Corruption: Helping Countries Combat

Helping Countries Combat
Corruption
The Role of the World Bank
Poverty Reduction and Economic Management

THE WORLD BANK
SEPTEMBER 1997
The report grew out of the work of an internal task force, the Corruption
Action Plan Working Group, which was set up in 1996. The group was coordinated
by Mike Stevens and included Ladipo Adamolekun, Peter Calderon, Michael Cohen,
Alejandro Escobar, Gunnar Eskeland, Louis Forget, Anthony Gaeta, Cheryl Gray,
Daniela Gressani, Rohil Hafeez, Ernesto Henriod, Petter Langseth, Kathryn Larrecq,
Karin Millett, John Nellis, Klaus Rohland, Malcolm Rowat, Alfonso Sanchez,
Sabine Schlemmer-Schulte, Paul Siegelbaum, Raghavan Srinivasan,
Frederick Stapenhurst, Stephen Weissman, Jim Wesberry, and Myla Williams, with
additional support from Peter Eigen and Jeremy Pope of Transparency
International. The report also draws on World Development Report1997: The State
in a Changing World.
The Bank’s expanding agenda for addressing corruption issues has been devel-
oped under the overall direction of Sven Sandstrom. This report was produced by
the Poverty Reduction and Economic Management (PREM) Network of the Bank
under the guidance of Masood Ahmed and Cheryl Gray. Further information about
the Bank’s work in this area can be obtained by contacting the staff of this network.
CONTENTS
Foreword 1
1. Key Messages 3
2. Corruption and Economic Development 8

How do we define corruption? 8
What are the causes of corruption? 12
What do economics and political science tell us? 14
What is the Bank’s experience? 17
3. A Bank Strategy for Tackling Corruption 23

The Bank’s legal mandate 23
The Bank’s fiduciary responsibility 25
Helping countries combat corruption 25
Contributing to international efforts 27
4. Controlling Corruption in Bank-financed Projects 29

Procurement 29
Codes, pacts, and pledges 31
Loan disbursement 32
5. Helping Countries Reform Economic and Sector Policies 35

Deregulation and the expansion of markets 35
Policy advice when government continues to play a role 36 iii
CONTENTS 6. Helping Countries Strengthen Institutions 39
Public management reform 40
Legal and judicial reform 43
Civil society and the media 44
7. Mainstreaming a Concern for Corruption in Bank Activities 48

Economic work 48
Country assistance strategies and the country dialogue 50
Lending program 51
Procurement and financial management 53
External agency practices and public sector management 53
Staffing implications 55
8. International Efforts 58
Current international initiatives 59
Bank actions at the international level 62
9. Concluding Thoughts 64
Appendix 66
The International Finance Institution’s approach to combating fraud and corruption
in project finance 66
The Multilateral Investment Guarantee Agency’s approach to combating fraud and
corruption in guarantees 68
iv
FOREWORD
G
lobal concerns about corruption have intensified in recent years. There
is increasing evidence that corruption undermines development. It also
hampers the effectiveness with which domestic savings and external aid
are used in many developing countries, and this in turn threatens to
undermine grassroots support for foreign assistance. Corruption is of growing con-
cern to donors, nongovernmental organizations, and governments and citizens in
developing and industrial countries alike. Fortunately, the opportunities to address
corruption are also greater than they have ever been. New global standards of
behavior are emerging, driven partly by changing attitudes toward transnational
bribery in industrial countries and partly by heightened awareness in developing
countries of the costs of corruption. Developments in information technology in
both developing and industrial countries have also played a role.
The success of national anticorruption efforts depends primarily on the resolve
with which they are pursued and on the economic policies and institutions that
underpin them. External agencies can also play an important supportive role. With its
cross-country expertise and broad development mandate, the Bank can help countries
design anticorruption strategies and can also be an active participant in international
efforts to deal with the issue. At the Annual Meetings of the World Bank and the
International Monetary Fund in October 1996, I offered the World Bank’s assistance
to member governments implementing national programs to discourage corrupt
practices and I pledged the Bank’s support for similar efforts at the international level.
The Bank has long been concerned with controlling fraud and corruption in
its projects, and its procurement and disbursement procedures have been progres- 1
FOREWORD sively refined to minimize the risks for both lenders and borrowers. More broadly,
corruption as an issue of development was highlighted in the Bank’s two
governance reports, “Governance and Development” in 1992 and “Governance: The
World Bank’s Experience” in 1994, and in World Development Report 1997: The
State in a Changing World. In some countries the Bank has registered its concern
about corruption in high-level meetings with government leaders—for example,
when governments have persisted with nonviable and costly public investment pro-
jects. The Bank has curtailed lending, sometimes drastically, where poor
governance, including systemic corruption, has affected Bank projects. And the
structural adjustment programs it has supported in many countries, as well as
improving economic performance, have reduced economic rents that are the source
of much corruption.
However, until now the Bank has not had a systematic framework for address-
ing corruption as a development issue in the assistance it provides to countries and
in its operational work more generally. This report provides such a framework. It
identifies ways in which the Bank might help countries implement national anticor-
ruption measures, suggests how the Bank should mainstream consideration of the
issue in its work, discusses how the Bank can contribute to international efforts to
control corruption, and examines the control of fraud and corruption within Bank-
financed projects.
The international community simply must deal with the cancer of corruption,
because it is a major barrier to sustainable and equitable development. This report
clearly signals that the World Bank Group stands ready to do all that we can to help
our member countries and partners to increase their efforts in the fight against cor-
ruption. The time for action is now.
James D. Wolfensohn
President
2
CHAPTER 1
Key Messages
T
he purpose of this report is to provide a framework within which the
World Bank can approach corruption. Such a framework is needed to
guide Bank activities at four levels:
• Preventing fraud and corruption within Bank-financed projects.
• Helping countries that request Bank support in their efforts to reduce
corruption.
• Taking corruption more explicitly into account in country assistance strategies,
country lending considerations, the policy dialogue, analytical work, and the choice
and design of projects.
• Adding voice and support to international efforts to reduce corruption.
The first level has long been a concern of the Bank. Procurement and loan dis-
bursement policies have been progressively refined to ensure the efficient use of
Bank resources. Further initiatives are under way to streamline procurement and
disbursement and to promote borrower accountability. The second level is partly
familiar territory, partly new. While the Bank has helped countries reform economic
policies and strengthen public institutions for many years, its involvement in
explicit anticorruption strategies is novel. In the past year a small but growing
number of countries have approached the Bank for assistance, adding to the larger
number of countries in which the Bank is already supporting policy and
institutional reform that, among other things, contributes to the fight against cor-
ruption. The third level is more difficult terrain, but unavoidable if the Bank is to
confront corruption squarely as a development issue and provide relevant policy
advice to borrowers. The fourth level is a new area for the Bank, but one in which a 3
KEY MESSAGES strong lead has been given by the Bank’s president, and in which prospects for col-
lective action are good.
Each level is linked with the others. Preventing fraud and corruption in Bank-
financed projects should be done in ways that build the capacity of national
procurement and financial management systems. If the Bank is to help countries
design and implement anticorruption strategies, it needs to integrate an awareness
of corruption risks and costs into the economic and social analysis it undertakes.
And since corruption is a global problem, the Bank’s efforts to help individual devel-
oping countries deal with this issue will be enhanced by more active participation in
international efforts.
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.
Lending and, with due respect to legal obligations, disbursement decisions will be
guided by:
• Whether Bank projects are likely to be affected by corruption during design or
implementation, or thereafter.
• The extent to which the achievement of development objectives is compromised
by corruption.
• The willingness of the government to act to control corruption if it threatens the
effectiveness of Bank projects and/or economic and social development.
The scope and nature of the Bank’s response will be tailored to the type and
extent of corruption being addressed. In all cases, the Bank’s activities will be
defined by its Articles of Agreement and focus on the economic issues within its
mandate. The Bank recognizes that corruption is a complex and sensitive topic and
that staff will need careful guidance on how to approach it in the country dialogue,
in the lending program, and in economic and sector work.
The Bank’s approach grows from an understanding that:
• Corruption is a global problem (chapter 2). Corruption exists in all coun-
tries to varying degrees. It is systemic in many of the countries that borrow from
the Bank and in some industrial countries. And corruption has significant transna-
tional dimensions that the Bank must consider. Current efforts by OECD countries
to criminalize foreign bribery and end its tax deductibility are strongly welcomed.
• Sustainable development requires the control of corruption (chapter 2). A
4 growing body of empirical evidence supports what Bank staff and many others have
long sensed—that the social and economic costs of corruption are high and fall dis-
KEY MESSAGES
proportionately on the poor. Corruption also burdens the private sector, deters for-
eign investors, and harms the environment. It undermines trust in government and
diminishes the effectiveness of public policy.
• Corruption puts political support for aid programs at risk. Corruption
undermines the effectiveness of aid and threatens to erode political support for it.
The Bank’s ability to continue to support the development efforts of poor countries
depends critically on maintaining confidence that aid works.
• A window of opportunity has opened to address corruption in a more com-
prehensive way (chapter 2). Bank staff, other donors, and many borrowers strongly
support such efforts.
• Corruption is a governance issue, and can be addressed by the Bank within
the framework established for governance (chapter 2). The Bank can take many
actions within its Articles of Agreement to help countries fight corruption.
However, the Bank must focus on the economic concerns within its mandate and
must refrain from interfering in countries’ political affairs.
• Tackling corruption is neither easy nor quick (chapter 3). Corruption is a
symptom of deeper-seated factors. The causes are complex, and the means to con-
trol it are not fully understood. Corruption thrives when economic policies are
poorly designed, education levels are low, civil society is underdeveloped, and the
accountability of public institutions is weak—conditions that exist in many settings
but are particularly prevalent in some developing countries. Corruption often has a
political dimension and reflects the way power is exercised in a country. And it is
constantly changing its form in response to changes in the global economy and
technical innovation. Like others working in this area, Bank staff must address the
issue with humility, realizing that we have much to learn. Approaches that work in
one setting can have unintended consequences in another, and the Bank must con-
stantly evaluate the effectiveness of its efforts.
• Political will is essential (chapter 3). The sustained reduction of systemic
corruption requires committed leadership and support from citizens and civil soci-
ety. External actors like the World Bank can help, but aid conditionality cannot sub-
stitute if political will is missing.
• The Bank should address corruption more explicitly than in the past, but in
ways that reflect its mandate and its comparative advantage (chapter 3). In the past
the Bank was often reluctant to confront corruption openly because of the issue’s 5
KEY MESSAGES political sensitivity and the lack of demand from borrowers for assistance in this
area. As an institution that believes in the power of public policy to achieve develop-
ment goals, the Bank needs to more readily acknowledge the effect corruption has
on the programs of its borrowers and be ready to help where it can be effective.
Despite the complexity and sensitivity of corruption, there are measures the
Bank can take to help countries tackle the problem:
• The Bank can help countries design and implement anticorruption strate-
gies (chapters 5 and 6). With its considerable experience in helping countries
reform economic policies and strengthen institutions, the Bank is well placed to
support national anticorruption efforts. For governments intent on reform, a cen-
tral part of controlling corruption is getting the basics of public policy and manage-
ment right.
• The Bank can pay more attention to corruption when designing and assess-
ing economic reforms (chapter 5). Although most of the Bank’s economic policy
recommendations clearly reduce opportunities for corruption, there are some
areas—including tax reform, expenditure reductions, infrastructure privatization,
and environmental regulation—in which close attention should be paid to the
capacity of governments to implement policy reform. If such capacity is lacking,
policy change may increase the risk of corruption. The answer is not to forgo
reform, but to consider and help strengthen institutional capacity in tandem with
policy design.
• The Bank can put additional emphasis on strengthening public sector man-
agement and governance (chapter 6). Although many of the Bank’s activities help
build public institutions, a greater focus on this goal is warranted. Well-performing
public sectors are characterized by a professional civil service, strong financial man-
agement, accountable organizations, and a capacity for effective policymaking.
Fighting corruption also requires strengthening the rule of law through clear legis-
lation, effective enforcement capacity, alert statutory oversight agencies, an
independent judiciary, and an engaged civil society.
To play a more active role in these areas, the Bank needs to place a concern for
corruption in the mainstream of its operational work and research. It needs to:
• Ensure that the projects it supports and its operational procedures set an
example of best practice, while taking into account their effect on borrowing coun-
tries (chapter 4). Bank projects must not be seen in isolation, since they are invari-
6 ably affected by the overall system of public management and governance in
borrowing countries. Moreover, in countries that depend on aid to finance their
KEY MESSAGES
development projects, the lending operations and policies of the Bank and other
donors deeply affect overall public management. The Bank’s procurement and dis-
bursement should progressively place more emphasis on borrower accountability,
thereby contributing to stronger government financial management systems.
• Raise the impact of corruption in its dialogue with borrowers (chapter 7).
Where corruption is widespread and affects a country’s development objectives and
Bank-financed projects, the Bank needs to raise the issue with borrowers and seek
ways to help governments and civil society address it.
• Address corruption and its economic effects more explicitly in country assis-
tance strategies and the design of projects (chapter 7). The country strategy should
consider how the Bank might help a country address corruption when it is a prob-
lem. Design of projects should take account of corruption risks.
• Build knowledge (chapter 7), by dedicating more resources to understand-
ing the dynamics of corruption and how some countries have reduced it, dissemi-
nating such knowledge, and applying such learning actively in its work.
• Fill critical skill gaps (chapter 7)—particularly in financial management,
procurement, and public sector management.
• Continue to build working relationships with partners (chapter 7), both in
borrowing countries (including local NGOs and the private sector) and on a
regional or global basis (including bilateral donors, NGOs, and international organi-
zations). Doing so will help focus the Bank’s efforts where it has a comparative
advantage.
• Become an active partner in multilateral efforts to control corruption and
reduce transnational bribery (chapter 8). One important example is the current ini-
tiative, led by the OECD, to coordinate the criminalization of transnational bribery
and the elimination of its tax deductibility in member states.
7
CHAPTER 2
Corruption and Economic

