The Fight Against Corruption: The World Bank Proposal (ARI)

The Fight Against Corruption: The World Bank Proposal (ARI)

Theme: A wide-ranging World Bank anti-corruption strategy is pending approval from the organisation’s Development Committee. This ARI examines the strong political tint that the Bank’s activity might acquire in attempting to conduct in-depth assessment of the level of corruption in member countries.

Summary: The World Bank regularly provides assistance for the introduction of institutional reforms, many of which effectively reduce the room for corruption. The strategy now proposed is more ambitious, because the Bank’s actions would be decided according to its own assessment of the general state of corruption in each country. Given the links between corruption and power, and the statutory limitations placed on the Bank, it will be important to consider the political implications of this approach.

Analysis: Although he remains a very controversial figure, no one would question the fact that Paul Wolfowitz was an excellent US ambassador to Indonesia for three years during the Reagan Administration. It was no surprise that the current World Bank president’s lecture in Jakarta on 11 April 2006 was littered with amiable references to people and institutions that he knew as ambassador. However, the main theme that day was of course not his affectionate memories but rather reflections on a practice that is very deep-rooted in Indonesian society, both civil and political: corruption. Jakarta was the platform from which the President of the World Bank issued both his local audience and the rest of the world with a warning that the World Bank was preparing itself to wage a battle against ‘one of the biggest threats to development…’.

And the Fight Continues…
There is nothing new under the sun. Almost exactly ten years earlier, the current President’s predecessor, James Wolfensohn, visited Indonesia and received direct information –from unofficial channels– on certain of the alarming peculiarities of local capitalism. Wolfensohn also learnt that many of the organisation’s own professionals were demanding energetic action to tackle the corruption they stressed was affecting many projects within the Indonesian portfolio. The Bank’s experience world-wide appeared to confirm that the Indonesian case was not unique. But it had preferred not to tackle corruption head-on. Within the Bank’s prolific literature the term was enshrouded by euphemisms such as ‘sub-optimal supply’ or ‘implicit burden’, both more technical and less imaginative, than those attributed to Suharto, ‘what you [in the West] call corruption, for us are family values’ (Sebastian Mallaby, The World’s Banker, 2004). Judging this to be a critical theme, Wolfensohn decided to openly confront it, and just a few moths later he surprised his Governors when he spoke openly about the ‘cancer of corruption’ during the 1996 General Assembly. A year later, the Board passed the World Bank’s first anti-corruption strategy.

The World Bank is now promoting its second attempt. Formally, the Bank is responding to a Development Committee (DC) requirement of April 2006, for it ‘to lay out a broad strategy… for helping member countries strengthen governance and deepen the fight against corruption’, but those who are familiar with normal procedures know that, in truth, it must have been the institution itself which proposed this line of action to the Ministers. The Bank has published several working papers on the subject, and the following notes are based, in particular, on Strengthening Bank Group Engagement on Governance and Anticorruption (GAC, 5/IX/2006), presented to DC members at their meeting last September. The Committee accepted the document following lengthy debate, but only as the first step towards a new anti-corruption strategy; thereby rejecting the idea that it already was the definitive strategy. The Bank is working on a new text to be put before the DC in April, which is likely to feature ideas gathered from an extensive web-based consultation (, Update on the Consultations, 30/I/2007). These notes only represent an initial reaction to specific aspects of a process that is still underway.

A Strong Commitment to Anti-corruption
GAC is an extensive paper, with the ambitious target of fully committing the Bank to the fight against corruption in its member countries. It is not possible here to analyse all of its aspects, but, prior to the DC review process in April, it is worthwhile gauging its political content. As will be discussed below, the anti-corruption fight proposed in GAC goes beyond mere technical considerations to actively pursue the Bank’s penetration of countries’ structures and relations of power. Legitimising the World Bank’s role in such an endeavour raises a number of questions that are worthy of consideration.

