Global Policy Forum

Privatization And ‘Reforms’


By Someshwar Singh

Third World Network
July 5, 2000

The growth of corruption across the globe is largely the result of rapid privatization of public enterprises, along with reforms to downsize and undervalue civil services, pushed on developing countries by the World Bank, the IMF and western governments supporting their transnational corporations, a new report brings out.

The report, "Exporting Corruption - Privatisation, Multinationals and Bribery," by Sue Hawley and published by the NGO, The Corner House, estimates that western businesses pay bribes to the tune of $80 billion a year - roughly the amount that the United Nations believes is needed to eradicate global poverty.

The Corner House is a UK-based research and solidarity NGO that brings out briefing notes on major international development issues.

Corruption, says the Corner House paper, has become a major international concern and topic of international conferences, policy forums and ministerial speeches. It was also the focus of a recent OECD convention, and a target issue for non-governmental efforts as that of Transparency International.

The focus needs to be shifted to the "supply-side" of bribery and corruption, says the report, pointing out that corruption practised by multinationals in the South not only undermines ‘good governance', but also development and exacerbates poverty and inequality.

"If corruption is growing throughout the world, it is largely a result of the rapid privatisation (and associated practices of contracting-out and concessions) of public enterprises worldwide," says the report. "This process has been pushed by western creditors and governments and carried out in such as way as to allow multinational companies to operate with increased impunity."

"Thus multinationals, supported by western governments and their agencies, are engaging in corruption on a vast scale in North and South alike. Donor governments and multilateral agencies such as the World Bank and International Monetary Fund frequently put forward anti-poverty and "good governance" agendas, but their actions send a different signal about where their priorities lie."

Efficient, accountable, adequately-paid and well-motivated civil services are essential for combating corruption, and civil service reform has been a major component of structural adjustment lending since the 1980s.

"Yet for the World Bank and IMF, reform primarily means ‘downsizing'. As the Bank itself has discovered, these cuts have produced neither greater efficiency nor increased revenue. Eight out of 15 countries in Africa actually increased their wage bills after downsizing because of payoffs to retrenched workers. In 40% of cases, laid-off civil servants had to be rehired." An internal Bank staff report in 1999 noted that "civil service reforms were eroding governance". At the same time structural adjustment programmes have led to large decline in wages of civil servants who remain employed—resulting "in lack of motivation, low morale and increased risks of petty corruption."

Most commentators on corruption - and on the ‘good governance' initiatives instigated to combat it - dwell on developing countries, not industrialized ones, observes the report. "Most scrutinize politically-lax cultures in the South, not the North. Most call attention to the petty corruption of low-paid civil servants , not to the grand corruption of wealthy multinationals. Most focus on symptoms such as missing resources, not causes such as deregulation of state enterprises. Most talk about bribe-takers, not bribe-givers."

Corruption is increasingly cited as a reason for withholding foreign aid or debt relief. If a country's inability to pay interest on its loans is due to its leaders siphoning off national earnings into their own bank accounts, the reasoning goes, surely extending aid or cancelling the debt will merely sanction further graft.

For multinationals, bribery enables companies to gain contracts (particularly for public works and military equipment) or concessions which they would not otherwise have won, or to do so on more favourable terms. In 1999, the US Commerce Department reported that, in the preceding five years, bribery was believed to have been a factor in 294 commercial contracts worth $145 billion, the report observed.

Citing many instances of western multinational firms being implicated in charges of corruption, the report says action against corruption has to involve effective sanctions by developing countries against multinationals which engage in corrupt practices; greater political transparency to remove the secrecy under which corruption flourishes; and resistance to the uncritical extension of privatization and neo-liberal economic policies.

Citing the effectiveness of sanctions, the report notes that in Singapore, a middleman was convicted in 1996 of paying bribes totalling $9.8 million on behalf of Siemens, Pirelli, BICC, Tomen and Marubeni. Not only did the government ban all five companies from bidding for any government contracts for five years, it also banned "firms associated with the five companies, any new company that the firms may jointly set up, and firms that share the same directors as the five." Many western companies do not dirty their own hands, the report observes. Instead, they pay local agents, who get a 10% or so ‘success fee' if a contract goes through and who have access to the necessary ‘slush-funds' to ensure that it does.

Bribery is also increasingly subtle. It often takes the form of semi-legal fees or ‘commissions', and inflated or marked-up prices. In contracts guaranteed by export credit agencies, such ‘commissions' are included in the costs and thus in the total contract value covered by the guarantee—practices which Transparency International says is "an indirect encouragement to bribe which, in future, brings it close to complicity with a criminal offence." Until recently, many countries including France, Germany and the UK treated bribes as legitimate business expenses which could be claimed for tax deduction purposes.