Development
C
orruption is a complex phenomenon. Its roots lie deep in bureaucratic
and political institutions, and its effect on development varies with coun-
try conditions. But while costs may vary and systemic corruption may
coexist with strong economic performance, experience suggests that cor-
ruption is bad for development. It leads governments to intervene where they need
not, and it undermines their ability to enact and implement policies in areas in
which government intervention is clearly needed—whether environmental regula-
tion, health and safety regulation, social safety nets, macroeconomic stabilization,
or contract enforcement. This chapter looks at the complex nature of corruption, its
causes, and its effects on development.
How do we define corruption?

The term corruption covers a broad range of human actions. To understand its
effect on an economy or a political system, it helps to unbundle the term by identi-
fying specific types of activities or transactions that might fall within it. In consider-
ing its strategy the Bank sought a usable definition of corruption and then
developed a taxonomy of the different forms corruption could take consistent with
that definition. We settled on a straightforward definition—the abuse of public
office for private gain.1 Public office is abused for private gain when an official
accepts, solicits, or extorts a bribe. It is also abused when private agents actively
offer bribes to circumvent public policies and processes for competitive advantage
and profit. Public office can also be abused for personal benefit even if no bribery
8 occurs, through patronage and nepotism, the theft of state assets, or the diversion
of state revenues. This definition is both simple and sufficiently broad to cover most
CORRUPTION AND ECONOMIC DEVELOPMENT

of the corruption that the Bank encounters, and it is widely used in the literature.
Bribery occurs in the private sector, but bribery in the public sector, offered or
extracted, should be the Bank’s main concern, since the Bank lends primarily to
governments and supports government policies, programs, and projects.
Bribery. Bribes are one of the main tools of corruption. They can be used by
private parties to “buy” many things provided by central or local governments, or
officials may seek bribes in supplying those things.
• Government contracts. Bribes can influence the government’s choice of
firms to supply goods, services, and works, as well as the terms of their contracts.
Firms may bribe to win a contract or to ensure that contractual breaches are toler-
ated.
• Government benefits. Bribes can influence the allocation of government
benefits, whether monetary benefits (such as subsidies to enterprises or individuals
or access to pensions or unemployment insurance) or in-kind benefits (such as
access to certain schools, medical care, or stakes in enterprises being privatized).
• Lower taxes. Bribes can be used to reduce the amount of taxes or other fees
collected by the government from private parties. Such bribes may be proposed by
the tax collector or the taxpayer. In many countries the tax bill is negotiable.
• Licenses. Bribes may be demanded or offered for the issuance of a license that
conveys an exclusive right, such as a land development concession or the exploitation
of a natural resource. Sometimes politicians and bureaucrats deliberately put in place
policies that create control rights which they profit from by selling.
• Time. Bribes may be offered to speed up the government’s granting of per-
mission to carry out legal activities, such as company registration or construction
permits. Bribes can also be extorted by the threat of inaction or delay.
• Legal outcomes. Bribes can change the outcome of the legal process as it
applies to private parties, by inducing the government either to ignore illegal activi-
ties (such as drug dealing or pollution) or to favor one party over another in court
cases or other legal proceedings.
The government benefits purchased with bribes vary by type and size.
Contracts and other benefits can be enormous (grand or wholesale corruption) or
very small (petty or retail corruption), and the impact of misinterpretation of laws
can be dramatic or minor. Grand corruption is often associated with international
business transactions and usually involves politicians as well as bureaucrats. The 9
CORRUPTION AND ECONOMIC DEVELOPMENT bribery transaction may take place entirely outside the country. Petty corruption
may be pervasive throughout the public sector if firms and individuals regularly
experience it when they seek a license or a service from government. The bribes
may be retained by individual recipients or pooled in an elaborate sharing arrange-
ment. The sums involved in grand corruption may make newspaper headlines
around the world, but the aggregate costs of petty corruption, in terms of both
money and economic distortions, may be as great if not greater.
Theft. Theft of state assets by officials charged with their stewardship is also
corruption. An extreme form is the large-scale “spontaneous” privatization of state
assets by enterprise managers and other officials in some transition economies. At
the other end of the scale is petty theft of items such as office equipment and sta-
tionery, vehicles, and fuel. The perpetrators of petty theft are usually middle- and
lower-level officials, compensating, in some cases, for inadequate salaries. Asset con-
trol systems are typically weak or nonexistent, as is the institutional capacity to
identify and punish wrongdoers.
Theft of government financial resources is another form of corruption.
Officials may pocket tax revenues or fees (often with the collusion of the payer, in
effect combining theft with bribery), steal cash from treasuries, extend advances to
themselves that are never repaid, or draw pay for fictitious “ghost” workers, a pat-
tern well documented in the reports of audit authorities. In such cases financial
control systems typically have broken down or are neglected by managers.
Political and bureaucratic corruption. Corruption within government can take
place at both the political and the bureaucratic levels. The first may be independent
of the second, or there may be collusion. At one level, controlling political corrup-
tion involves election laws, campaign finance regulations, and conflict of interest
rules for parliamentarians. These types of laws and regulations lie beyond the man-
date and expertise of the Bank but nevertheless are part of what a country needs to
control corruption.2 At another level corruption may be intrinsic to the way power
is exercised and may be impossible to reduce through lawmaking alone. In the
extreme case state institutions may be infiltrated by criminal elements and turned
into instruments of individual enrichment.
Isolated and systemic corruption. Corruption in a society can be rare or wide-
spread. If it is rare, consisting of a few individual acts, it is straightforward (though
seldom easy) to detect and punish. In such cases noncorrupt behavior is the norm,
10 and institutions in both the public and private sectors support integrity in public
life. Such institutions, both formal and informal, are sufficiently strong to return

the system to a noncorrupt equilibrium. In contrast, corruption is systemic (perva-
sive or entrenched) where bribery, on a large or small scale, is routine in dealings
between the public sector and firms or individuals. Where systemic corruption
exists, formal and informal rules are at odds with one another; bribery may be ille-
gal but is understood by everyone to be routine in transactions with the
government. Another kind of equilibrium prevails, a systemic corruption “trap” in
which the incentives are strong for firms, individuals, and officials to comply with
and not fight the system. And there may be different degrees of coordination
between those taking bribes, ranging from uncontrolled extortion by multiple offi-
cials to highly organized bribe collection and distribution systems. Antibribery laws
notwithstanding, there are many countries in which bribery characterizes the rules
of the game in private-public interactions. Systemic corruption may occur
uniformly across the public sector, or it may be confined to certain agencies—such
as customs or tax authorities, public works or other ministries, or particular levels
of government.3
Corruption in the private sector. Fraud and bribery can and do take place in
the private sector, often with costly results. Unregulated financial systems perme-
ated with fraud can undermine savings and deter foreign investment. They also
make a country vulnerable to financial crises and macroeconomic instability. Entire
banks or savings and loan institutions may be taken over by criminals for the pur-
pose of wholesale fraud. Popular support for privatization or the deepening of finan-
cial markets can be eroded if poor regulation leads to small shareholders or savers
withdrawing when confronted by insider dealings and the enrichment of managers.
And a strong corporate focus on profitability may not prevent individual employees
soliciting bribes from suppliers. Furthermore, when corruption is systemic in the
public sector, firms that do business with government agencies can seldom escape
participating in bribery.
While noting the existence of fraud and corruption in the private sector and
the importance of controlling it, this report is concerned with corruption in the
public sector. Public sector corruption is arguably a more serious problem in devel-
oping countries, and controlling it may be a prerequisite for controlling private sec-
tor corruption.4 Still, Bank activities can also promote the control of bribery and
fraud in the private sector by helping countries strengthen the legal framework to
support a market economy and by encouraging the growth of professional bodies 11
CORRUPTION AND ECONOMIC DEVELOPMENT that set standards in areas like accounting and auditing. In the long run, control-
ling corruption in the private sector may require improvements in business culture
and ethics.
What are the causes of corruption?