The World Bank offers member countries programmes to drive forward institutional reforms in areas that are key for good governance: financial management of the public sector, customs, the legal system, organisation of markets, etc. These programmes constitute a very important part of the Bank’s activity, and it is possible that they account for between 20% and 30% of its annual operations. Working in conjunction with the authorities, the Bank’s professionals design and decide content for a strategy, and then actively cooperate in the operational phase. These programmes have been of great value to countries in the throes of institutional creation. Likewise, Bank assistance has facilitated identification and elimination of outbreaks of corruption which often surface in these and other areas of public administration. As we will see below, it would appear that the Bank is satisfied with these results but that it is now seeking to achieve goals which go much further. Moving beyond the traditional practice of establishing consensus with the authorities for the purpose of identifying and introducing specific institutional reforms, it now wishes to focus its attention on the overarching issue of the state of corruption at country level. This much is clear from certain parts of GAC, the web-based questions, and the emphasis –expressly underlined by the Bank’s President (Press Audio Call, 30/I/2007)– that governments should no longer consider themselves to be the institution’s exclusive interlocutors.

One essential document in the World Bank’s normal operational policy is the CAS (Country Assistance Strategy), which is an authentic business plan for Bank actions in each country. Work guidelines for staff indicate that this country report must cover the area of governance, including corruption issues, but in reality the latter are rarely the subject of in-depth or systematic treatment. The new strategy revitalises these guidelines without concessions. Without exception, every country-report will have to examine and diagnose the state of corruption in the country in question. If a substantial risk is identified –if staff consider that governance and corruption are obstructing economic growth and poverty reduction– then ‘governance should be the central plank of the country-report, probably as the overarching theme for Bank interventions’.

How would the Bank proceed in a country if a report stressed the threat of substantial risk? The paper provides a number of guidelines for reaction, based on a typology that is a bit simplistic. In a ‘limited number’ of countries deemed to be of ‘high opportunity’, the Bank would provide full assistance to political leaders, on the basis that the latter would naturally want to eradicate corruption. In the ‘large group’ of countries in which governance and corruption still constitute a problem, but where there is apparent political willingness to address it, the Bank proposes its proactive involvement on all anti-corruption fronts, including detachment of special advisors and the analytical work of its staff. And lastly there would be also be a ‘limited number’ of countries classified as an ‘exceptional risk’, whose authorities were not giving priority to an anti-corruption campaign. The Bank announces that in these countries it would only undertake actions involving restricted cooperation, which, where necessary, would be maintained with partners ‘outside central government’. The procedure reveals that there will clearly be uncertainties for countries. GAC fails to identify criteria for systematic ex-ante scoring of countries, meaning that the typology would be simply ex-post; in other words, the result of rating exercises previously undertaken by the Bank.

Documental Syncretism and a Lack of History
Before commencing, it is worthwhile noting two observations by way of background. The first of these is in relation to what we would term the syncretism observed in the paper. The second is with regard to a significant omission.

GAC is the type of paper that anticipates the criticism it will attract, and therefore incorporates ready-made responses. It grants the Bank significant operational freedom in the field, while assuring member countries that they will always be respected within the terms of the institution’s governing principles. Any reservation of a practical nature that may be levelled at it (for example, it states that it is doubtful that planned procedures will ensure equality of treatment between countries) is offset by the contents of a different section of the document (in the case in hand, by paying tribute to the principle of equal treatment). This technique for document writing is well-known, as is its use and abuse in politics. But in this case the devil is not in the detail, but rather in the implementation of the strategy itself. One may legitimately wonder if staff, under the pressure of working in the field, will not prioritise the newsworthy data that is in fact available in a country to the detriment of the principle of equal treatment: a country where information on corrupt practices is actually accessible might appear much more corrupt than another nation in which information gathering is difficult, costly or dangerous. As is wont to happen in large companies, the World Bank may find itself creating a great divide between what the decision-making organs thought they had approved, and the rule-of-thumb approach generated in the field.

