How the Bank Helps Countries Fight Corruption


April 8, 2004-Combating corruption requires a comprehensive approach that tackles its many causes and the structural issues that allow it to thrive.

It also requires courage and perseverance from political leaders, public servants, civil society, the media, academics, the private sector and international organizations.

The Bank has assisted anti-corruption operations in nearly 100 countries. Since 1997, the Bank's anticorruption strategy has called for action in four key areas:

Preventing fraud and corruption in Bank financed projects and programs;
Helping countries that request assistance in combating corruption;
Mainstreaming a concern for corruption directly into country analysis and lending decisions; and
Contributing to international efforts to fight corruption.

How Corruption Keeps Poor People in Poverty
Poor governance and corruption can be the greatest obstacle to economic and social development.
It undermines development by distorting the rule of law and weakening the institutional foundation on which economic growth depends. It hurts the poor because it diverts public services from those who need them most and stifles private sector growth.

The World Development Report, 2004: Making Services Work for the Poor again raised corruption as a major inhibitor of poverty reduction.

Noting economic growth and financial resources were needed to achieve freedom from illness and illiteracy (two of the most important ways that poor people can escape from poverty), it said countries were too often held back by corruption.

Too often basic services such as water, sanitation, health, education and electricity failed poor people - in access, quality and affordability. More often than not there were deeper problems of accountability lurking behind these failures. These problems led to high teacher absenteeism rates, missing drugs in health clinics, money that did not reach the frontline service provider and corruption.

The report said strengthening accountability could help rectify these problems. Enabling the poor to monitor and discipline service providers and strengthening incentives for providers to serve the poor were identified as key areas.

Sharing Experience
The Bank shares the experience it has gained in its projects with the international community.
A joint World Bank-Transparency International (TI) workshop last year outlined the formidable challenges inherent in fighting corruption. It was concluded that demand for reforms must be increased from within societies, vested interests who benefit from corrupt systems confronted and the political drivers of corruption tackled.

In May 2003, the 11th International Anti-Corruption Conference (IACC) and the subsequent intergovernmental Global Forum III, held in Seoul, Korea emphasized that laws, regulations and enforcement cannot alone address the problems of corruption in societies. Instilling values and ethics is critical for success.

In December, the Bank actively supported the creation of the United Nations Convention Against Corruption, which was signed in Merida, Mexico.

In February, the Bank participated in a workshop with members of the OECD's Development Assistance Committee, the African Development Bank, the Secretariat of Transparency International, the Soros Foundation and International IDEA to discuss lessons learned in the fight against corruption. Among the issues identified were the need for international aid donors become more co-ordinated in the efforts to combat corruption. They also agreed there was a need to better manage the large amount of knowledge that has been generated on the corruption fight.

The Bank's Anti-Corruption Work With Countries
In recent years, the Bank has lent more than $5 billion a year to help countries build efficient and accountable public sector institutions. Governance and anti-corruption measures are addressed in Country Assistance Strategies, the Bank's medium-term country-level business plans. This helps spotlight not only governance shortcomings but what the government and the Bank are doing to address these issues.

Its governance programs promote:

Anti-corruption;
Public expenditure management;
Civil services reform;
Judicial reform;
Tax policy; and
Administration, decentralization, e-government and public services delivery.
Promoting Extractive Industries Revenue Transparency
In December last year, the Bank endorsed the Extractive Industries Transparency Initiative and pledged to work with several developing nations, as well as companies on ways to publish revenues accruing from the oil, gas and mining sectors. The initiative was launched by British Prime Minister Tony Blair at the World Summit on Sustainable Development in Johannesburg. In many developing and transition countries, revenues from oil, gas and mining companies - in the form of taxes, royalties, signature bonuses, and other payments - have been an important engine for economic growth and social development. However, research has found that in some nations with weaker institutions the lack of accountability and transparency about these revenues can exacerbate poor governance and lead to more corruption, conflict and inequality.

An example of a cutting edge revenue transparency project is the Chad-Cameroon Pipeline. The Bank is working with Chad, one of the world's poorest countries, to improve governance and the transparency of revenues from a major petroleum project to ensure the benefits are passed on to the country's citizens.

The Bank supported the construction of a 1,050km pipleline in Chad to oil loading facilities in Cameroon to help finance much-needed development. The Bank established a safeguard program with clear rules for the allocation of oil revenues to ensure the country's oil money is managed for the well-being of all of Chad's citizens. Under the rules the oil money goes into an escrow account in London, subject to full disclosure and audit. After debt servicing to the World Bank and the European Investment Bank, the rules specify that 10 percent be set aside for a "future-generations" fund, and that 80 percent be allocated to priority sectors, including health education, infrastructure, rural development, water and environment. An allocation of five percent is set aside for oil producing areas themselves for special development projects. An oversight committee bringing together members from the administration, the Parliament, civil society, human rights groups, and faith-based organizations must approve spending from the petroleum account.