The causes of corruption are always contextual, rooted in a country’s policies,
bureaucratic traditions, political development, and social history. Still, corruption
tends to flourish when institutions are weak and government policies generate eco-
nomic rents. Some characteristics of developing and transition settings make cor-
ruption particularly difficult to control. The normal motivation of public sector
employees to work productively may be undermined by many factors, including low
and declining civil service salaries and promotion unconnected to performance.
Dysfunctional government budgets, inadequate supplies and equipment, delays in
the release of budget funds (including pay), and a loss of organizational purpose
also may demoralize staff. The motivation to remain honest may be further weak-
ened if senior officials and political leaders use public office for private gain or if
those who resist corruption lack protection. Or the public service may have long
been dominated by patron-client relationships, in which the sharing of bribes and
favors has become entrenched. In some countries pay levels may always have been
low, with the informal understanding that staff will find their own ways to supple-
ment inadequate pay. Sometimes these conditions are exacerbated by closed politi-
cal systems dominated by narrow vested interests and by international sources of
corruption associated with major projects or equipment purchases.
The dynamics of corruption in the public sector can be depicted in a simple
model. The opportunity for corruption is a function of the size of the rents under a
public official’s control, the discretion that official has in allocating those rents, and
the accountability that official faces for his or her decisions.5 Monopoly rents can
be large in highly regulated economies and, as noted above, corruption breeds
demand for more regulation. In transition economies economic rents can be enor-
mous because of the amount of formerly state-owned property essentially “up for
grabs.” The discretion of many public officials may also be large in developing and
transition economies, exacerbated by poorly defined, ever-changing, and
inadequately disseminated rules and regulations. Finally, accountability is typically
weak in these settings. The ethical values of a well-performing bureaucracy may
12 have been eroded or never established. Rules on conduct and conflict of interest
may be unenforced, financial management systems (which normally record and

control the collection of revenues and the expenditure of budgeted resources) may
have broken down, and there may be no formal mechanism to hold public officials
accountable for results. The watchdog institutions that should scrutinize govern-
ment performance, such as ombudsmen, external auditors, and the press, may be
ineffectual. And special anticorruption bodies may have been turned into partisan
instruments whose real purpose is not to detect fraud and corruption but to harass
political opponents.
A defining characteristic of the environment in which corruption occurs is a
divergence between the formal and the informal rules governing behavior in the
public sector. The Bank is unaware of any country that does not have rules against
corruption, although not all countries have all the rules that may be necessary.
These range from laws making it a criminal offense to bribe a public official to pub-
lic service regulations dealing with the expected behavior of public officials,
conflicts of interest, the acceptance of gifts, and the duty to report fraud.
Government agencies—police and army, tax and customs departments, local gov-
ernments, and public enterprises—may have their own regulations and codes of
behavior. Organic laws, often embedded in constitutions, cover budgeting, account-
ing, and auditing, supported by laws and regulations on public procurement and the
safeguarding of public assets. In addition, there are laws on the conduct of elections
and the appointment of judges, and codes governing the conduct of legislators.
Some of these laws are a colonial inheritance, some have been adapted from coun-
tries with a similar legal tradition, and some are additions to existing laws (for
example, providing for special anticorruption commissions and other watchdog
bodies).
Where corruption is systemic, the formal rules remain in place, but they are
superseded by informal rules.6 It may be a crime to bribe a public official, but in
practice the law is not enforced or is applied in a partisan way, and informal rules
prevail. Government tender boards may continue to operate even though the crite-
ria by which contracts are awarded have changed. Seen in this light, strengthening
institutions to control corruption is about shifting the emphasis back to the formal
rules. This implies acknowledging that a strong legal framework to control corrup-
tion requires more than having the right legal rules in place. It means addressing
the sources of informality, first by understanding why the informal rules are at odds
with the formal rules and then by tackling the causes of divergence. In some coun- 13
CORRUPTION AND ECONOMIC DEVELOPMENT tries the primary reason for divergence may be political, a manifestation of the way
power is exercised and retained. This limits what the Bank can do to help outside
the framework of its projects. In other countries the reason may be weak public
management systems and inappropriate policies, which the Bank can help improve.
What do economics and political science tell us?

While it would be easy to say that all corruption is bad, the Bank must base its
approach on evidence and analysis of corruption’s effects on development. The polit-
ical sensitivity surrounding issues of governance underscores the need for such a
foundation. In preparing this report, the Bank examined the conclusions drawn by
economic researchers working on the topic, the perspectives of disciplines other
than economics, and the evidence from the Bank’s operational work.
Economic research. The body of research addressing the economic effects of
corruption has grown significantly in recent years. The research is both macroeco-
nomic and microeconomic, theoretical and empirical. Its conclusions depend in
part on what the researcher views as the bottom line: short-term economic
efficiency in private markets, long-term dynamic efficiency and economic growth,
equity and fairness, or political legitimacy.
One strand of literature explores, primarily from a theoretical perspective, the
likely economic effects of different forms of corruption.7 Some writings of this
group argue that corruption can be efficiency enhancing. First, the argument is
made, corruption may not distort the short-run efficiency of an economy if it
merely entails a transfer of economic rents from a private party to a government
official. Thus a bribe to an official who is allocating, say, foreign exchange or credit
in short supply can be seen as a market payment for ensuring that resources go to
the party most likely to use them efficiently (the one who can pay the highest
bribe). The problem with this line of reasoning is that it fails to take into account
any objective other than short-term efficiency. In the long run, expectations of
bribery may distort the number and types of contracts put up for bid, the method
used to award contracts, and the speed or efficiency with which public officials do
their work in the absence of bribes. It may also delay macroeconomic policy reform.
In addition, the gains from such bribery may be inequitably distributed (accessible
only to certain firms and public officials).
Second, bribes can theoretically increase economic efficiency if they allow
14 firms to avoid overly restrictive regulations or confiscatory tax rates. That is, bribes
lower the costs of bad regulations to firms that bribe. There may be some validity to

this argument, particularly in the short run. Yet such bribery defuses pressure for
broader reform and invites firms to evade good regulations as well as bad.
Furthermore, the costs of such a system may fall disproportionately on smaller
firms.8 A policy framework based on many legal restrictions and widespread bribery
to avoid them is like a highly regressive system of taxes on the private sector, and
few would argue for such a system in developing countries. And in some transition
economies such restrictions have proliferated in an uncontrolled way with the
express purpose of extracting rents. This causes a shift of economic activity to the
informal sector.
To summarize, models purporting to show that corruption can have positive
economic effects are usually looking only at static effects in the short run. In the
long run, opportunities for bribery are likely to lead public officials to change the
underlying rules of the game or their own behavior in the absence of bribes, and
the results are likely to be costly in terms of economic efficiency, political
legitimacy, and basic fairness.
Another strand of literature examines the links between investment, economic
growth and the quality of government institutions.9 It finds that weak public insti-
tutions, as evidenced by unreliable contract enforcement, unclear property rights,
unpredictable policies, inefficient public administration, corruption, and other indi-
cators, significantly reduce private investment and lead to slower growth. While
useful in highlighting the broad economic effects of institutional deficiency, much
of the literature has been unable to separate the effect of corruption from other
dimensions of government quality.10
Finally, there is the uneven performance of countries to contend with. While
few would disagree that corruption has undermined development in Africa and has
slowed the emergence of well functioning market economies in the former Soviet
Union, the coexistence of high growth and systemic corruption in some Asian coun-
tries challenges those who believe that corruption is always economically harmful.
Several explanations have been suggested. First, perhaps predictability is what mat-
ters, and some governments reliably deliver what is “bought” with bribes while
other governments do not.11 Second, others view highly concentrated corruption at
the top of the political system (cited as more the model in some Asian settings) as
less distortionary than uncontrolled corruption at lower levels (as in parts of the
former Soviet Union).12 Third, if political systems are well established and the rules 15
CORRUPTION AND ECONOMIC DEVELOPMENT of the game are known to all, the transactions costs of rent seeking may be less
costly than in less stable, less certain environments. Fourth, corruption may be
imposing environmental and social costs that are not captured in national accounts
data. We do not know these costs, and country experience differs widely even within
Asia. Nobody, however, argues that corruption is good for development, and recent
research suggests that corruption may be restraining growth even in Asia.13 What is
clear is that the nature and dynamics of corruption vary greatly among countries,
making it a diverse and complex phenomenon to address.
Political science. Political scientists look beyond the visible signs of corruption
to the broader setting in which it occurs. They see corruption in relation to the
legitimacy of the state, the patterns of political power, and the engagement of civil
society. Corruption may be a manifestation of the way political power is contested
and exercised. To the leadership the creation and allocation of state rents serves
political purposes: rewarding supporters, buying off opponents, ensuring the back-
ing of key groups, managing ethnic diversity, or simply accumulating resources to
fight elections. To obtain these resources, leaders may forge alliances with business
groups or create and distribute rents through the bureaucratic apparatus. The
resulting policies may favor or discourage capital accumulation and economic
growth, depending on the nature of the alliances struck.14 Politicians in such coun-
tries may be aware of the distortionary consequences of such rents but view them as
a necessary tool of political management. If this is the case, the pattern of corrup-
tion will change only if the power structure changes, which may result from a pop-
ular outcry against corruption.
Political scientists also take a historical perspective. Over time most industrial
countries have developed merit-based bureaucratic values, institutionalized compet-
itive politics, established transparent government processes, and fostered an active
media and an informed civil society. These mechanisms constrain political and
bureaucratic corruption, making it the exception rather than the norm. The transi-
tion may be spurred by an enlightened ruler or, more likely, by the growing power
of new political groups with an interest in better-performing government. In devel-
oping countries, in contrast, government institutions are weaker, civil society is less
engaged, and political and bureaucratic processes are less accountable and transpar-
ent. An effective state apparatus and capacity for law enforcement may be virtually
nonexistent. In such settings, sustained progress in building an honest and effective
16 state apparatus requires addressing the mix of factors in the state and in society
that give rise to both corruption and weak social and economic performance. This is

an exceedingly complex and long-term effort.15
Public management. The public management view of corruption is clear-cut.
Systemic corruption, in the form of graft and patronage and the inefficiencies that
accompanied it, spurred the nineteenth-century reforms in Europe and North
America that created the modern bureaucratic state. Corruption opposes the
bureaucratic values of equity, efficiency, transparency, and honesty. Thus it weakens
the ethical fabric of the civil service and prevents the emergence of well-performing
government capable of developing and implementing public policies that promote
social welfare.
The machinery of modern government, as it evolved in industrial countries
and has been transferred to developing countries, includes systems that protect
public organizations from corruption and promote accountability. These systems,
including a meritocratic civil service and watchdogs such as supreme audit institu-
tions, ombudsmen, and public service commissions, should not be neglected. Some
OECD countries seeking to improve government performance through New Public
Management reforms are developing “risk management” perspectives on
corruption. But they do so within a framework of strong financial management
control systems and a renewed emphasis on the ethical values of public service.
While economies may still grow in countries in which corruption is entrenched in
the public sector, the public management view is that successive stages of economic
and social development will be harder if not impossible to achieve without well-per-
forming government. Ultimately, countries need to create durable institutions to
foster and protect integrity in public life if public policy is to achieve the objectives
(such as poverty reduction and environmental protection) that are at the core of
sustainable economic and social development.
What is the Bank’s experience?

