.   In countries where the government has sought Bank assistance in developing an anticorruption strategy, policymakers may be interested in taking a nonpartisan approach. EDI's integrity workshops can facilitate this process by providing a forum for the discussion of international experiences and local alternatives. This is a new and promising activity for the Bank, but it requires careful preparation and sensitive handling.46 This type of activity should be carried out only in response to a request from the national authorities, and in partnership with them.

Open and transparent government.  Corruption thrives in the dark. The Bank supports efforts to encourage open and transparent government. Publication of government budgets and their availability in easy-to-read summary form, frequent reports to the legislature on budget implementation that enable comparisons to be made between budgeted and actual revenues and expenditures, and timely preparation of public accounts and audit reports and their scrutiny by the legislature and the media are some of the foundations of open and accountable government. Government departments and agencies should be encouraged to produce annual reports on their activities, achievements, and financial results, and national governments should report these in consolidated form. To the extent that performance information can be included, agency accountability should improve. In some countries "sunshine" laws (which require agencies to hold public hearings before making policy or program decisions) and freedom of information laws (which require governments to make information surrounding decisions available unless there are supervening public policy reasons for secrecy) may be appropriate. Court decisions should be published. And the regular publication of consultative documents when new policy is contemplated is good practice everywhere.


Notes

35. The difficulties are detailed in numerous studies of the Bank's experiences in civil service reform, by the center, by the Regions, and by the OED. A study of Bank approaches to civil service reform is currently under way. See Barbara Nunberg, "Rethinking Civil Service Reform: An Agenda for Smart Government."

36. See Figures 5.5 and 5.6 in World Development Report 1997: The State in a Changing World, New York: Oxford University Press, 1997.

37. In many countries decisions to introduce new policies are made without regard to the long-term costs of implementation. This is because policymaking is not disciplined by institutional processes that require the costs to be identified and considered before the policy decision is made. Where aid is additional, the discipline of a hard budget constraint is lost.

38. There is tentative empirical evidence that corruption affects the allocation of budget resources between sectors, specifically of a negative relationship between corruption and government spending on education. Since educational attainment is an important determinant of economic performance, this could have adverse long-run consequences for economic growth. See Paulo Mauro, "The Effects of Corruption on Growth, Investment, and Government Expenditure: A Cross-Country Analysis." Washington, D.C.: IMF, 1996.

39. This is a particularly serious problem in Sub-Saharan Africa, where auditors general frequently complain that audits cannot be completed in departments and agencies because accounting records are incomplete and audit queries go unanswered. Consolidated government accounts are presented to parliament years after spending takes place, if ever.

40. The Bank is working with a growing number of governments to strengthen the capacity of the supreme audit institution by modernizing audit laws, training staff, and installing improved management systems. EDI has begun working with parliamentarians in selected countries to help watchdog bodies, such as public accounts committees, become more effective.

41. When corrupt tax or customs officials systemically collude with taxpayers to substitute a lower tax assessment and pocket the difference (bribery with theft), businesses operating in competitive markets have an incentive to comply. Insisting on paying the official tax or duty would put them at a competitive disadvantage in relation to colluding firms. If a strong financial management system can be installed that controls theft (for example, recording assessments made by individual officials and requiring superiors to sign off on work performed by subordinates; reporting valuations, assessments, and collections; and adding spot checks and independent valuations), firms may instead have an incentive to abide by the law and avoid bribery and collusion. See Andrei Shleifer and Robert Vishny, "Corruption," Quarterly Journal of Economics, 1993, 108.

42. Using a model law (UNCITRAL) adapted to individual country legal systems, the Bank has helped many countries, especially those in transition, establish legal frameworks for public procurement. This work has been funded from loans and Institutional Development Facility grants.

43. In a growing number of countries the Bank, through EDI, has helped governments carry out service delivery surveys. These surveys ask program beneficiaries questions about the quality and reliability of government services and in so doing may bring to light patterns of petty bribery. The surveys reveal how programs are delivered and can help build demand for more accountable and more effective government. If beneficiaries complain of bribes, surveys can help to foster a dialogue with the government on corruption. The surveys are best carried out as part of a broader reform program aimed at improving performance rather than at specifically exposing corruption.

44. A recent survey of public and private participants from developing countries attending some high-level training in the United States found that the creation of anticorruption agencies was ranked low in the steps a country should take to counter corruption. See Daniel Kaufmann, "Listening to Stakeholders' Views about Corruption in Their Countries," Harvard Institute for International Development, January 1997.

45. Public education, for example, is strongly emphasized in the anticorruption strategy of Hong Kong's Independent Commission against Corruption.

46. EDI normally seeks both a government and a civil society partner.

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