The World Bank: Addressing the Problem of Corruption IACC Durban, South Africa October 1999

1. The World Bank: Addressing the Problem of Corruption IACC Durban, South Africa October 1999

2. Corruption is not a new concern • Bank projects • Governance in client countries: • Growing attention in the 1980s to policy reform and public sector management • 1983 WDR on Public Management • 1989 Africa Perspectives Study • 2 Governance reports (1990 and 1994)

3. … but World Bank attention to the issue has grown dramatically in recent years • Growing evidence of the economic costs of corruption, particularly on the poor • 1990s: Political opening and end of the Cold War • Rise of international attention and activism • President Wolfensohn: • Annual Meetings speech 1996 • New Bank anticorruption policy 1997 • Mainstreaming in 1998 and 1999

4. “ The causes of financial crises and poverty are one and the same . . . if [countries] do not have good governance, if they do not confront the issue of corruption, if they do not have a complete legal system which protects human rights, property rights and contracts . . . their development is fundamentally flawed and will not last.”James D. WolfensohnAddress to the Board of Governors September 28, 1999

5. Our policy addresses this issue directly ... • 1997 Board policy: “Corruption should be explicitly taken into account in country risk analysis, lending decisions, and portfolio supervision if it affects project or country performance and the government’s commitment to deal with it is in question.”

6. A Four-part Strategy • Level 1: Preventing Fraud/Corruption in WB Projects • Level 2: Helping Countries that Request Assistance in curbing corruption • Level 3: Considering Corruption in: • Country Assistance Strategies • Country Lending • Policy Work • Choice and Design of Projects • Level 4: Supporting International Efforts to Curb Corruption

7. What are the Economic Costs of Corruption?

8. 70 60 50 40 30 20 10 CIS DC SSEA MNA CEE LAC SSA Corruption is a problem Percent of entrepreneurs

9. Senior Management Time Spent With Officials(mid-1990s, various sources) Ukraine Russia Zambia Egypt Lithuania Brazil Guatemala Pakistan Uganda Uruguay El Salvador 10% 20% 30% 0% Percent of time spent by the firm’s management with officials 9

10. Why firms declined to invest in Latvia: • Financing (23%) • Regulatory Uncertainty/Corruption (19%) • Insufficient Demand (15%) • Taxes (15%) • Cost of Regulations (8%)

11. Factors correlated with corruption 4 6 3.5 3 5 2.5 4 2 1.5 3 1 Low Medium High 0.5 2 6 0 4 1 3.5 5 3 4 0 2.5 3 2 2 1.5 1 1 0.5 0 Low Medium High 0 Low Medium High Index of corruption Low High Medium Policy distortion index Predictability of judiciary index Civil servant wages relative to manufacturing Index ofmeritocracy

12. The degree of civil liberties in a country, a free press, and involvement of civil society helps in controlling corruption. Briberyand Civil Liberties HIGH BRIBERY THA CMR NGA NIC AGO IDN PHL HND GTM VNM RUS MOZ VEN IND KEN COL GRC EGY POL UKR (GCS97+) UGA TZA CIV JOR ARG MEX ETH KOR CRI BRA ISL TUR ZWE ITA CHN BFA HUN GHA MYS MWI SVK ZMB MAR MUS PER TWN CZE Bribery SWZ LSO NAM ESP PRT ZAF ISR BEL FRA TUN CHE CHL NLD JPN AUT NZL DEU AUS IRL CAN USA SGP LUX GBR DNK FIN LOW SWE NOR r=0.67 BRIBERY LOW HIGH Civil Liberties (Freedom House) Source: Kaufmann and Sachs (1998)

13. How can the World Bank help clients address corruption ... • Corruption is a symptom of dysfunctional institutions … and development means building institutions • The political and economic aspects of governance are intertwined

14. Multipronged Strategy for Combating Corruption • Economic Policy: • Deregulation • Tax Simplification • Financial • Controls: • Audit • Procurement • Civil Service: • Pay • Meritocracy Corruption • Public Oversight: • Parliamentary Oversight • Civil society and media • “Power of data”/Surveys • Independent agency/NGO • Legal-Judicial: • Independence • Judicial Strengthening • ADR Mechanisms

15. Mechanisms to enhance Rules state capability and restraints • • Judicial independence • • Watch-dog bodies • • Merit-based recruitment- promotion • • Decen- • • Public-private tralization deliberation councils • • Co-production with communities • • • Client • Competitive service delivery delivery surveys Competitive Voice and Partnerships Pressures

16. Guiding Principles:Leadership, Partnership, and Selectivity • A country’s leaders must be in the driver’s seat • Citizens must be able to hold those leaders accountable • Organizations must have capacity and incentives to do their job

17. Latvia: Report Card of Government Services Post Office State Educational Institutions Office of Social Benefits Polyclinic/ Health Services Agency of Immigration & Citizenship Prosecutor Customs Service Courts Local Housing Authority Police 0 10 20 30 40 percent giving favorable rating Based on a World Bank - Latvia survey of households

18. Ukraine Unofficial payments by enterprises Type AverageEnterprises License/Service/ fee required admitting need to pay “Favor” (1996) “unofficially” Enterprise registration $176 66% Each visit by fire/health inspector $42 81% Tax inspector (each regular visit) $87 51% Telephone line installation $894 78% Lease in state space (sq. ft. per mth) $7 66% Export license/registration $123 61% Import license/registration $278 71% Border crossing (lump sum) $211 100% Border crossing (percent of value) 3% 57% Domestic currency loan from bank on 4% 81% preferential terms (percent of value) Hard currency loan on preferential 4% 85% terms (percent of value)

19. Purchasing Public Positions: Officials’ Perceptions 48 Customs inspectors 60 41 Tax inspectors 52 Natural Resource Licensers 33 43 32 Judges 39 Ordinary Police 40 Georgia 25 Albania Investigators& Prosecutors 33 32 21 Local officials 24 Ministers 10 5 0 20 40 60 80 Percent of Public Officials Believed to Have Purchased Their Positions

20. Some Programs that Address Corruption • Service Delivery(Guinea, Tanzania) • Tax Administration (Latvia) • Judicial Reform (Albania, Guatemala, Morocco) • Administrative and Civil Service Reform (Albania, Bolivia, Ghana, Indonesia, Tanzania,Yemen) • Decentralization (Ethiopia, Hungary, Thailand) • Procurement reform (Benin, Georgia, and Colombia) • Infrastructure privatization(Argentina, India)

21. Average Capitation Grant per Student in Uganda, 1991 Prices US$ per Student 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1991 1992 1993 1994 1995 Intended Grant Amount Received by School (mean)

22. Knowledge Sharing • External Training and Collaborative Workshops(WBI) • Comprehensive Anticorruption strategies • Investigative journalism • Auditor General • Parliamentary Public Accounts Committee • Anticorruption and Public Sector Reform web sites

23. Challenges Ahead • A Time for Optimism and Commitment • Greater focus and attention • Increasingly open dialogue • New ideas and experimentation • A Need for Realistic Expectations • One of the most complex and difficult development challenges • Look for improvement, not perfection

24. “[T]he causes of financial crises and poverty are one and the same . . . if [countries] do not have good governance, if they do not confront the issue of corruption, if they do not have a complete legal system which protects human rights, property rights and contracts . . . their development is fundamentally flawed and will not last.”James D. WolfensohnAddress to the Board of Governors September 28, 1999