Most of the economic and sector work undertaken by the Bank does not directly
address corruption. However, a small but growing number of public expenditure
reviews have drawn attention to the problem, and survey data gathered in the
course of private sector assessments are beginning to illuminate the costs of bribery
to entrepreneurs. Based on the economic and sector work that does address the
topic, informal country knowledge within the institution, and examples from the
Bank’s vast store of country reports in which the influence of corruption can be 17
CORRUPTION AND ECONOMIC DEVELOPMENT inferred (even if the term is seldom used), the following picture emerges of the
many ways in which corruption imposes costs on our borrowers.
• Macroeconomic stability may be undermined by loss of government revenue
and excessive spending. This can happen through corruption in tax and customs
departments, through debt incurred when the scrutiny of finance ministries and
central banks is bypassed, through contracts that are awarded to high-cost bidders or
without competitive tendering, and through the general erosion of expenditure con-
trol. Excessive debt may be incurred through “white elephant” investment projects
that owe their origin, in part, to bribes. Macroeconomic stability may also be threat-
ened by debt guarantees and other off-budget contingent liabilities agreed to in cor-
rupt transactions without public scrutiny. It may also be threatened by fraud in
financial institutions, leading to loss of confidence by savers, investors, and foreign
exchange markets. In transition economies and in many developing countries cor-
ruption may reduce revenue collection by driving firms (or their most profitable
activities) out of the formal sector and by providing a moral justification for
widespread tax evasion.16 The costs of macroeconomic instability are borne by all ele-
ments in society but especially by the poor.
• Foreign direct investment may still flow to countries in which corruption is
systemic but only if bribery is affordable and the results are predictable. Even so,
corruption can have a negative effect on foreign investment. Where corruption is
large and systemic, investment may be concentrated in extractive industries in
which operations can be enclaved, or in light manufacturing or trading operations
that can be relocated if corruption costs become unbearable. Or foreign investors
may shun the country altogether. For most foreign firms, corruption is a cost of
doing business to be recouped from revenues.17 If the costs become too high or
unpredictable, foreign firms will disengage unless global marketing or sourcing
considerations require them to maintain a presence in that country. High levels of
corruption add to the risk of a country being marginalized in the international
economy.
• Small entrepreneurs may be affected in many developing and transition
economies. Evidence from private sector assessments suggests that corruption
increases the costs of doing business, that small firms bear a disproportionately
large share of these costs, and that bribes can prevent firms from growing.18
• The environment may be endangered. Many countries have enacted laws to
18 protect the environment and have created special agencies to enforce these laws,
but there is often a disconnect between policy and its implementation. Complying

with environmental regulations imposes on firms costs that can be avoided by
bribery. There are huge rents to be earned from activities such as logging in tropi-
cal rain forests, where permits can be obtained corruptly or where inspectors can be
bribed. The environmental costs of corruption may take the form of ground water
and air pollution, soil erosion, or climate change, and can be global and intergener-
ational in their reach.
• The poor suffer. While poverty assessments have focused more on measur-
ing poverty than explaining it,19 anecdotal and survey evidence reveal the cost of
petty corruption to the poor. When access to public goods and services requires a
bribe, the poor may be excluded. Given their lack of political influence, the poor
may even be asked to pay more than people with higher incomes.20 Furthermore,
when corruption results in shoddy public services, the poor lack the resources to
pursue “exit” options such as private schooling, health care, or power generation.
A survey of 3,600 firms in 69 countries carried out for the 1997 World
Development Report provides further evidence of the widespread existence and neg-
ative effects of corruption. As noted in the report:
The survey confirmed that corruption was an important—and widespread
—problem for investors. Overall, more than 40 percent of entrepreneurs
reported having to pay bribes to get things done as a matter of course. . . .
Further, more than half the respondents worldwide thought that paying a
bribe was not a guarantee that the service would actually be delivered as
agreed, and many lived in fear that they would simply be asked for more
by another official. . . . The consequences of corruption often do not end
with paying off officials and getting on with business. Government arbi-
trariness entangles firms in a web of time-consuming and economically
unproductive relations. . .21
The survey also confirms the negative correlation between the level of corrup-
tion (as perceived by businesspeople) and the level of investment in an economy.
Notes
1. The literature contains many definitions of corruption, as writers either seek a compre-
hensive term or focus on a single aspect. In the words of the Bank’s General Counsel, Ibrahim
Shihata,
Corruption occurs when a function, whether official or private, requires the allo-
cation of benefits or the provision of a good or service. . . . In all cases, a position
19
of trust is being exploited to realize private gains beyond what the position
holder is entitled to. Attempts to influence the position holder, through the pay-
ment of bribes or an exchange of benefits or favors, in order to receive a special
gain or treatment not available to others is also a form of corruption, even if the
gain involved is not illicit under applicable law. The absence of rules facilitates
the process as much as the presence of cumbersome or excessive rules does.
Corruption in this sense is not confined to the public sector and, in that sector,
to administrative bureaucracies. It is not limited to the payment and receipt of
bribes. It takes various forms and is practiced under all forms of government,
including well-established democracies. It can be found in the legislative, judi-
cial, and executive branches of government, as well as in all forms of private sec-
tor activities. It is not exclusively associated with any ethnic, racial, or religious
group. However, its level, scope, and impact vary greatly from one country to
another and may also vary, at least for a while, within the same country from
one place to another. While corruption of some form or another may inhere in
every human community, the system of governance has a great impact on its
level and scope of practice. Systems can corrupt people as much as, if not more
than, people are capable of corrupting systems.
Most definitions relate corruption to the behavior of a public official, who may be the
object or the subject of corruption. Thus corruption is “an illegal payment to a public agent to
obtain a benefit that may or may not be deserved in the absence of payoffs” (Rose-Ackerman) or
“the sale by government officials of government property for personal gain” (Shleifer and Vishny,
“Corruption,” Quarterly Journal of Economics, 1993, 108). The benefit need not be financial or
immediate, the public official may be appointed or elected, and the bribe may be offered or
extorted. For the OECD Working Group, the focus is on bribery: “the promise or giving of any
undue payment or other advantages whether directly or through intermediaries to, or for the
benefit of, a public official to influence the official to act or refrain from acting in the
performance of his or her official duties in order to obtain or retain business.” The Bank’s
Procurement Guidelines take a functional perspective, defining a corrupt practice as “the offer-
ing, giving, receiving, or soliciting of anything of value to influence the action of a public official
in the procurement process or in contract execution.”
Most definitions imply two willing actors (while fraud requires only one), usually but not
always including a public official. Thus, “corrupt practices mean the bribery of public officials or
other persons to gain improper commercial advantage” (EBRD). However, “no precise definition
can be found which applies to all forms, types and degrees of corruption, or which would be
acceptable universally as covering all acts which are considered in every jurisdiction as contribut-
ing to corruption” (Council of Europe). The definition adopted by the Bank is not original. It was
chosen because it is concise and broad enough to include most forms. Like most other
definitions, it places the public sector at the center of the phenomenon.
2. Participants in the “integrity workshops” facilitated by the Economic Development
Institute, Transparency International (TI), and others may discuss such matters as part of the
“integrity infrastructure” required to control corruption. “Integrity infrastructure” is a term
coined by TI to describe the full range of values, processes, and organizations within and outside
the public sector that contribute to accountable, transparent, and honest government. See TI’s
“National Integrity Source Book,” published in 1996 and used in integrity workshops.
3. Once it is widespread, or systemic, the likelihood of detection and punishment falls in
any individual case. As the expected cost of corruption falls for the public official, the incidence
20 rises still farther. This pattern of an initially rising but then falling cost can lead to multiple equi-
libria. One equilibrium is a society relatively free from corruption; the other is one in which cor-

ruption is widespread and systemic. Moving from widespread corruption to a society relatively
free from corruption is much harder than merely reducing corruption at the margin within
either case. Within systemically corrupt systems, decentralized forms appear to be economically
more costly than centralized forms.
4. Recent survey work by Daniel Kaufmann (“Listening to Stakeholders’ Views about
Corruption in Their Countries,” Harvard Institute for International Development, January 1997)
suggests that opinion leaders in developing countries see corruption in the public sector as by far
the greatest problem. The Bank’s private sector assessments reveal the burden of public sector
corruption on the private sector in many countries. This contrasts with a commonly held view in
industrial countries that corruption within the private sector is the greater problem.
5. Robert Klitgaard uses the equation C (corruption) = M (monopoly) + D (discretion) - A
(accountability). See R. Klitgaard, “Cleaning Up and Invigorating the Civil Service,” World Bank
Operations Evaluation Department, November 1996.
6. See C. Gray, “Legal Process and Economic Development: A Case Study of Indonesia,”
World Development 19: 7, 1991.
7. Susan Rose-Ackerman provides an excellent overview of this literature in “When is
Corruption Harmful?” a background paper for World Development Report 1997, August 1996.
See also P. Bardhan, “The Economics of Corruption in Less Developed Countries: A Review of
Issues,” Center for International and Development Economics Research Working Paper C76-064,
February 1996.
8. For examples of this regressive impact, see Susan Rose-Ackerman and Andrew Stone,
“The Costs of Corruption for Private Business: Evidence from World Bank Surveys,” May 1996.
9. See S. Borner, A. Brunetti, and B. Weder, Political Credibility and Economic
Development, New York: St. Martin’s Press, 1994; P. Mauro, “Corruption and Growth,” Quarterly
Journal of Economics, 1995; P. Keefer and S. Knack, “Why Don’t Poor Countries Catch Up? A
Cross-National Test of an Institutional Explanation,” IRIS Working Paper, University of Maryland;
Shang-Jin Wei, “How Taxing Is Corruption on International Investors?” National Bureau of
Economic Research Working Paper 6030, 1997.
10. This is changing, however, with the spread of survey data (such as Transparency
International’s Corruption Perception Index) that enable cross-country comparisons and analyses
of corruption and economic performance to be made. Care must be taken in using these mea-
sures. The Transparency International Corruption Perception Index is a measure of what busi-
nessmen perceive to be a country’s level of corruption. It is not an objective measure.
11. The importance of predictability is stressed in World Bank, World Development Report
1997: The State in a Changing World, New York: Oxford University Press, 1997.
12. See A. Shleifer and R. Vishny, “Corruption,” Quarterly Journal of Economics, 1993,
108, 599–617.
13. See Daniel Kaufmann, “Corruption: The Facts,” Foreign Policy, June 1997.
14. See Mushtaq Khan, “Corruption in South Asia: Patterns of Development and Change,”
School of Oriental and African Studies, University of London.
15. See Michael Johnston, “What Can Be Done about Entrenched Corruption?” Paper pre-
sented at the Annual World Bank Conference on Development Economics, Washington, D.C.,
April 30–May 1, 1997.
16. See, for example, Hernando de Soto’s description of the informal sector in Peru in The
Other Path, New York: Harper & Row, 1989.
17. See Shang-Jin Wei, “How Taxing Is Corruption on International Investors?” National
Bureau of Economic Research Working Paper 6030, 1997. 21
18. See Susan Rose-Ackerman and Andrew Stone, “The Costs of Corruption for Private
Business: Evidence from World Bank Surveys.” See also Daniel Kaufmann, “The Missing Pillar of
a Growth Strategy for Ukraine: Institutional and Policy Reforms for Private Sector Development,”
in Ukraine: Accelerating the Transition to Market, P. Cornelius and P. Lenain, eds., Washington,
D.C.: IMF, January 1997; Daniel Kaufmann and A. Kaliberda, “Integrating the Unofficial Economy
into the Dynamics of Post-Socialist Economies: A Framework of Analysis and Evidence,” in
Economic Transition in the Newly Independent States, B. Kaminski, ed., Armonk, N.Y.: M.E.
Sharpe, 1996.
19. This is now changing, with participatory poverty assessments that seek to directly tap
the experiences of the poor.
20. Pioneering work in this area has been done by the Public Affairs Centre in Bangalore,
which found that in five Indian cities poor households were much more likely to pay “speed
money” for public services than households in general. See Sam Paul, “Corruption: Who Will
Bell the Cat?” April 1997.
21. World Bank, World Development Report 1997: The State in a Changing World, New
York: Oxford University Press, 1997.
22
CHAPTER 3
A Bank Strategy for

