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World Bank corruption fight drags on

23 November 2006


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The World Bank’s anti-corruption framework was the subject of a bruising Development Committee debate at the annual meetings. Further challenges for the Bank include the impact of a rapid rise in Chinese lending to developing countries on anti-corruption efforts, and debt campaigners use of the corruption issue to highlight creditor responsibility for ‘illegitimate lending’.

The stand-off at the September meeting was between board members led by the US and Japan who support the Bank’s anti-corruption framework, and those who feel the framework jeopardises the development mandate of the Bank, including developing countries and several European board members, most notably the UK. There was a six-hour board discussion of the two paragraphs of the final communiqué that referred to the strategy, with the discussion focusing on the extent to which the paper was finalised or still a work in progress. In the end, the block led by the UK gained the upper hand, with the communiqué stressing “the importance of Board oversight of the strategy as it is further developed”.

severe problems with the construction and use of the Bank's governance indicators

At the meetings of the G24 group of developing countries, Mushtaq Khan of the School of Oriental and African Studies in London dissected the Bank’s own empirical analysis to refute any causal connection between better scores on corruption indicators and growth. This coincides with the view of the Bank’s own evaluation unit which, in a leaked note on the anti-corruption framework, described the link between corruption and country performance as “more varied and diverse”.

Khan calls for a more nuanced understanding of the “structural drivers” of corruption, the different types of corruption which result and the appropriate policies needed to address them. He fears that the current reform agenda, which sets expectations too high in the battle against corruption, risks “disillusionment and reform fatigue”.

Civil society groups have been determined to slow the pace of the framework’s development (see Update 52). In response, the Bank announced in November a second consultation on the framework running until early January. Bank staff will organise “multi-stakeholder workshops” in “several” countries. A more extensive consultation process was rejected due to the requirement to report to the board in January.

Feedback from consultations will go into the January board report which will subsequently feed into a March progress report. This will be reviewed by the board before a final report goes to the Development Committee at the spring meetings in Washington in April. A “global conference” may be organised in early or mid 2007.

The Bank’s internal work plan is much more extensive, including: systematic consultation with all staff and management; formation of a steering committee to develop options for “country-level engagement”; strengthening of governance units; development of staff guidelines; an independent review of the department of institutional integrity; and the creation of new methodologies for country governance assessments.

Faulty measurements?

All sides agree that the key to rooting out corruption is building better governance institutions; but what institutions and how to measure their effectiveness? Visiting London in October to discuss the Bank’s strategy, Daniel Kaufmann, creator of the Bank’s governance assessments, said: “The call for additional indicators is fine, but let’s not get into the pitfall of not using the good things that exist.” However, an OECD report published in August suggests severe problems with the construction and use of the Bank’s governance indicators, including correlation errors, lack of comparability over time, sample bias, and insufficient transparency.

This may lead the Bank to listen to the “modest proposal” of Cornell University economist Ravi Kanbur to introduce outcomes-based indicators in its governance assessments, a suggestion put forward by the Bretton Woods Project in 2004 (see Update 43). Kanbur argues for the inclusion of a new category of scoring which should evaluate “the evolution of an actual development outcome variable” such as one of the Millennium Development Goal indicators.

China crisis

China has reportedly committed $8.1 billion to Sub-Saharan African countries this year compared with $2.3 billion pledged by the Bank. While recipient governments may see Chinese money as a windfall free from the meddling conditions of Western aid agencies, the World Bank has voiced concerns that corrupt regimes may turn to China to avoid facing anti-corruption measures or environmental and social safeguards.

Speaking ahead of a China-Africa summit held in Beijing in early November, Bank president Paul Wolfowitz said big Chinese banks “do not respect” the Equator Principles – a voluntary code of conduct pledging that projects financed by private bank lending will meet certain social and environmental standards. He said that though Chinese banks lending in Africa were “relatively new to this kind of activity, they must not make the same mistakes as France and the US did with Mobutu’s Zaire.” China’s foreign ministry spokesman Liu Jianchao shot back, “in fact, [China’s investment] benefits Africa’s economic and social development.”

Wolfowitz also said he was concerned about lending by China, Venezuela, India and others to poor countries that had benefited from debt relief: “There is a real risk of seeing countries which have benefited from debt relief become heavily indebted once more.” In Bank parlance, this is called the ‘free rider’ problem. New Bank policy means that poor countries which are found guilty of borrowing from ‘free riding’ creditors will be punished by having financing cut or made more expensive.

Bank watchers have criticised this approach for punishing poor borrowers while doing nothing to discipline ‘opportunistic’ lenders. Instead, they say the Bank and donor governments should focus on the systematic shortages in development finance. The ‘free rider’ problem also exposes the failure of the international community to establish a fair and transparent arbitration procedure for debt workouts. If there was a way for future governments to question the legitimacy of past borrowing, all lenders – including the Chinese – would likely be more prudent.

Celine Tan, researcher at Warwick University’s Centre for the Study of Globalisation and Regionalisation concludes that the measures proposed by the Bank to deal with the ‘free riding’ problem “are not only operationally flawed but represent instead new mechanisms to continue binding IDA countries to financing flows – and thereby financial discipline.”

Illegitimate lenders

Debt campaigners have maintained that northern donors must accept responsibility where they have knowingly entered into loan arrangements which were used for corrupt or other illegitimate purposes. A breakthrough came in early October when Norway announced the unconditional cancellation of $80 million in “illegitimate debts” owed by Egypt, Ecuador, Peru, Jamaica and Sierra Leone. According to debt campaigning NGO EURODAD, Norway’s government has “admitted that it’s lending in these particular cases was irresponsible and motivated by domestic concerns, rather than an objective analysis of the development needs of the countries involved”. The débacle involves the export of Norwegian ships to developing countries between 1976 and 1980. It exported these ships mainly to secure employment for a domestic ship-building industry in crisis, not because these ships served the development needs of the countries concerned.

Debt campaigners will use the Norwegian decision to put pressure on other bilateral and multilateral donors to audit their past lending practices. Norway has established a fund for the Bank to undertake a study of illegitimate debt. Immediately the arguments will be used to put pressure on donors to cancel Liberia’s debts. According to Jubilee USA arrears to the World Bank and IMF – made up of lending to the former dictator Samuel Doe – amount to over $1.5 billion.