Furthermore, a strategy announcing itself as the successor to an analogous predecessor should contain some historical background on why the previous strategy failed to work and how the components of  the new one will make up for past failings and errors. It is interesting to examine Annex A of GAC, Lessons from a Decade…, in which there are long lists of examples of Bank activity in the field of governance and anti-corruption. It would appear that many countries have either reformed their institutions of governance or introduced innovative programmes with Bank support. The information provided is positive: mistakes and failures do not figure, nor is there analysis on whether the reforms introduced remain in place years later, which is a key point (the phenomenon of reoccurrence, that certain experts refer to as re-corruption). It is not easy to reach the conclusion that corrections or changes should be made. But, if this is really the case, why was a new anti-corruption strategy necessary? Only the odd isolated phrase responds to this question. The current Bank Board is not satisfied, not because of any defects or insufficiencies inherent in the current approach, but rather with the approach itself, which has traditionally focused on specific areas of the work of public administration. In these terms, GAC certainly establishes a new and much more ambitious approach.

The Advent of a New Political Role
This new approach may have enormous practical repercussions. The Bank proposes detailed investigation of the governance and state of corruption observed in a country. GAC does not attempt to provide evidence that this approach accords with the Bank’s mission. It simply takes this for granted. However, any observer –whether from a developing or donor country– would necessarily feel some concern in regard to its apparent incongruence with the first article (Purposes) of the Bank’s Articles of Agreement. Furthermore, a number of practical observations should be added in this respect:

  • Investigating public sector corruption in a country requires that staff have access to the nooks and crannies of political organisation and of course to the main perpetrators of corruption; individuals who often form part of the administrative structures or their political leadership hierarchies. Electoral systems and financing of campaigns, conflicts of interest within the ruling classes, the institutional limits to the exercise of power or the legal channels for investigating and satisfactorily resolving complaints; any given aspect, or all aspects of political organisation may suffer from regulatory insufficiencies which clear the ground for corruption to occur. Formally correct systems can degenerate as a result of deliberate practices on the part of members of the government or state agencies, their relatives or civil servants in their charge. In analysing the state of corruption in a country, these are amongst the essential points that would draw the Bank’s attention. But does the World Bank have the right, based on the emphasis it places on corruption, to pass judgement on a country’s political structures, and perhaps propose alternatives, or to subject the political class to direct questioning? Is the Bank capacitated/legitimised to enter the political arena of member countries in this manner?
  • Secondly, a country’s ownership of a programme –that is, auditing responsibilities, management and responsibility– is an established principle, both in the IMF and the World Bank. But many countries know from experience that international bodies are not always true to their self-proclaimed principles. An anti-corruption campaign, often involving an arduous purification and cleansing operation within the circles of power, is a matter in which respect for the country’s ownership is paramount. All manner of friction would doubtless be caused in the country’s political life, which could only be addressed by means of the full commitment and responsibility of its governors. This process could never involve a third party.
  • But the Bank is displaying its readiness to work with, civil society, the media and local communities as well as with the government, and, as previously mentioned, it is not ruling out the possibility of cooperating with the former in the first instance should the government show a lack of interest. This could mark the launch pad for an activism in a nation’s political life laden with risks. The allies sought by the Bank are not precisely institutions which are of a technical or apolitical nature. When we speak of civil society, we are referring to an aim (a legitimate one, of course) to influence political life in defence of a specific set of interests. In respect to the non-state media, it would be naive to think that they were necessarily free means of expression serving the common good. Local communities are generally part of the public sector, removed from the centre, to some degree at least, but with their own political agendas. Shielded to a greater or lesser degree, any of the potential allies might be participating in the general corruption, or generating their own. It would not be right to start from the premise that corruption exists exclusively in government institutions. Definitively, the dynamics generated by internal political conflicts, some of whose actors might wish to ‘use’ the Bank for their own ends, could place the Bank in highly compromising situations.