Tackling Corruption
G
iven the mounting evidence of the costs of corruption and the need for
more coordinated approaches at both country and international levels,
the Bank requires a broad framework to address the issue. This chapter
outlines the emerging strategy for the Bank, which has four channels:
• Preventing fraud and corruption within Bank-financed projects.
• Helping countries that request Bank support in their efforts to reduce
corruption.
• Taking corruption more explicitly into account in country assistance strategies,
country lending considerations, the policy dialogue, analytical work, and the choice
and design of projects.
• Adding voice and support to international efforts to reduce corruption.
The ultimate goal of a Bank strategy to help countries address corruption is
not to eliminate corruption completely, which is an unrealistic aim, but to help
those countries move from systemic corruption to an environment of well-perform-
ing government that minimizes corruption’s negative effect on development.
The Bank’s legal mandate

Although corruption is a politically sensitive issue in many countries, the Articles of
Agreement authorize the Bank to address corruption, within certain limits. In a
recent paper on the subject, the General Counsel pointed out that
the World Bank can hardly insulate itself from major issues of international
development policy. Corruption has become such an issue. Its prevalence in
a given country increasingly influences the flow of public and private funds 23
A BANK STRATEGY FOR TACKLING CORRUPTION for investment in that country. The Bank’s lending programs and in partic-
ular its adjustment lending take into account factors which determine the
size and pace of such flows. From a legal viewpoint, what matters is that the
Bank’s involvement must always be consistent with its Articles of
Agreement. The Bank can, in my view, take many actions to help the fight
against corruption. It can conduct research on the causes and effects of this
worldwide phenomenon. It can provide assistance, by mutual agreement, to
enable its borrowing countries to curb corruption. It may take up the level
of corruption as a subject of discussion in the dialogue with its borrowing
members. And, if the level of corruption is high so as to have an adverse
impact on the effectiveness of Bank assistance, according to factual and
objective analysis, and the government is not taking serious measures to
combat it, the Bank can take this as a factor in its lending strategy towards
the country. The only legal barrier in this respect is that in doing so the
Bank and its staff must be concerned only with the economic causes and
effects and should refrain from intervening in the country’s political affairs.
While the task may be difficult in borderline cases, its limits have been pre-
scribed in detail in legal opinions endorsed by the Bank’s Board.22
According to one such legal opinion, the concept of governance in the
sense of the overall management of a country’s resources cannot be irrel-
evant to an international financial institution which at present not only
finances projects but also is deeply involved in the process of economic
reform carried out by its borrowing members.23 Clearly, the concern here
is not with the exercise of state powers in the broad sense but specifically
with the appropriate management of the public sector and the creation of
an enabling environment for the private sector. It is a concern for rules
which are actually applied and institutions which ensure the appropriate
application of these rules, to the extent that such rules and institutions
are required for the economic development of the country and in particu-
lar for the sound management of its resources.24
No doubt the Bank has to address issues of corruption in this context
with great caution, acting on the basis of established facts and only to the
extent that the issues clearly affect the economic development of the
country. It cannot, however, ignore such issues at a time when they have
24 become a major concern, not only to the sources of international finan-
cial flows but also to business organizations and indeed to the govern-
A BANK STRATEGY FOR TACKLING CORRUPTION

ments and peoples of most of its member countries.25
Thus corruption can be addressed by Bank staff as an economic concern
within the framework already approved by the Board for governance issues. This
framework provides scope for the Bank to help countries by advising on economic
policy reform and strengthening institutional capacity. However, the Bank’s man-
date does not extend to the political aspects of controlling corruption. And though
the engagement of civil society is crucial for the long-run control of corruption,
there are obvious limits on the extent to which the Bank, as a lender to
governments, can directly support civil society’s efforts to control corruption. So
while the Bank’s mandate provides scope for the institution to help countries con-
trol corruption, it shapes the way in which the Bank may respond.
The Bank’s fiduciary responsibility

The Bank has long recognized its fiduciary responsibility to ensure that fraud and
corruption are minimized in the projects it finances. This is enshrined in the Bank’s
Articles, and was emphasized again by President James D. Wolfensohn in his speech
at the Annual Meetings in October 1996. Procurement, disbursement, financial
reporting, supervision, and auditing procedures have evolved to ensure that this
responsibility is met, as discussed in chapter 4. The Bank’s procurement guidelines
were further amended in 1996 to make explicit what the Bank would do if it deter-
mined that fraud and corruption had occurred within a Bank-financed project.
The emphasis on controlling fraud and corruption within Bank-financed pro-
jects will continue to be a central part of the Bank’s strategy. However, the strategy
needs to reconcile a tension that all external aid agencies confront to some extent.
In the short run, fraud and corruption within an aid-funded project can be
controlled by tightening project management systems. In the long run, sustained
reduction will come about only if government (or agency) control systems are
strengthened.26 A strategy for protecting Bank-financed projects from fraud and
corruption needs to address this tension and try to ensure that whatever means are
used, borrower accountability is enhanced.
Helping countries combat corruption

Experience with economic reform suggests that progress cannot be achieved merely
through conditionality imposed by external actors like the Bank. Reform programs 25
A BANK STRATEGY FOR TACKLING CORRUPTION must be driven from within, and this is no less true for anticorruption ones.
Furthermore, tackling corruption requires the engagement of those outside govern-
ment—parliamentarians, civil society, households, the private sector, and the
media. As a provider of development finance and policy advice to governments, the
Bank is an important ally in the fight against corruption.
The main thrust of the Bank’s support for countries’ anticorruption efforts will
be in helping to design and implement government programs. In some cases the
Bank may be asked to help with specific anticorruption efforts, in areas within its
mandate and expertise. It will respond to such requests in partnership with other
international institutions and bilateral aid donors as appropriate. In other cases, the
Bank may provide assistance in economic policy reform and institutional strength-
ening that, while aimed primarily at improving government performance, also helps
reduce corruption. In addition, the Bank, and in particular the Economic
Development Institute, can support government efforts by facilitating workshops for
parliamentarians or journalists on these issues. These areas of assistance are
discussed in detail in chapters 5 and 6.
As a practical matter, the Bank’s advice to a particular country will depend on
that country’s circumstances. In some countries, economic policy reform will be
the priority. In others the immediate need may be targeted interventions in tax or
customs agencies, or procurement reform. Circumstances will also determine
whether the strategy should be comprehensive or incremental. Comprehensive
strategies can be developed where national leadership is committed to change and
the political will exists to undertake in-depth economic and institutional reforms.
Opportunities for in-depth reform may exist at the local level or in particular agen-
cies or departments even if those opportunities are missing at the national level. In
some cases there may be more political will for economic policy reform than for in-
depth work at the institutional level. And even when the possibility for economic
policy reform is limited, there may still be scope for activities, such as public educa-
tion or dialogue with leaders in government and civil society, that can lay the foun-
dation for more substantial action later.
Developing countries range from those in which dynamic forces are working
for more transparent and accountable government to those caught in a vicious cir-
cle of systemic corruption and no growth. In some countries historical forces are
helping to modernize the state, working in much the same way they did in indus-
26 trial countries a century ago. In Latin America, the civil society is engaged, and pol-
icymakers see the control of corruption as an integral part of public sector modern-
A BANK STRATEGY FOR TACKLING CORRUPTION

ization. Privatization has been substantial, and economies are now much more open
to market forces. In a number of East Asian countries the private sector is especially
dynamic, and policymakers recognize the challenges and opportunities of the global
economy and the need for a change in the role of the state. The Bank’s role in such
circumstances is to be ready to help governments improve performance by provid-
ing policy advice and assisting with institutional strengthening while at the same
time ensuring that Bank-financed projects are free of corruption.
Poorer countries, particularly some in Africa, cannot wait for historical
processes, particularly if the preconditions for change are absent. Africa’s modern
private sector remains small and operates by informal rules in its relations with
government. In some of these countries high levels of corruption may be a stable
equilibrium, with political elites, bureaucratic functionaries, entrepreneurs, and
ordinary people all bound by its rules. Although the context is quite different, simi-
lar forces exist in some transition economies, where the institutions of a command
economy are no longer relevant and there is a vacuum in government capacity.
Efforts to combat systemic corruption and build strong institutions in such coun-
tries need to be more deliberate, focusing not just on building the various compo-
nents of the “integrity system” but also on economic policy reform and on how
policy reform and institution building can reinforce one another. Success will
depend on the roles played by national leaders, public officials, and civil society; on
the design and implementation of economic policies; and on the condition of public
management systems. External agents like the Bank and bilateral donors also have
an important role to play, both because significant external support is needed to
help build capacity and because aid plays a major role in shaping and maintaining
the state.
Contributing to international efforts

Finally, a central part of the Bank’s strategy involves lending its voice and support
to international efforts to control corruption. Corruption has important
international dimensions, as many bribes flow across international boundaries.
Governments in both capital-exporting and capital-importing countries have a
responsibility to promote ethical and law-abiding behavior by companies and indi-
viduals within their jurisdictions. International initiatives to control corruption are
growing, as outlined in chapter 8, and the Bank can play an active role. 27
A BANK STRATEGY FOR TACKLING CORRUPTION Notes
22. See “Issues of Governance in Borrowing Members—The Extent of Their Relevance
under the Bank’s Articles of Agreement, Legal Memorandum of the General Counsel,” December
21, 1990 (SecM91–131, February 5, 1991); “Prohibition of Political Activities in the Bank’s Work,
Legal Opinion of the General Counsel,” July 11, 1995 (SecM95-707, July 12, 1995).
23. “Issues of Governance in Borrowing Members” (Sec M91–131, February 5, 1991).
24. For details, see Ibrahim Shihata, “The World Bank in a Changing World,” 1991, 1,
53–96.
25. See Ibrahim Shihata, “Corruption—A General Review with an Emphasis on the Role of
the World Bank.” Paper based on a keynote address delivered at the International Symposium on
International Crime, Jesus College, Cambridge, England, September 9, 1996.
26. For example, a bilateral donor may ensure the proper use of aid funds by procuring
goods directly and delivering them “in kind” to project beneficiaries. While this may ensure
bribe-free procurement, it does nothing for (and may undermine) borrower accountability.
28
CHAPTER 4
Controlling Corruption in
Bank-Financed Projects
T
he Bank has a responsibility under its Articles to ensure that the funds it
lends to borrowers are used for their intended purposes and with due
attention to economy and efficiency. The Bank is also interested in the
development effectiveness of its projects and sees loans as a vehicle for
the transmission of best practice in project management to borrower governments.
Central to the management of Bank-assisted projects are the Bank’s procurement
and loan disbursement procedures.27
Procurement
In public procurement, bribery and extortion are consensual crimes with the pub-
lic at large as victim. Both givers and takers of bribes have every reason to keep
quiet. Companies that have paid bribes, but not enough to win the contract,
seldom call foul. Firms that have not bribed are often reluctant to lodge formal
complaints even if they believe the successful bidder unfairly won. Bank procure-
ment rules, based on open, competitive tendering with predisclosed evaluation and
selection criteria, and Bank supervision are, overall, powerful deterrents to bribery.
But fraud and corruption may still occur if Bank guidelines are not followed dur-
ing bidding or contract execution. If the Bank is to have the moral standing to
advise countries on the control of corruption, it must be seen to have effective
processes to ensure that its own loans are, to the maximum extent possible, free of
corruption.
Recent initiatives to strengthen the procurement process under Bank-financed
projects include: 29
CONTROLLING CORRUPTION IN BANK-FINANCED PROJECTS • Modifying the Procurement and Consultant Guidelines in August 1996 and
January 1997, respectively, with a new section headed “Fraud and Corruption,” setting
forth how the Bank will disbar from future Bank-financed projects indefinitely or for a
stated period a bidder it determines has engaged in fraud or corruption. The Bank
may declare misprocurement and cancel the disbursement of funds if a public servant
is found to be involved in a corrupt practice and the government does not take cor-
rective action. The Standard Bidding Documents also now require information on
commissions to agents and establish the right of the Bank to inspect the supplier/con-
tractor’s books.
• Introducing a provision in the Procurement and Consultant Guidelines to
permit, at the request of a borrower, the inclusion in the bid form of an undertaking
to observe the laws of the country on fraud and corruption in bidding and execution
of the contract (in effect, a “no bribery pledge”).
• Introducing more transparency in the selection of consultants by requiring
public advertisement of larger assignments, disclosure of shortlisted firms and their
technical scores, and public opening of financial proposals.
• Launching in-depth surprise procurement audits of selected projects in some
countries to identify weaknesses in the procurement supervision system.
The Bank’s Strategic Compact recognizes the importance of controlling fraud
and corruption in the projects the Bank finances. The Compact includes additional
funds to improve procurement, disbursement and audit capabilities. With respect to
procurement the Compact provides resources for:
• Increasing the number of skilled procurement staff to better support task
managers throughout the project cycle.
• Increasing the frequency of country procurement assessments to help
borrower governments improve public procurement institutions and systems and
thus build local capacity.
• Intensifying ex post reviews by external auditors, for procurements not cov-
ered by the Bank’s prior review process, to ensure greater borrower accountability.
Implementation of the above measures has begun and will be spread over three years.
The Cost Effectiveness study initiated by the President is examining measures to
improve the efficiency of business processes including procurement supervision, and
its recommendations are awaited. The decentralization of the Bank’s business,
another important component of the Strategic Compact, warrants a review of the fea-
30 sibility and merits of delegation of procurement assistance and supervision functions
to field offices. The outcome of these reviews will be presented in a procurement
CONTROLLING CORRUPTION IN BANK-FINANCED PROJECTS

