Academic journal article Law and Policy in International Business

The Role of the World Bank in Controlling Corruption

Academic journal article Law and Policy in International Business

The Role of the World Bank in Controlling Corruption

Article excerpt

Widespread corruption is a symptom that the state is functioning poorly. Ineffective states can retard and misdirect economic growth. International aid and lending organizations have begun to focus on corruption control as part of a general rethinking of their role in the post-Cold War world. Both James Wolfensohn, the President of the World Bank (Bank), and Michel Camdessus, the head of the International Monetary Fund (IMF), have put the control of corruption on their institutions' agendas.(1)

Nevertheless, some argue that corruption is a political issue and is, therefore, outside the purview of the World Bank. Corruption, however, has fundamental economic impacts and is thus an appropriate area for World Bank and IMF concern. Bribes represent illegal user fees, taxes, or access charges paid to public agents. These payments influence economic decisions ranging from the size and character of public investment projects to the level of compliance with business regulations. It is difficult to see how a concern for the economic costs of corruption can be responsibly excluded from World Bank lending criteria.

Of course, bribery is often tied to politics. Some countries have weak laws against bribery; other countries' leaders only enforce the law against political opponents. Corrupt top officials regularly take a cut for themselves of lucrative state activities. Widespread corruption at the top, however, is not itself evidence that most people accept such a state of affairs. Surveys of popular attitudes suggest that such tolerance is rare. The fight against high level political corruption is inevitably political because top leaders are involved in malfeasance. A successful effort to reduce corruption may, however, be a condition for efficient economic growth.

The World Bank is a development institution, but it is also a political animal. As a coalition of most of the countries of the world, it has no choice. Firms based in donor countries want to continue contracting with borrower countries under World Bank loans; borrowers want to maintain Bank support. These interests of donors and borrowers form the political coalition that supports the Bank. Thus, there is a bias in favor of making loans without asking too many questions about the integrity of the projects. This bias is exacerbated by the conditions under which loans are made. They are tied to the fiscal health of the borrowing government, not the success of the individual project. Thus, the Bank itself has little financial incentive to monitor the integrity of individual projects. Those who wrote the Bretton Woods Convention establishing the World Bank sought to counter this bias with a strong focus on economic rationality. The emphasis on technical and economic training within the World Bank's professional staff is the organizational response to these pressures. Unfortunately, recent experience suggests that it is insufficient and that a more direct approach is needed. An explicit concern with corruption is consistent with a focus on economic rationality and is one way to counter some of the political pressures faced by the Bank. The bias in favor of uncritical lending counsels an explicit concern with malfeasance in order to preserve the Bank's commitment to economic efficiency and the alleviation of poverty.

In constructing an overall lending plan for a borrower country, the identification of beneficiaries is a necessary first step. The World Bank need not accept the priorities expressed by a country's rulers if the regime either represents only a portion of the population or is inordinately concerned with personal enrichment. With the growth of commercial lending to the developing world in recent years, the World Bank can focus more firmly on the goals of reducing poverty and aiding institutional development.

Because corruption is usually considered wrong in itself, its mere existence is a cause for concern. An economist, however, takes a more skeptical view--arriving at that conclusion only after understanding corruption's impact on the efficiency and equity of the economic system. …

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