The DC communiqué explicitly reminds the Bank that ownership and leadership are key to the success of an anti-corruption strategy, and that in order to ensure this governments must be its key interlocutors. Obviously, it recognises that the Bank may develop relationships with other domestic institutions, although it does so with two reservations: the need to take into account each country’s specific elements and to remain within the mandate received by the Bank. Both reservations are very significant. The first obliges the Bank to pay great attention to complex political-economic issues, and to do so from a position of respect for the existing institutions, however weak they may be. For instance, the legitimate government of a small nation might be particularly vulnerable to the influence of political opposition on the civil sectors on which the Bank’s work might be based. The second reservation recalls that member countries have sought to avoid any type of Bank interference in the circles of power. ‘The Bank shall not become involved in the political affairs of a country’, say the Articles of Agreement, art. IV/10, under a curt heading: Political activity prohibited.

Is it the Only Strategy Possible?
Given the foregoing comments, what is likely to be the fate of (the re-drafted) GAC when it is considered by the DC at its April meeting?

By employing the appropriate language, it is likely that a new GAC will secure the DC’s seal of approval, thereby allowing the Bank to implement the proposed anti-corruption focus. In the last resort, issues such as compliance with the Articles of Agreement will take second place to an issue –the fight against corruption– which might be denoted a public global good, and which no country will wish to strongly oppose. The DC is formed by 24 Ministers of member countries. The Ministers of donor countries, who represent contributors keen to ensure that their development aid is put to good use, will be able to explain to the people they represent that they have taken the step of entrusting a great multilateral institution with the responsibility of combating corruption in aid-receiving countries. Their counterparts in receiving countries will not wish to risk that a critical position on their part be seen as evidence of corrupt practices in their countries. Both parties will delegate to their 24 representatives on the Bank’s Board the difficult task of surveillance of the execution of the strategy and with ensuring that the institution acts within its statutory framework.

Without the strategy proposed in GAC, would it be possible for the Bank to address the phenomenon of corruption? The response to this question has to be affirmative. Lack of trust vis à vis Bank aims and its potential political involvement does not entail the rejection of other modes of action on the part of the Bank itself in the struggle against corruption.

First, because there is one area in which the Bank is legally bound to act with the utmost diligence: its own projects (Articles of Agreement, art. III/5(b)). The Bank’s so-called ‘reputational’ risk is at maximum level when one of its projects registers unjustified deviations of funds. For this reason, the Bank has always been a keen fiduciary agent with a powerful professional investigation team which does not hesitate to take drastic measures if it uncovers corrupt practices in the execution of a project. Likewise, it has made an enormous effort to reform and use –under its own supervision– national regulations for public contracting (country systems), in such a way that they incorporate best practice, limit administrative discretionality and hence stem potential channels for corruption. This is therefore a very valuable tool in the fight against corruption within the project’s beneficiary country.

GAC contains a section of proposals for intensifying control of projects, but it appears to be too concerned with mechanisms for monitoring, control and penalising. There are two problems with this. One is the lack of interest in country systems: GAC does mention them, but it lacks any proposals for extending or improving current practice. And yet these would constitute an effective way of ensuring countries took greater responsibility for transposing international standards into domestic legislation, and, above all, for their transparent application. Secondly, there is the danger that as precautionary measures are tightened, there will be an unstoppable spiral in transaction costs with the Bank. The working paper refers to the example of a road programme, appropriately ‘ring-fenced’, which it took two years to prepare. It is a general opinion, shared by many of the Bank’s own managers, that its procedures are already tremendously cumbersome and slow, resulting in the fact that, to all intents and purposes, they dissuade a growing number of countries from cooperating with it. This is especially the case in periods of abundant liquidity, when it is possible for countries to capture funds from alternative sources, perhaps more expensive, but which are not subject to conditions, demanding prior country-reports or anti-corruption ‘ring-fencing’. The problem is that the institution has to apply all its efforts to securing a balance between the control of loaned funds and the needs and wishes of its clients.