supervision strategy paper for discussion with the Board later this year. The paper will
incorporate lessons from recent independent Country Procurement Audits. The paper
will also examine the need for additional measures to strengthen the Bank’s procure-
ment supervision.
Codes, pacts, and pledges

Corporate codes of conduct. Some have proposed that bidders under aid-financed con-
tracts should be screened according to whether they have established corporate codes
and compliance procedures that discourage bribery. If this were adopted, a “white-list”
of firms eligible to bid under donor aid contracts would be developed. The Bank
should support the principle of adopting corporate codes eschewing bribery, although
it would be impractical to make corporate codes a condition for participation in Bank-
financed international competitive bidding contracts at this stage for the following
reasons:
• Making corporate codes an eligibility requirement would restrict competition
until codes become common for both large and small firms in all countries in which
firms bid for Bank-financed contracts. Bank policy is to broaden, not restrict, compe-
tition for Bank-financed procurement.
• Corporate codes may not spread until countries criminalize foreign bribery.
Only the United States has done this effectively, and few firms outside the United
States have adopted corporate codes that address bribery (though the International
Chamber of Commerce [ICC] is now urging all its national committees to encourage
firms to adopt such codes).28
• Neither the Bank nor the borrower would have the resources to verify the
adequacy of compliance procedures, a problem likely to persist until global standards
and certification processes are developed.
When foreign bribery is more widely criminalized, corporate codes become com-
mon, and certification standards are established, corporate codes might be considered
as a requirement in Bank-financed international competitive bidding contracts. In the
meantime the Bank can encourage bidders to submit information on corporate codes
and compliance procedures on a voluntary basis. The Bank will also follow
international developments in this area closely.
No bribery pledges. The objective of a “no bribery pledge” is to discourage
bribes, primarily in international bidding, by committing firms to bid on a bribe-free 31
CONTROLLING CORRUPTION IN BANK-FINANCED PROJECTS basis, secure in the knowledge that competitors are similarly binding themselves. The
most basic form of the no bribery pledge is a letter from the chief executive of each
bidding company promising that the firm will obey the laws of the country and not
bribe to obtain the contract. Furnishing such a pledge would be a condition of
bidding. Typically, this would be matched by a public announcement by the head of
government that officials would neither accept nor solicit bribes. More elaborate ver-
sions of the no bribery pledge extend the pledge to contract implementation and to
subsidiaries and subcontractors. They propose the submission of codes of conduct and
a certification at the completion of the contract that bribes have not been paid at any-
time. The no bribery pledge could be part of a broader “integrity pact” entered into
voluntarily by government and bidders, featuring efforts to address capacity
constraints in government and enlist the support of civil society in monitoring com-
pliance.29
Advocates of the idea argue that a no bribery pledge can be a powerful signal
that the rules of the game have changed. Furthermore, a pledge not to bribe offers a
solution to the collective action dilemma that many firms that bribe in foreign mar-
kets face—they would rather not bribe but cannot be sure their competitors will
abstain as well. Bidders may therefore welcome the chance to reduce the cost of bid-
ding, and a no bribery pledge might increase competition and lower prices. Countries
with weak procurement capacity that find it difficult to effectively police the bidding
process may welcome the approach.30 There is a risk, however, that aggressive firms
may sign and bribe anyway.
To enable the Bank to respond to borrowers that request such a clause in Bank-
financed projects, the Bank has amended its Procurement Guidelines so that, at the
request of a borrower, an undertaking to observe the country’s laws on bribery may be
inserted into the bid form as part of a national anticorruption program. The key to
the effectiveness of a no bribery pledge is credibility. This means it must be accompa-
nied by supporting reforms which improve bidding and contract execution processes.
Ideally, such reforms should emerge from a dialogue with the private sector in which
constraints to efficient bidding for public sector contracts and their execution are dis-
cussed and remedies agreed on.
Loan disbursement
The Bank’s loan disbursement procedures affect the control of corruption in Bank-
32 financed projects. When the Bank lent heavily for large infrastructure projects, the
proceeds of loans were often disbursed directly to contractors, on presentation by

government of payment documentation. Now, with a different mix of projects and in
an effort to develop borrowers’ institutional capacity, increase project effectiveness,
and reduce the Bank’s costs, disbursements are increasingly made into special
accounts established by the borrower, Around $8 billion out of $16 billion
investment lending is routinely disbursed through special accounts. This includes
about $4 billion of some $9 billion annually, or approximately one-half of total dis-
bursements, which are made against statements of expenditure. The latter summa-
rize how money has been used for agreed categories of project expenditure.31
The extent to which the Bank can check statements of expenditure is
constrained by several factors. At headquarters it is often difficult to match items
claimed for reimbursement with line items in the project accounts and to
determine whether the items are eligible for Bank financing. Moreover, Bank staff
conducting supervision missions carry out only limited on-site reviews of documen-
tation due to claims on their time for resolving other project management and
implementation problems.
In the long run more emphasis should be placed on borrower capacity build-
ing, by strengthening financial management and better integrating physical imple-
mentation with financial indicators and loan disbursement. The Loan Department
has been developing a new approach to disbursement, the Loan Administration
Change Initiative (LACI), which emphasizes the importance of borrower financial
management and accounting systems to manage and monitor Bank projects effec-
tively. Instead of being disbursed against individual expenditure transactions or
statements of expenditure, the proposal is to disburse loans in quarterly payments
against supporting documentation and other information derived from borrower
financial management systems and reported quarterly in an integrated Project
Financial Management Report, to include a project progress report, financial state-
ments, and a procurement management report. This would strengthen the linkage
between financial information and the physical progress of a project. LACI would be
a graduated approach, with new projects following the LACI process and projects in
the existing portfolio being converted to the new process when the Bank
determined that acceptable project financial management systems were in place and
reporting formats were agreed to. An integral feature would be the development of
performance measurement systems. This approach would require the participation
of a financial management specialist on each project task team. LACI is currently at 33
the pilot stage. If it meets its objectives after a thorough assessment of the pilot
results, the Bank will progressively adopt LACI as the basis for loan disbursement in
countries that meet the required standards. Improved financial management
approaches will, in any case, be implemented, regardless of whether there is a direct
link with disbursement requests, as envisaged under LACI.
Notes
27. The stocks of IBRD and IDA projects currently disbursing are $88.4 billion and $42.5
billion, respectively, against an annual flow of new loan approvals of $14.5 billion and $6.9 bil-
lion, respectively, in FY96. This stock of projects collectively generates about 40,000 individual
procurement contracts annually, of which 10,000 (60 percent of value) are conducted under
international competitive bidding rules, and 20,000 (30 percent of value) are conducted under
local bidding rules. About 10,000 contracts undergo prior review by Bank staff (60 percent of
value). The remainder are subject to what is termed “post-audit” selective checking after the
event to verify that procurement followed the procedures specified in the loan documents.
28. The International Chamber of Commerce (ICC) encourages its members to adopt a
voluntary code of conduct to combat extortion and bribery in international trade.
29. The introduction of a no bribery pledge is being discussed by the Global Coalition for
Africa with a number of African governments.
30. Another approach is to contract out the procurement process to international procure-
ment agents. Alternatively, specialist firms may be used to provide benchmark prices against
which to compare the prices obtained from government bidding. Both approaches have been
applied at various times in Latin America and elsewhere.
31. In FY93 total disbursements were $18 billion, of which $7.8 billion was made against
statements of expenditure. In FY96 total disbursements were $19.1 billion, of which $9.4 billion
were made against statements of expenditure.
34
CHAPTER 5
Helping Countries Reform

Economic and Sector
Policies
E
conomic policy reform should be a main pillar of an anticorruption
strategy in many countries. Deregulation and the expansion of markets
are powerful tools for controlling corruption, and the Bank will continue
to encourage governments to pursue these goals wherever feasible.
Where governments must continue to play an active role in the economy,
policymakers should carefully consider the demands a new policy might place on
institutional capacity.
Deregulation and the expansion of markets

Markets generally discipline participants more effectively than the public sector can,
and their power to do so is closely linked to sound economic policy. Enlarging the
scope and improving the functioning of markets strengthens competitive forces in
the economy and curtails rents, thereby eliminating the bribes public officials may
be offered (or may extort) to secure them. There is a strong correlation between
policy distortions and corruption.32
Some policy reforms can have quick results, particularly some macroeconomic
reforms and deregulation, which do not make heavy demands on institutional
capacity. The incentives of economic actors can be changed overnight by the
removal of controls and the introduction of market-determined allocation systems
in areas like foreign exchange and bank credit. The state’s role in supporting rather
than supplanting markets is now widely accepted around the world.
Macroeconomic and sector policy reforms that contribute to the expansion of
markets and the reduction of rents include: 35
HELPING COUNTRIES REFORM ECONOMIC AND SECTOR POLICIES • Lowering tariffs and other barriers to international trade.
• Moving from dual to single exchange rates, with market-determined rates.
• Introducing competitive credit markets.
• Eliminating price controls.
• Cutting subsidies to enterprises.
• Reducing regulations, licensing requirements, and other barriers to entry
for new firms, both domestic and foreign.
• Privatizing government assets in clearly competitive markets.
• Abolishing monopoly export marketing boards.
Policy reform has helped reduce opportunities for corruption in many coun-
tries. In cases where countries have carried out economic reform programs and
corruption persists, part of the answer lies in an unfinished reform agenda. In
many countries the benefits of macroeconomic reforms have been blunted by the
absence of complementary microeconomic reforms at the sector level. The Bank
stands ready to work with governments on macroeconomic and sector policies that
not only improve performance but also help to reduce opportunities for
corruption.
Policy advice when government continues to play a role

