Stiglitz on Corruption

This is a good follow-up to the post noting the release of The Bribe Payers Index. Here's Joseph Stiglitz on the need to reduce corruption in developing countries while not losing sight of the bigger goal of enhancing development and reducing poverty:

An intricate plan of attack, by Joseph Stiglitz, Guardian: 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. ...

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 favours. Smaller-scale corruption is bad, but systemic corruption of political processes can have even greater costs. Campaign contributions and lobbying that lead to rapid privatisations 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...

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...

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 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. 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...

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 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 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.