The World Bank discovers Corruption

For over 50 years, the World Bank has ignored corruption in its analyses and prescriptions. Billions of dollars of aid have been hijacked by corrupt rulers, yet the Bank has ascribed development failures to faulty policies or bad projects rather than plain theft.

Third World members of the Bank have never wanted any discussion of corruption-they have too many skeletons in the cupboard. Nor did Western countries in Cold War Days, since they were wooing corrupt dictators. Both sides signalled to Bank staff to stick to economics and keep mum about politics, in which they implicitly included corruption.

That has finally changed with the World Development Report 1997, which shows corruption as not just a political aberration but an economic disaster. The overall theme of the report is on the evolving role of the state. It argues that while state-dominated development has failed, so will stateless development. Development needs a Strong state which focuses on tasks which markets cannot do. One of them is combating corruption.

The Bank surveyed 3,600 firms in 69 countries. Over 40 per cent reported paying bribes as a matter of course. Most said a bribe did not guarantee performance, and feared they would be asked for more by other officials. Arbitrariness and delays made investment risky, escalated project costs, and rewarded manipulation over productivity.

The survey showed corruption to be worst in the former Soviet Union and Africa, and least in Asia. But even in India, a villager can barely conceive of the state as independent of corruption. Kickbacks and patronage seem the very purpose of political power, not a perversion of it.

In East Asian countries, corruption has co-existed with rapid economic growth. So some economists say corruption is not necessarily bad, and can grease the wheels of progress, but such short-term benefits will be offset in the long run by perverse incentives that diminish productivity.

Besides, corruption is less debilitating in East Asia because (a) it is less widespread, being concentrated at the top (b) it is more predictable and so reduces risks and delays for investors (c) the region has competitive policies. And growth in East Asia would have been even faster without corruption:

Econometric analysis of the 69 countries in the survey shows that:

The greater the policy distortion through controls, the greater the .corruption.

The more predictable the judiciary, the less the corruption.

The better civil servants are paid, the less the corruption.

The more recruitment is based on merit, the less the corruption.

Robert Klitgaard, a Bank economist, says corruption is equal to monopoly windfalls plus discretion in decision-making minus accountability (C MD-A). The solution lies in reducing monopoly and the discretionary power of politicians and bureaucrats, and increasing their accountability.

To achieve this, WDR \’97 suggests three lines of action. First, have policies that increase competition and so eliminate monopolistic enclaves. Second, strengthen institutions to enable them to combat corruption. Third, give ordinary people a greater voice, through democratic decentralisation and a stronger civil society.

Policies that encourage competition not only increase efficiency but curb corruption. When controls are abolished, the associated kickbacks disappear too. India needs to lower import duties and other trade barriers; and price controls (especially on oil and fertilisers); end monopolies in trade and manufacture; reduce subsidies, targeting them at the poor alone, and reduce controls at the state government level.

Half-baked liberalisation can create rather than reduce corruption. Cost-plus contracts for private power projects and controlled entry into telecom have become new avenues of corruption. Half- baked liberalisation lacks transparency and competitiveness. We need free entry into industries, not restricted entry as for telecom. We need to abolish price and profit guarantees for power projects, which in turn requires the end of state electricity boards as monopoly power purchasers. We need independent regulators to ensure fair competition in privatised sectors.

Every country needs administrative reforms and technical assistance to create strong, capable institutions. In some African countries, government accounts are not even audited. But India inherited from the British Raj a top class civil service, police and judiciary. All three have plummeted downhill since. Don\’t blame just venal politicians. Blame also the police-judicial system that has become incapable of speedily convicting wrong-doers. This in turn has distorted politics.

The state is defined as an entity, which has a legal monopoly over violence. So if musclemen are not penalised, they become, in effect, the state. If bandits are not in jail, they will end up in the legislatures, as is increasingly the case in India.

We need more than an independent judiciary. We need judicial predictability (to end the state of appeals) and greater speed. Justice delayed is justice denied. So judges who delay justice should be penalised. Judges must be accountable as well as independent.

Politicians may be venal but have to seek re-election regularly, and to that extent are accountable. But policemen and civil servants have secure tenures, despite the most glaring evidence of wide-spread corruption and abuse. This must end. Most officials should be on five year contracts. These should be renewable with the consent of the community they serve, not political bosses.

Better investigative and prosecuting capacity is vital. The inability of the CBI to find clinching evidence in the hawala case is a good example of incompetence. Technical assistance is needed to upgrade capabilities. Special anti corruption bodies can work well (Hong Kong, Chile) Brazil, Colombia and Venezuela have created strong, independent attorney-generals who have brought top officials and politicians to book. This holds a lesson for India. Forget about the Lokpal Bill, an eyewash. We need an independent prosecutor\’s office with the rank of attorney-general, its own investigative staff, and access to all government records.

Finally, ordinary people need a greater voice. Democracy and free press help, but do not guarantee clean public life. Change is needed in three directions – decentralisation, greater participation by users, and a strong civil society.

Decentralisation takes decision-making closer to beneficiaries, and so makes officials more responsive. Giving panchayats financial powers and the right to hire and fire officials will increase the people\’s voice and officials\’ accountability.

Projects and programmes improve when the beneficiaries participate in their design and implementation (as in joint forest management). Regular consumer surveys can highlight the travails and suggestions of users. Ideally, we need laws which force the suspension of any official against whom there are a specified number of complaints.

Finally, we need a strong civil society that takes the initiative instead of depending helplessly on politicians and officials. A strong civil society is full of groups that band together for social goals. These range from women\’s credit groups to sports clubs to educational NGOs. A strong civil society brings pressure to bear against the corrupt. It cannot be created through a World bank loan. We must do it ourselves.

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