The Case for Prevention
Bank research shows that anti-corruption efforts pay off when they focus on preventative measures that reduce opportunities for corruption. These include:

Reducing the likely benefits from corruption. Promoting competition in the private sector through lower barriers to entry, regulatory reform where there are natural monopolies and ensuring competition in government procurement through national advertising can help reduce corruption.
Import liberalization, removing price controls, industrial and trade licensing requirements can cut corruption. When India liberalized industrial licenses in the early 1990s, a large industry aimed at obtaining licenses and the corruption associated with it disappeared.
Increasing information, transparency and public oversight. Corruption often occurs because of a lack of information. Governments may lack information on what their agents are doing on the ground, consumers of government services may not be aware of the rules. Clarifying rules and increasing transparency can cut corruption. Involving the beneficiaries in the oversight of government programs also reduces opportunities for corruption.

Recent Anti-Corruption Efforts
Fighting Money Laundering and Combating the Financing of Terrorism
The Bank and the International Monetary Fund have joined the international effort to combat money laundering and the financing of terrorism. The Bank has 40 projects benefiting 115 countries on its books. The projects provide a range of assistance including training programs and help with drafting legislation, strengthening the capacity of legislators and establishing Financial Intelligence Units.

Combating Corruption in the Forestry Industry
The World Bank has continued to intensify its effort to improve governance and contain illegal activities in the international forestry industry. The annual global market value of losses from illegal cutting of forests are estimated at over $10 billion. In the Amazon, for example, 80 percent of timber harvests are estimated to be illegal. The Bank has been working with Brazil through its strategy for sustainable land use to improve its governance structure to contain predatory logging, tax avoidance, and the introduction of log-tracking and independent certification of forest harvesting and management operations.

Legal and Judicial Reform
The Bank has prepared a policy note which can be used as a guide by governments on best practice in the writing of an anti-corruption statue. It also maintains a web site with the latest information on model anti-corruption laws. The Bank is providing assistance to the judicial systems of over 40 client countries to, among other objectives, help them enforce laws outlawing bribery, nepotism, and other corrupt acts. Recognizing that corruption feeds on opaque processes and a lack of information, it is assisting clients to develop and implement freedom of information laws, regulations requiring public servants to disclose their assets and income, and other measures to open government up to public scrutiny.

The Costs of Corruption

April 8, 2004-More than $1 trillion dollars (US$1,000 billion) is paid in bribes each year, according to ongoing research at the World Bank Institute (WBI).

Daniel Kaufmann, the Institute's director for Governance, says this US$1 trillion figure is an estimate of actual bribes paid worldwide in both rich and developing countries.

"It is important to emphasize that this is not simply a developing country problem," Kaufmann says. "Fighting corruption is a global challenge."

The $1 trillion figure, calculated using 2001-02 economic data compares with an estimated size of the world economy at that time of just over US$30 trillion, Kaufmann says, and does not include embezzlement of public funds or theft of public assets.

It is extremely difficult to assess the extent of worldwide embezzlement of public funds, "but we do know it is a very serious issue in many settings." For example Transparency International estimates that former Indonesian leader Suharto embezzled anywhere between $15-35 billion from his country, while Ferdinand Marcos in the Philippines, Mobutu in Zaire and Abacha in Nigeria may have embezzled up to $5 billion each.

Kaufmann notes that a calculation of the total amounts of corrupt transactions is only part of the overall costs of corruption, which constitutes a major obstacle to reducing poverty, inequality and infant mortality in emerging economies.

WBI research shows that countries that tackle corruption and improve their rule of law can increase their national incomes by as much as four times in the long term, and child mortality can fall as much as 75 percent. "We have found what we label as the '400 percent governance dividend'," Kaufmann says.

A country with an income per capita of US$2000 that addresses corruption, improves its governance and the rule of law could expect to see its income rise to US$8000 in the long run.

Tackling Corruption Can Boost Development
Not surprisingly, tackling corruption and governance can provide a major boost to a developing country, according to Kaufmann.

Countries like Botswana, Chile, Costa Rica, and Slovenia, which have curtailed corruption to levels comparable with those of many wealthy industrialized countries, challenge the popular notion that a country needs to become rich in order to address corruption. Research utilizing a comprehensive governance database of 200 countries shows, in fact, that higher national incomes per capita result from improving governance, rule of law, and corruption control.

There are many successes at the project level that also illustrate what is feasible, such as the citizen's report card in Bangalore, India, which has resulted in an increase in citizen satisfaction with local agencies and a decline in corruption, or expenditure tracking surveys in Uganda, which led to a reduction in budgetary leakages away from local schools.

