Global Policy Forum

By Joseph Stiglitz *

At its recent annual meeting, World Bank officials spoke extensively about corruption. It is an understandable concern: money that the Bank lends to developing countries that ends up in secret bank accounts or finances some contractors' luxurious lifestyle leaves a country more indebted, not more prosperous.

James Wolfensohn, the Bank's previous president, and I are widely credited with putting corruption on the Bank's agenda, against opponents who regarded corruption as a political issue, not an economic one, and thus outside the Bank's mandate. Our research showed systematic relationships between corruption and economic growth, which allowed us to pursue this critical issue.

But the World Bank would do well to keep four things in mind as it takes up the fight.

First, corruption takes many forms, so a war on corruption has to be fought on many fronts. You can't fight the diversion of small amounts of money by weak and poor countries while ignoring the massive diversion of public resources into private hands of the sort that marked, say, Russia under Boris Yeltsin.

In some countries, overt corruption occurs primarily through campaign contributions that oblige politicians to repay major donors with favors. Smaller-scale corruption is bad, but systemic corruption of political processes can have even greater costs. Campaign contributions and lobbying that lead to rapid privatizations of utilities – before appropriate regulatory frameworks are in place, and in a manner that produces only a few bidders – can impede development, even without direct kickbacks to government officials.

Life is never black and white. Just as there is no "one size fits all" policy for economic development, there is no such policy for fighting corruption. The response to corruption needs to be as complex and variegated as corruption itself.

Second, it's fine for the World Bank to deliver anti-corruption sermons. But policies, procedures, and institutions are what matter. In fact, the Bank's procurement procedures are generally viewed around the world as a model to be admired. Indeed, some countries with large dollar reserves – hardly in need of World Bank credit – borrowed from the Bank at far higher interest rates than they were getting from the United States, believing that these procedures would help ensure high-quality projects free of corruption and become standard in other areas.

But success in fighting corruption entails more than just good procurement procedures (avoiding, for instance, single-source non-competitive bidding). Many other policies and procedures can be enacted that reduce incentives for corruption. For example, some tax systems are more corruption-resistant than others, because they curtail the discretionary authority of tax officials.

Third, the World Bank's primary responsibility is to fight poverty, which means that when it confronts a poor country plagued with corruption, its challenge is to figure out how to ensure that its own money is not tainted and gets to projects and people that need it. In some cases, this may entail delivering assistance through non-governmental organizations. But seldom will it be the case that the best response is simply to walk away.

Finally, while developing countries must take responsibility for rooting out corruption, there is much that the West can do to help. At a minimum, Western governments and corporations should not be complicit. Every bribe that is taken has a payer, and too often the bribe payer is a corporation from an advanced industrial country or someone acting on its behalf.

Indeed, one reason for the so called "natural resource curse" – the fact that resource-rich countries do not, on average, do as well as resource-poor countries – is the prevalence of corruption, too often aided and abetted by companies that would like to get the resources they sell at discount prices. The US under President Jimmy Carter made an important contribution in passing the Foreign Corrupt Practices Act, which made bribery by American companies anywhere in the world illegal. The OECD's Convention on Bribery was another step in the right direction. Making all payments to governments transparent would bring further progress, and Western governments could encourage this simply by tying this requirement to tax deductibility.

It is equally important to address bank secrecy, which facilitates corruption by providing corrupt dictators with a safe haven for their funds. In August 2001, just before the terrorist attacks on America, the US government vetoed an OECD effort to limit secret bank accounts. While the government has since reversed its stance on bank secrecy for terrorists, it has not done so for corrupt officials. A strong stand by the World Bank would enhance its credibility in the war on corruption.

Those who criticize the Bank's stance on corruption do not do so because they favor corruption. Some critics worry about corruption in the corruption agenda itself: that the fight will be used as a "cover" for cutting aid to countries that displease the US administration. Such concerns have found resonance in the seeming incongruity of the Bank's tough talk on corruption and simultaneous plans to expand lending to Iraq. No one is likely to certify that Iraq is corruption-free – or even ranks low on corruption internationally.

The most strident criticism, however, comes from those who worry that the World Bank is straying from its mandate. Of course, the Bank must do everything that it can to ensure that its money is well spent, which means fighting both corruption and incompetence.

But money itself will not solve all problems, and a single-minded focus on fighting corruption will not bring development. On the contrary, it might merely divert attention from other issues of no less moment for those struggling to lift themselves out of poverty.

About the Author: Joseph E. Stiglitz, a Nobel laureate in economics, is Professor of Economics at Columbia University and was Chairman of the Council of Economic Advisers to President Clinton and Chief Economist and Senior Vice President at the World Bank. His latest book is Making Globalization Work.

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