Multinational corporations' corrupt practices affect the South in many ways, says the report. In addition to undermining development and increasing inequality and poverty, they disadvantage smaller domestic firms. They transfer money that could be put towards poverty eradication into the hand of the rich. They distort decision-making in favour of projects that benefit the few rather than the many. They also increase debt; benefit the company, not the country; bypass local democratic processes; damage the environment; circumvent legislation and promote weapons sales.

As western governments and the World Bank and IMF shout ever more loudly about corruption, their own policies are making it worse in both North and South, the report maintains. Particularly at fault are deregulation, privatisation, and structural adjustment policies requiring civil service reform and economic liberalisation.

In 1997, the World Bank asserted that "any reform that increases the competitiveness of the economy will reduce incentives for corrupt behaviour. Thus policies that lower controls on foreign trade, remove entry barriers to private industry, and privatise state firms in a way that ensure competition will all support the fight."

The Bank has so far shown no signs of taking back this view, the report observes. It continues to claim that corruption can be battled through deregulation of the economy; public sector reforms in areas such as customs, tax administration and civil service; strengthening of anti-corruption and audit-bodies; and decentralization.

Yet the empirical evidence, much of it from the World Bank itself, suggests that, far from reducing corruption, such policies, and the manner in which they have been implemented, have in some circumstances, increased it, says the NGO study.

In a section called "The World Bank's Corrupt Auditors," the report notes that the independent accounting firm appointed by the World Bank to investigate corruption in Bank projects has itself been caught paying bribes in one of the countries it was asked to investigate.

The Société Générale de Surveillance (SGS) of Switzerland - hired in September 1996 by World Bank President James Wolfensohn to conduct spot audits and uncover corruption in Bank-funded projects in Poland, Kenya and Pakistan—admitted in December 1997 to having paid a "substantial commission" in 1992 to obtain a government contract for inspection services in Pakistan.

Moreover, in August 1999, SGS was banned from operation for five years in Ethiopia for illegal activities including tax evasion and working without proper work licenses. Another firm, Price Waterhouse Coopers, which helps the World Bank's internal Audit Department was found guilty in January 2000 by the US Securities and Exchange Commission of "not only a lack of sufficient global safeguards, but also a systematic failure by professionals 'to adhere to even their own firm's existing controls.'"

SEC found thousands of instances of Price Waterhouse Coopers' staff and partners holding shares in companies they audited, says the report.

While 55% of the $25 billion that the World Bank lends each year is disbursed locally, the other 45% is dispersed directly to foreign companies through "International Competitive Bidding." The majority of these contracts, says the report, go to companies from the OECD countries, mainly in the G-7. The US and Germany each get 6% of contracts and the UK, 3%. "Britain, in fact, gets more back in contracts for its companies than it contributes to the Bank."

The consultancy contracts to Bank-financed projects—which absorb 10% of the Bank's $25 billion loans—are particularly prone to corruption since they are not subject to international advertisements and competitive bidding.

A host of specialized lobbying firms have grown up to help companies win these deals. Many were started by former World Bank staff and representatives themselves. For instance, International Business Consultants was set up by World Bank procurement chief Donald Strombom when he left the Bank in 1997.

The report also singles out private banking services and offshore financial centres as the major conduits and repositories for bribes and corrupt gains.

"An estimated $40 billion from poor and former communist economies finds it way into US or European banks every year, much of it illegitimately gained," the report says. Some $30 billion of western aid "used as part of the Cold War game of winning friends" has ended up in Swiss bank accounts alone, it adds. "Leaders from some African countries have collectively had up to $20 billion on deposit in Swiss banks."

Today, private banking - increasingly used for confidential services to international elites, is believed to be worth as much as $17 trillion worldwide, and is experiencing phenomenal growth. The private banking boom, says the report, has its origin in the debt crisis and is the major reason for the continued indebtedness of many poor countries.

"Because of the debt crisis in the late 1980s onwards, western banks had fewer opportunities to lend to Third World countries and thus started to pursue wealthy individuals in the Third World to encourage them to place their wealth in private bank accounts. The result was a revolving door. International loans to developing countries were creamed off by those in power and "transferred into banks—ironically often to ‘private banking' branches of the very same international banks that had issued the international loan—in the first place."

"An estimated 80% of the loans made by commercial banks during the 1980s never reached their destined countries, remaining instead in Northern bank accounts. In Latin America, two-thirds of total debt is thought to have been deposited in Northern banks," the report adds.

The report suggests that more sweeping attempts to recover stolen money will require both promulgating an international convention and closing loopholes that allow ill-gotten gains to leave countries in the first place.

Unlike the war on illicit drugs, which lobbies feverishly against producing regions in the developing world but turns soft on rich consumers in the developed world, the tirade on "good governance" against the developing countries can be turned around in their favour - for there is much to uncover about good governance in the very quarters that are so eloquently preaching their sanctity.

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.