Is the Battle Against Corruption Being Won?
Progress has been made in fighting corruption in some areas, but much still needs to be done, says Kaufmann. The main challenge lies ahead, and will require enormous political resolve, by national governments, the private sector (including multinationals), and international bodies.

Some country leaders and governments are serious about addressing corruption. On the international scene, one positive is the adoption of the United Nations Convention Against Corruption, signed in December 2003 in Merida, Mexico. Other international organizations, such as the Organization of Economic Co-operation and Development and the Organization of American States, have also implemented anti-corruption conventions.

Kaufmann says the World Bank, which until the mid-1990s had been constrained from assisting countries fight corruption, significantly stepped up its efforts under current President James Wolfensohn, following the landmark "cancer of corruption " speech on this challenge at the 1996 IMF/World Bank Annual Meetings.

Through projects in about 100 countries, the Bank is assisting in this area. Equally important is the Bank's own 'zero tolerance' policy on corruption internally and the aggressive approach to minimize corruption on Bank-funded projects. The Bank publicly names companies found to have been engaged in corrupt practices in its projects. So far more than 100 firms have been debarred.

Research confirms some countries have achieved success while others have not.

"There are success stories in some countries, cities and institutions. But the sobering reality is that for each success case, there has been inaction or deterioration in others. The variation in performance across countries, cities and institutions in controlling corruption is enormous. The key is to learn from the mistakes and successes of early experience in this area," Kaufmann says.

The Way Forward
Given the "sobering reality" of the extent of international corruption, some rethinking of how to address it might be necessary, according to Kaufmann. Key issues include:

Viewing corruption within the context of governance and institutional change. Promoting the rule of law, protection of property rights, freedom of the press, political competition, and transparency in general, and in politics in particular (such as in campaign finance) is vital. Mechanisms to allow citizens to have an effective voice are also central.

The power of data and transparency. Reformist countries utilize data to measure and monitor progress on governance and assist in decision-making on governance and corruption. Pro-transparency measures such as Freedom of Information Acts, public asset disclosure by high officials, and transparent access to the voting records of parliamentarians should be further encouraged. As important is the continuing scaling up in worldwide indicators as well as country-specific diagnostic efforts.
There is no evidence that ideology, culture, globalization or privatization are culprits behind corruption. Corruption has thrived and been quashed by governments of all political leanings. Globalization can help control corruption by increasing transparency and competition.
Revisiting the wisdom of anti-corruption agencies and traditional legal initiatives. The overall record of anti-corruption agencies (which are often created for political expediency and at the expense of difficult systemic reforms) is mixed at best. So is the focus on redrafting laws. This suggests that a shift away from these agency-creation and/or traditional legal initiatives may be warranted. Instead, what is needed is moving towards much more focus on incentives, prevention, and systemic institutional and regulatory reforms, focusing on existing public, private and civil society institutions.
Citizen involvement in fighting corruption. Anti-corruption efforts cannot succeed only by actions of a few government agencies. Civil society, the media, Parliament, the judiciary and the private sector must be involved in a participatory way, with full voice and empowerment. Innovative ways of involving the citizenry at the local level, working with their municipalities to improve governance and control corruption, can be very effective - such as in a large project reaching many Indonesian villages, or in the participatory budgeting process in Porto Alegre, Brazil.

Open and transparent private sector competition, to avoid capture of state institutions by monopolistic private vested interests.

Domestic politics contributes enormously to the success or failure of any effort to reduce corruption. Vested interests need to be explicitly recognized and understood, acknowledging that at times the domestic private elite exerts undue influence against public governance reforms. For reforms to proceed, there has to be leadership from within the domestic political scene, which is prepared to overcome pressures blocking reforms from members of the public and private sectors. A redoubling of international efforts is crucial, but these will not succeed without leadership and resolve from within the country.
The role of an international compact. International organizations need to distill the lessons of experience and suggest frank and concrete steps to improve results. Multinational corporations can significantly affect governance and corruption within an emerging economy - for better or worse. Thus, a set of incentives and transparency measures (such as 'publish what you pay' to governments; debarring of rogue firms engaged in bribery, etc.) is required to ensure a positive influence. Further disclosure in international banking and tackling money laundering are also important. A higher priority effort by the G-8 against corruption is also warranted. Finally, in this context, further prominence of governance and anticorruption incentives and criteria for eligibility to join global or regional economic and trade agreements can also be a powerful incentive. This is illustrated for instance by the cases of Chile (accessing early to NAFTA, and then EU and other such agreements), and the EU accession countries from the transition region. Eventual membership in these 'select' international economic and political clubs provided an impetus to improve governance.