There is also the fact that, to date, although the international anti-corruption movement may appear very well thought-out on paper, its effectiveness in real terms has been questionable: it is that of the international agreements, including those of the United Nations and the OECD. The latter is particular interesting, because it covers ‘transnational’ corruption, the supply of incentives –until recently considered as a deductible cost in many advanced economies– with which companies try to attract the attentions of the civil servants on whom the award of a permit, tax settlement or tender depend. The signatory countries have failed to recognise that the Bank has a relevant role in the practical development of the agreements, when it should at the very least exercise that of registering and critically supervising their compliance (a task which, in the case of the OECD agreement, an NGO is trying hard to execute). But it would nonetheless appear obvious that an anti-corruption campaign with the scope intended by the Bank should be developed in much closer conjunction with these international initiatives. As we have observed, GAC proposes far-reaching Bank involvement in corrupt countries, and yet the chapter it devotes to collective actions is merely descriptive.

And lastly, there is the fact that stimulating economic growth in developing countries is the task for which the Bank personnel have the greatest experience. It is not possible to assume that countries with no growth, or with high income volatility, will have available the resources necessary for structuring institutional reforms in such a way that they ensure corruption cannot take root. It is very likely that only sustained growth can ensure a solid base which enables the society in question to address corruption and gradually eradicate it. It is impossible to apply a process of immediate surgical extirpation to the phenomenon. Many advanced countries suffered from spiralling corruption in the past, which they were not able to overcome by means of programmes dispatching quick action, but rather because of processes triggered by economic growth itself. Market expansion generates mercantile uses, imposes regulations and requires public institutions of a type that is incompatible with states of generalised corruption. They reduce the phenomenon to individual cases –sometimes, of course, very significant ones– which are routinely addressed by the regulatory or legal institutions.

This topic –the guidelines for interaction between corruption, institutions and economic growth– is very complex, and there is far from unanimity in the literature. GAC supports the hypothesis that corruption acts as a brake to development, although its originators must be aware that it is difficult to balance said hypothesis with the persistence of strong growth rates in countries, democratic or otherwise, with significant levels of corruption. It would be a pity if the Bank were to base its priority focus on corruption on this opinion, neglecting both its historic commitment to growth and the accumulation of unknowns that scientific debate has yet to resolve. It is interesting to reread Ben Friedman in this respect (the Moral Consequences of Growth, 2005), when he argues in favour of economic growth as the dynamic factor capable of generating moral progress in societies. As well as driving forward democratic structures and institutions which protect individual rights, moral progress –which Friedman reinterprets using the Enlightenment writers as his base– also includes the habits of transparency and responsibility that steadily render generalised corrupt practices unsustainable.

Conclusions: The World Bank’s member countries (and owners) should be conscious of that fact that if, via the DC, they approve the main pillars of the strategy discussed they will reorient the institution’s activity in real terms. To date, they have viewed the Bank as an institution providing powerful support, both financially and technically speaking, for government growth strategies, and even for policies focusing on administrative reform and markets, without the need for it to engage in countries’ internal politics. However, it will be difficult for the Bank to execute the anti-corruption work programmes included in GAC, without situating itself at the absolute limit of the statutory mandate formally prohibiting its involvement in political activity, or indeed without transgressing said limit.

Furthermore, it will be important that member countries do not feel obliged to accept the proposed strategy simply because they feel that it is the only way that the World Bank can enter the anti-corruption fight. From introduction of institutional reforms to financing and technical assistance for development projects, the Bank has fulfilled, and can continue to fulfil, a critical mission in favour of economic growth, with attendant effects on corruption that, although indirect, cannot be overlooked. And in exercising its fiduciary obligation, its strict control of loans allows the Bank to collaborate with countries to establish national standards of financial rigour that make corruption less likely. Finally, the signatory countries to the international anti-corruption agreements should extend the Bank’s current mission of ‘support’ so as to involve it in the supervision of its compliance.

Luis Martí
State Economist