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The World Bank and Corruption

Author: Robert McMahon, Editor
April 21, 2006
This publication is now archived.

Introduction

Corruption is seen as a serious threat to developing states, blamed for up to tens of billions of dollars in wasted foreign aid and for prolonging the impoverishment of much of Africa. Experts point to poor governance as the main reason for the problem but watchdog groups and U.S. congressional monitors are directing fresh scrutiny at the world's top development body—the World Bank. Critics accuse the bank of abetting corrupt regimes by approving loans without clear performance benchmarks. The bank launched an anticorruption campaign ten years ago but results have been disappointing. New World Bank President Paul Wolfowitz has signaled a tougher approach by freezing loans on a number of troubled projects. In early April, he announced a new corruption-fighting strategy that will include boosting investment in rule of law institutions and improving audits of bank programs. Corruption monitors welcome the moves but doubts persist about the willingness of governments to cooperate and the bank's ability to police itself.

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What is the World Bank?

It is the world's largest development bank, one of the two so-called Bretton Woods institutions—along with the International Monetary Fund—set up to help reconstruction after World War II. The World Bank's focus today is on poverty reduction. The bank says last year it provided more than 20 billion dollars for 245 projects in developing countries, including financial and technical expertise. The bank typically lends money at low interest to countries that have difficulty raising money in capital markets. Countries borrowing from the bank have a longer period to pay back loans than is permitted by commercial banks. The bank is owned and governed by 184 countries, but the United States and the wealthiest European nations are the largest contributors and exert the most influence over its agenda.

How extensive is the corruption problem?

In April Wolfowitz called corruption a chief threat to development in poor countries, saying it distorts markets, lowers investment, and "encourages people to apply their skills and energies in nonproductive ways." He has made anticorruption a major theme of his first year as president and vowed to set in motion a country-by-country process to attack the problem. The moves come at a time of increasing scrutiny of the bank's own role in corruption. A recent study by U.S. News & World Report quotes analysts as saying more than 20 percent of the funds disbursed by the bank each year may be wasted through corrupt practices. A Northwestern University professor, Jeffrey Winters, says his research found nearly 100 billion dollars of World Bank funds have been squandered by corruption over the years. The bank rejects these claims and says it is difficult to calculate how much of its funds have been distorted by corruption.

But experts say there is a clear correlation between corruption and stagnant growth on the world's poorest continent: Africa. The African Union has said corruption costs the continent $148 billion per year. The Heritage Foundation says two World Bank entities provided nearly $70 billion [in 1995 dollars] in development assistance to 48 countries in sub-Saharan Africa between 1980 and 2002. But at least twenty-three of those countries experienced negative growth in gross domestic product (GDP) in that period. Bruce Rich, an expert on multilateral banks for the organization Environmental Defense, says the World Bank's problems stem from a failure to ban corrupt contractors and companies from its programs and investigating fraud by government officials. "I think you have to start somewhere and the bank can start by ensuring that its own loans are clean, which it didn't do in the past."

Princeton Lyman, CFR's Ralph Bunche senior fellow for Africa studies, credits the bank with building infrastructure, training professionals, and providing important health and education programs in Africa. But he adds: "The dilemma is that Africa is still poor and still poorer than most other developing continents, so something is not right."

Why has corruption been so difficult for the bank to address?

Experts say there has long been a culture of loan approval at the bank. They point to the bank's founding Articles of Agreement, which specify that the organization was only to concentrate on economic matters and "its officers shall not interfere in the political affairs of any member." Previous World Bank President James Wolfensohn, when he launched an anticorruption campaign in 1996, stressed other language in the Articles of Agreement asserting the duty of bank officers to make sure money was properly spent. George Ayittey, professor of economics at American University and a former World Bank consultant on African development, says Wolfensohn ran into institutional resistance and inertia. "Taking on corruption was going beyond the sort of mandate. It was seen by some bank officials as overstepping its boundaries and trying to meddle in the internal affairs of client states."

Adam Lerrick, an economist at Carnegie Mellon University in Pittsburgh and a visiting scholar at the American Enterprise Institute, says there is a fundamental flaw in the international aid system: "the donors are more desperate to give than the recipients are to receive. Under these conditions, aid cannot succeed."

What has the World Bank done in the past to fight corruption?

A number of experts applaud former President Wolfensohn for ending official silence at the bank on corruption. They praise the bank's work compiling data on governance worldwide, including the "Doing Business" database, a detailed examination of the investment climate in states, including problems with corruption and strengthening rule of law. The bank encouraged countries to set up anti-corruption commissions but even bank officials now say they may have over-estimated the value of these bodies. The International Herald Tribune recently quoted the director of global programs at the World Bank Institute, Daniel Kaufman, as saying: "Very often, anticorruption commissions are a politically expedient response to domestic and international pressures to show action."

"No matter how horrific African poverty appears to people in rich countries, in the minds of the African elites, the poor are just part of the landscape," says economist Adam Lerrick.

What new steps are being taken by the World Bank?

Wolfowitz says the bank will send out anticorruption teams in many of its country offices to work with local institutions to protect its projects from corruption and strengthen public procurement. Wolfowitz told reporters: "We also are changing the way we design our projects so that they address the incentives and opportunities to fight corruption right from the start."

But getting the most attention has been the president's moves to freeze loans over corruption concerns. They include more than $1 billion in health loans to India, loans of $265 million to Kenya, and the cancellation of a number of contracts for infrastructure and health projects to Bangladesh because of alleged corrupt bidding practices. Experts say the bank's credibility is most on the line regarding its freeze of loans to Chad, which has changed a law that had directed a portion of oil profits to social programs to the poor. Chad had been held up as a rare example where a poor but resource-rich country was aiming to commit itself to preserving profits from energy contracts for poverty relief.

What are other recommendations to tackle corruption in bank projects?

An article in a recent issue of Foreign Affairs by Ben Heineman and Fritz Heimann urges greater internal controls by the bank. They say bidders on bank projects should be required to have antibribery programs in place, adding, "Full disclosure of any financial support for a project and of any agents used by the parties involved should be made in both recipient and donor countries."

Lerrick says aid must be delivered through performance-based grants. For example, he says, in a program to vaccinate against a disease, the private sector and nongovernmental organizations should bid on contracts to vaccinate children and then only be paid upon delivery of audited results. In the case of Africa, Lerrick says, donors must be prepared to walk away if locals do not comply: "No matter how horrific African poverty appears to people in rich countries, in the minds of the African elites, the poor are just part of the landscape."

Professor Ayittey of American University says countries in Africa must be pressed to develop free media, strong prosecutors, and an independent judiciary. "Until these things happen you can forget about talking about fighting corruption," he says. William Easterly, a former World Bank economist, told the U.S. Senate Foreign Relations committee in March that the solution is to create an independent group of evaluators who have no conflict of interest to study bank programs. "Allocations of money to multilateral development banks should go up or down depending on their average performance as rated by the independent evaluators," Easterly said.

Do other international aid organizations have anti-corruption campaigns?

Yes. The U.S.-funded Millennium Challenge Corporation has a series of performance thresholds—including anticorruption safeguards—before money is funneled to projects, although the agency has been faulted for moving too slowly to disburse funds. The World Bank says it is working on a number of global anticorruption initiatives, including the Organization for Economic Cooperation and Development's Convention on Combating Bribery of Foreign Public Officials, the new UN Convention Against Corruption Treaty, and the British-based Extractive Industries Transparency Initiative.

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