In some areas, advice on policy reform may need to pay more attention to anticor-
ruption goals. Typically, these are areas in which the government must continue to
be involved because of market failure but in which public policy can work only if
sufficient institutional capacity exists. Without institutional capacity well-intended
policies can lead to poor outcomes and even greater corruption. Several examples
illustrate the links between design and institutional capacity: infrastructure privati-
zation, environmental regulation, tax reform, and public expenditure reduction. In
each of these areas the issue is not that the policies are necessarily misguided but
that institutional capacity is crucial to a successful outcome and that policies must
be designed in the light of a realistic assessment of this capacity.
Infrastructure privatization. In the long run privatization should decrease cor-
ruption, because it reduces the power and discretion of public managers and
bureaucrats and increases competition and transparency. In the short run, however,
the complex negotiations required for privatization—usually in a situation of shift-
ing policies and regulations—create temptation and opportunity. Weak institutions
36 are unlikely to resist temptation. If corruption becomes evident, a negative image of
privatization builds in the public’s eye—even though the transactions themselves
HELPING COUNTRIES REFORM ECONOMIC AND SECTOR POLICIES

still make good economic and financial sense.
The dangers are particularly acute in infrastructure privatization, in which, in
most cases, the stakes are large, the negotiations before the sale are elaborate, and
continued government oversight is justified. When a firm is divested into a competi-
tive market, the opportunities for corruption more or less end. In the case of a nat-
ural monopoly, corruption can continue indefinitely in the regulatory system.
Governments embarking on privatization of state enterprises need to reinforce
institutional capacity so that clear rules can be impartially applied, both before and
after sale. In the case of infrastructure, privatization should not be undertaken
without also establishing a minimum regulatory capacity. It has proven costly to
privatize first and try to install a regulatory regime later. Corruption is not an argu-
ment for not proceeding but for better design and implementation of privatization
programs.33
Environmental regulation. The environment is a sector in which governments
have tended not to be involved enough in the past and are now seeking greater
involvement through regulation. But tighter regulation without strong institutions
is likely to lead to more corruption, because it creates rents and gives the govern-
ment more coercive powers. A careful balance between policy and institutional
capability is crucial but is easily overlooked.
Some countries are testing new and innovative ways to use market
mechanisms for environmental control. These include, for example, auctions of
tradable permits to pollute and negotiated contracts with industry groups on
acceptable pollution levels in a particular watershed basin. In each case the level of
acceptable pollution is set by the government but how that level is reached is ulti-
mately decided by the market or the private sector. The Bank can help strengthen
governments’ capacity to design and implement such decentralized, market-based
approaches to pollution control.
Tax reform. In most cases tax reforms that eliminate multiple rates and
exemptions and limit the discretionary powers of tax officials help reduce corrup-
tion and enhance economic efficiency. However, tax rates that exceed what taxpay-
ers view as legitimate or what tax offices can administer encourage the
informalization of the economy and induce tax evasion and the corruption of tax
officials.34 High tax rates coupled with weak collection arrangements simply inflate
the gains from corruption without increasing the risk of detection. Where this is 37
HELPING COUNTRIES REFORM ECONOMIC AND SECTOR POLICIES the case, efforts should be made to design tax structures and rates that better match
institutional capacity and to strengthen that capacity over time (and adjust policy
accordingly).
Public expenditure reduction. Corruption may also increase when
governments are under pressure to reduce the public wage bill’s share in the budget
but find it politically difficult to do so. In such circumstances a mandated reduction
in the wage bill translates into yet lower real pay for government employees. Pay
cuts can have devastating effects on government performance, through the loss of
skilled professionals, demotivation of those who remain, and lowered resistance to
corruption. When the erosion of pay makes it impossible for staff to maintain basic
living standards, the government can quickly lose its capacity to control fraud, and
even the honest can be driven to absenteeism and moonlighting activities that may
conflict with their roles as public servants. On the surface the formal processes of
government may be maintained, while underneath an alternative set of informal
rules operates to the detriment of public welfare.
Large public sector wage bills are fiscally unsustainable and must be
addressed. But this should happen within an integrated framework of public sector
and governance reform (see chapter 6). The Bank’s ability to help with this, as with
other policy areas discussed above, will continue to increase as it learns more about
the important links between policy design and institutional capacity.
Notes
32. See Figure 2-2 in World Development Report 1997: The State in a Changing World,
New York: Oxford University Press, 1997.
33. Daniel Kaufmann and Paul Siegelbaum, “Privatization and Corruption in Transition
Economies,” Journal of International Affairs, 1997. 50(2), 419–58.
34. For example, in a number of transition economies in which government revenue
accounts for less than 10 percent of GDP, value-added tax rates are 20 percent or higher. Rates
this high are not widely enforceable in such an environment and create incentives for bribery.
38
CHAPTER 6
Helping Countries
Strengthen Institutions
B
uilding strong institutions is a central challenge of development and is
key to controlling corruption. Well-functioning public management sys-
tems, accountable organizations, a strong legal framework, an indepen-
dent judiciary, and a vigilant civil society protect a country against
corruption. Institutional strengthening is thus expected to form a key part of coun-
try anticorruption strategies.
In strengthening institutions to control corruption, countries have moved for-
ward in three areas:
• Building traditional systems of well-performing government: a professional civil
service, sound financial management, disciplined policymaking, and a balance of
responsibilities among central, state, and local governments.
• Strengthening the legal framework, including the judicial system.
• Increasing transparency and introducing other measures that strengthen the role
of civil society in demanding better government.
Although some aspects of the third category lie beyond the Bank’s mandate,
the Bank can do a great deal to help countries strengthen the capacity of
institutions inside and outside government to control corruption. For many years
the Bank has been helping countries build well-performing public institutions, and
it has increasingly recognized the important role played by civil society. But institu-
tion building is hard work. Continued efforts are needed both within and outside
the Bank to understand how successful institutional reforms are designed and
implemented.
39
HELPING COUNTRIES STRENGTHEN INSTITUTIONS Public management reform
Civil service reform. One of a country’s most important institutions is a professional
and well-motivated civil service, with selection and promotion based on merit
rather than patronage. A well-performing civil service resists petty corruption and
provides the staff for many of the institutions that protect integrity in government:
finance and personnel ministries, government tender boards, technical departments
that evaluate bids, bodies that implement regulatory policy, accounting units, and
internal and external audit departments. However, the Bank’s experience in assist-
ing with civil service reform in more than sixty countries has shown that progress
in this area tends to be slow.35 Mere downsizing in the absence of an integrated
reform program has not worked well and has been subject to reversal.
Better approaches to civil service reform need to be developed by the Bank in
partnership with other agencies and governments if countries are to make headway
in controlling corruption. Personnel policy, including recruitment, promotion, and
pay, is clearly a vital issue.36 Public sector pay in some countries collapsed in the
1980s and has yet to recover. The longer pay remains grossly inadequate, the more
bureaucratic corruption becomes entrenched. Defining what is meant by the civil
service and differentiating more clearly between a core civil service and other public
employees is also important. So are mechanisms to protect the civil service from
unwarranted political interference, such as public service commissions. Ethics
codes and institutional values, once established, help protect a civil service’s
integrity and professionalism, but require continual nurturing. And if civil services
are overstaffed, governments are trying to carry out too many tasks, or some func-
tions are best contracted out, staff reductions may be needed. The Bank will there-
fore consider afresh the direct financing of severance pay as a component of civil
service reform. Finally, the links between civil service reform and the labor market
need to be better understood.
Budget reform. Government should undertake only what it can do well within
its resource constraints. In many countries matching policy and affordability means
changing assumptions about the role and optimal size of government.37 The Bank
can help governments develop well-functioning budget processes that achieve the
government’s macroeconomic targets, allocate resources strategically, and enable
programs and projects to be implemented efficiently and effectively.38
Financial management. Good financial management systems are powerful
40 instruments for preventing, discovering, or facilitating the punishment of fraud and
corruption. They allocate clear responsibility for managing resources, reveal
HELPING COUNTRIES STRENGTHEN INSTITUTIONS

improper action and unauthorized expenditures, facilitate audit by creating audit
“trails,” and protect honest staff. By reducing opportunities for corruption and
increasing the risks of detection, good financial management systems help change
corrupt conduct from “high profit/low risk” to “high risk/low profit.” Yet many of
the Bank’s borrowers have weak government financial management systems.
Inoperative control systems permit widescale fraud, and in many cases auditing is
impossible.39
The Bank has helped strengthen financial management systems and audit
institutions in a number of countries, often using systems that better integrate bud-
geting, cash management, accounting, and auditing.40 But in many countries the
Bank’s emphasis has been on measures to improve financial management in Bank
projects. This does not necessarily create a capacity for better financial management
outside the confines of the project. While the Bank will always have a fiduciary
responsibility for its projects, it will pay greater attention to broader financial man-
agement systems, especially in countries in which standards are low. It has already
carried out a number of Country Financial Accountability Assessments (CFAAs) to
help identify institutional capacity weaknesses. The Bank can help governments
install and operate modernized systems where appropriate, and will give more
weight to financial management as a factor in country assistance strategies.
Tax and revenue departments. Tax and customs departments are often the locus
of major fraud and corruption and thus are candidates for inclusion in national
strategies to control corruption. Such malfeasance can often be meaningfully
addressed—assuming strong commitment from the top—by giving revenue agencies
greater managerial freedom (relative to normal civil service rules) to hire and fire
staff and to set pay levels while subjecting their performance to close scrutiny. By
controlling theft, good financial management systems change the economics of
bribery, and businesses no longer have an incentive to collude with a corrupt official
to avoid taxes. Rather, their incentive is to report extortion.41 Organizational restruc-
turing (for example, separating the tax assessment function from the collection func-
tion) and staff rotation can also help reduce opportunities for corruption, as can
control systems that require supervisors to attest that they have checked the work of
subordinates. Tax policy may also affect anticorruption goals. Simplifying tax and tar-
iff schedules and keeping rates at moderate levels reduces the discretion of tax and
customs staff and narrows the scope for corrupt payments. Sound macroeconomic 41
HELPING COUNTRIES STRENGTHEN INSTITUTIONS policy also plays a role by reducing the risks of distorted valuations. How
governments spend the revenues they collect also matters. If taxpayers do not see
their taxes put to good use, evasion and corruption may become socially acceptable.
The Bank has provided policy advice and technical assistance on tax and
revenue reform and is supporting tax modernization projects in a number of coun-
tries. The IMF is also active in this area, and coordination between the two institu-
tions is important. Intrinsic to Bank efforts to help countries improve their tax and
customs agencies are reforms that help governments control corruption.
Government procurement. Government procurement and contract
management systems in both rich and poor countries are highly vulnerable to fraud
and corruption. These risks are exacerbated when budgets come under pressure.
Payments are delayed and incentives to bribe increase. Institutional capacity weakens
if civil service pay and conditions are inadequate and the processes that ensure trans-
parency and good record keeping are eroded. In terms of size, governmentwide pro-
curement far outweighs procurement under Bank projects.
Reducing fraud and corruption requires a willingness to install or reestablish
sound systems and the capacity to operate them as intended. The basic principles of
sound procurement are well known and are reflected in the Bank’s approach to its
projects. The Bank also has provided procurement training and has helped a number
of countries (mostly transitional) enact procurement legislation that specifies open,
competitive bidding for public contracts.42 Although these efforts have been valuable,
there has not been enough systematic effort to assess governmentwide systems and
to incorporate the findings in country assistance strategies.
An increased effort is needed to help interested borrowers build capacity to pro-
cure goods and services and manage contracts. The Bank intends that country pro-
curement assessment reviews be developed into a more effective vehicle for
improving public procurement. The Bank’s public sector management and procure-
ment specialists will work to integrate the development of sound public procurement
into country strategies for public sector reform and continue to search for new tech-
niques and approaches that help minimize opportunities for corruption and improve
value for money.
Decentralization. Decentralization involves the shifting of power to lower tiers
of government or the granting of greater authority to line managers. Its effect on
performance and corruption depends on the setting. Decentralization can help
42 reduce corruption if it improves government’s ability to handle tasks while increas-
ing transparency and accountability to local beneficiaries.43 But decentralization can

