Publication: Business Day Issued: Date: 2006-11-24 Reporter: Joseph Stiglitz Reporter:

Guard Against Those Who Would Corrupt Fight Against Corruption

 

Publication 

Business Day
Date 2006-11-24

Reporter

 Joseph E. Stiglitz

Web Link

www.businessday.co.za

 

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 contractor’s 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.

First, corruption takes many forms *1, 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. *2

In some countries, overt corruption occurs primarily through campaign contributions that oblige politicians to repay major donors with favours *3. Smaller-scale corruption is bad, but systemic corruption of political processes can have even greater costs *4. Campaign contributions and lobbying that lead to rapid privatisations of utilities can impede development, even without kickbacks to government officials. The response to corruption needs to be as variegated as corruption itself.

Second, it’s fine for the World Bank to deliver anticorruption 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 borrowed from the bank at far higher interest rates than they were getting from the US, believing that these procedures would help ensure quality projects free of corruption.

But success in fighting corruption entails more than just good procurement procedures. 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 that need it. In some cases, this may entail delivering assistance through non-governmental organisations. 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 *5.

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 Jimmy Carter made an important contribution in passing the Foreign Corrupt Practices Act, which made bribery by US companies anywhere in the world illegal. 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 safe havens for their funds. A strong stand by the World Bank would enhance its credibility in the war on corruption.

Those who criticise the bank’s stance on corruption do not do so because they favour 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 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. Project Syndicate, 2006. www.project-syndicate.org

Stiglitz is a Nobel laureate in economics. His latest book is Making Globalisation Work.

With acknowledgements to Joseph E. Stiglitz and Business Day.


*1       One of the worst forms of corruption is the generally corrupt relationship based on mutually beneficial symbiosis between business benefactor and political beneficiary.

It gets even worse when the business benefactor is a major French defence contractor and the political beneficiary is the deputy president of an emerging country.


*2      And the sort that marks South Africa under Thabo Mbeki.


*3      There also the covert corruption that occurs through campaign contributions that oblige politicians to repay major donors with favours - like Thomson-CSF, Thyssen Rheinstal Technik, Ferrostaal, British Aerospace.


*4      Like funding one political party so hugely that it snuffs out all effective opposition and eventually democracy itself.


*5      Terry Crawford-Browne thinks that it's mainly these foreign corporations that corrupt our politicians and decision-makers to get the deals, but I think that it's a mutually beneficial symbiosis.