also increase corruption if local and regional governments have stronger incentives
(because of lower formal pay levels, for example) or more opportunities to carry out
fraudulent activities and are less constrained by financial management and auditing
systems (which are often in even shorter supply in regions than in the center). In
many countries, industrial and developing, more corruption is thought to exist in
state and, in particular, local governments than in the national government. This is
not an argument against decentralization, which for many other reasons may still
have a positive economic impact. Rather, decentralization initiatives must take into
account the relative accountability and capacity of national and subnational levels of
government when considering the structure of power sharing and must work to
develop the capacity of decentralized entities alongside the devolution of functions.
Legal and judicial reform

A country’s legal system—its laws and regulations as well as the processes and insti-
tutions through which they are applied—is vital for addressing corruption, just as it
is for resolving civil conflicts, enforcing property rights, and defining the limits of
state power. Laws and regulations that delineate market-friendly policies are power-
ful anticorruption tools (see chapter 4). The Bank has long been involved in helping
to design macroeconomic and sector policies, and the laws through which they are
implemented, in many countries.
Judicial reform. Enforcement of anticorruption legislation requires an efficient,
predictable, and accountable judiciary. In recent years the Bank has gained experi-
ence in judicial reform, especially in Latin America and Africa, and there is scope for
similar efforts in other regions. Bank-supported judicial reform has focused on judi-
cial independence (including proper criteria for the selection and removal of judges,
pay scales, training, and judicial ethics); improved court administration and case-
flow management; procedural reform, including reducing ex parte communication
between judge and litigants; better access to justice (through small claims courts,
alternative dispute resolution mechanisms, and legal aid); and legal education and
bar entrance requirements. Steps also need to be taken in many countries to counter
corruption by court staff who, as gatekeepers to the adjudication system, may extract
bribes.
Assessing the effectiveness of the judicial system should be part of the diagnos-
tic framework that Bank staff apply when asked to help a country strengthen its 43
HELPING COUNTRIES STRENGTHEN INSTITUTIONS capacity to combat corruption. But because this is a relatively new area for the Bank,
like many of the institutional topics discussed in this chapter, we still have much to
learn about how to judge effectiveness and which approaches to judicial reform work
best. We need to build evaluation into our activities, debate new approaches, draw in
outside expertise, and gather lessons from experiences elsewhere.
Special anticorruption bodies. There is now extensive experience worldwide
with independent bodies, typically set up by statute, to increase integrity in public
life. These include ombudsman offices, inspectors general, and independent corrup-
tion commissions. Experience in developing countries with ombudsman offices,
which pursue allegations of abuse of official power, is mixed. In Sub-Saharan Africa
and other regions the prevailing model has been an “executive” ombudsman, report-
ing to the head of the government rather than to the legislature and thus lacking the
independent status a true ombudsman should have. Inspectors general can be pow-
erful agents for controlling fraud and corruption within departments and agencies,
depending on how they are established and operate, but they can also work at cross-
purposes to accountability and performance.
Corruption commissions and special fraud units have been highly successful in
Chile, the former territory of Hong Kong, and New South Wales (Australia). In a
number of developing countries, however, they have been used as instruments of
partisan politics, undermining their effectiveness and public support.44 In the wrong
hands powerful anticorruption legislation can be abused. In some Latin American
countries independent attorneys general have proven effective in bringing charges
against those at the highest level of government (Brazil, Colombia, and Venezuela).
Had they been part of the executive branch, they would not have had the
independence necessary to act decisively against high-level corruption.
Anticorruption bodies appear to be a promising option if they can be made
truly independent of the executive and if there is a strong and independent judiciary.
However, we need to better understand the experiences of these bodies—where they
have been effective and where they have failed—before recommending them to gov-
ernments.
Civil society and the media

Civil society and the media are crucial to creating and maintaining an atmosphere in
public life that discourages fraud and corruption. Indeed, they are arguably the two
44 most important factors in eliminating systemic corruption in public institutions.
Corruption is controlled only when citizens no longer tolerate it. Private organizations,

professional organizations, religious leaders, and civil groups all have a stake in the
outcome of anticorruption initiatives and an interest in the process. They also may play
an important role as watchdogs of public sector integrity, and there is scope for
expanding this role and sharing the experiences among countries. The Bank, as a
lender to governments, can play only a limited role in supporting civil society in the
fight against corruption. But within its mandate and with the full support of govern-
ments, the Bank has undertaken, mostly through EDI, activities such as integrity
workshops and the training of journalists. More participatory approaches to project
design and implementation also make a contribution, as do Bank efforts to help coun-
tries improve the legal framework for NGOs. And as our understanding of what can be
done grows, there may be scope for further activities involving partnerships with civil
society, such as public education programs.45
National coalitions. In countries where the government has sought Bank assis-
tance in developing an anticorruption strategy, policymakers may be interested in tak-
ing a nonpartisan approach. EDI’s integrity workshops can facilitate this process by
providing a forum for the discussion of international experiences and local alternatives.
This is a new and promising activity for the Bank, but it requires careful preparation
and sensitive handling.46 This type of activity should be carried out only in response to
a request from the national authorities, and in partnership with them.
Open and transparent government. Corruption thrives in the dark. The Bank sup-
ports efforts to encourage open and transparent government. Publication of
government budgets and their availability in easy-to-read summary form, frequent
reports to the legislature on budget implementation that enable comparisons to be
made between budgeted and actual revenues and expenditures, and timely preparation
of public accounts and audit reports and their scrutiny by the legislature and the
media are some of the foundations of open and accountable government. Government
departments and agencies should be encouraged to produce annual reports on their
activities, achievements, and financial results, and national governments should report
these in consolidated form. To the extent that performance information can be
included, agency accountability should improve. In some countries “sunshine” laws
(which require agencies to hold public hearings before making policy or program deci-
sions) and freedom of information laws (which require governments to make informa-
tion surrounding decisions available unless there are supervening public policy reasons
for secrecy) may be appropriate. Court decisions should be published. And the regular 45
HELPING COUNTRIES STRENGTHEN INSTITUTIONS publication of consultative documents when new policy is contemplated is good prac-
tice everywhere.
Notes
35. The difficulties are detailed in numerous studies of the Bank’s experiences in civil ser-
vice reform, by the center, by the Regions, and by the OED. A study of Bank approaches to civil
service reform is currently under way. See Barbara Nunberg, “Rethinking Civil Service Reform:
An Agenda for Smart Government.”
36. See Figures 5.5 and 5.6 in World Development Report 1997: The State in a Changing
World, New York: Oxford University Press, 1997.
37. In many countries decisions to introduce new policies are made without regard to the
long-term costs of implementation. This is because policymaking is not disciplined by institu-
tional processes that require the costs to be identified and considered before the policy decision
is made. Where aid is additional, the discipline of a hard budget constraint is lost.
38. There is tentative empirical evidence that corruption affects the allocation of budget
resources between sectors, specifically of a negative relationship between corruption and govern-
ment spending on education. Since educational attainment is an important determinant of eco-
nomic performance, this could have adverse long-run consequences for economic growth. See
Paulo Mauro, “The Effects of Corruption on Growth, Investment, and Government Expenditure:
A Cross-Country Analysis.” Washington, D.C.: IMF, 1996.
39. This is a particularly serious problem in Sub-Saharan Africa, where auditors general
frequently complain that audits cannot be completed in departments and agencies because
accounting records are incomplete and audit queries go unanswered. Consolidated government
accounts are presented to parliament years after spending takes place, if ever.
40. The Bank is working with a growing number of governments to strengthen the capac-
ity of the supreme audit institution by modernizing audit laws, training staff, and installing
improved management systems. EDI has begun working with parliamentarians in selected coun-
tries to help watchdog bodies, such as public accounts committees, become more effective.
41. When corrupt tax or customs officials systemically collude with taxpayers to substitute
a lower tax assessment and pocket the difference (bribery with theft), businesses operating in
competitive markets have an incentive to comply. Insisting on paying the official tax or duty
would put them at a competitive disadvantage in relation to colluding firms. If a strong financial
management system can be installed that controls theft (for example, recording assessments
made by individual officials and requiring superiors to sign off on work performed by subordi-
nates; reporting valuations, assessments, and collections; and adding spot checks and indepen-
dent valuations), firms may instead have an incentive to abide by the law and avoid bribery and
collusion. See Andrei Shleifer and Robert Vishny, “Corruption,” Quarterly Journal of Economics,
1993, 108.
42. Using a model law (UNCITRAL) adapted to individual country legal systems, the Bank
has helped many countries, especially those in transition, establish legal frameworks for public
procurement. This work has been funded from loans and Institutional Development Facility
grants.
43. In a growing number of countries the Bank, through EDI, has helped governments
carry out service delivery surveys. These surveys ask program beneficiaries questions about the
quality and reliability of government services and in so doing may bring to light patterns of petty
bribery. The surveys reveal how programs are delivered and can help build demand for more
46 accountable and more effective government. If beneficiaries complain of bribes, surveys can help
to foster a dialogue with the government on corruption. The surveys are best carried out as part
of a broader reform program aimed at improving performance rather than at specifically expos-
ing corruption.
44. A recent survey of public and private participants from developing countries attending
some high-level training in the United States found that the creation of anticorruption agencies
was ranked low in the steps a country should take to counter corruption. See Daniel Kaufmann,
“Listening to Stakeholders’ Views about Corruption in Their Countries,” Harvard Institute for
International Development, January 1997.
45. Public education, for example, is strongly emphasized in the anticorruption strategy of
Hong Kong’s Independent Commission against Corruption.
46. EDI normally seeks both a government and a civil society partner.
47
CHAPTER 7
Mainstreaming a
Concern for Corruption in
Bank Activities
I
f the Bank is to help countries tackle corruption, it needs to take corruption
more explicitly into account in its own economic work and in its internal
processes. This chapter sets out how the Bank is moving forward in
mainstreaming a concern for corruption across the range of its operational
work. From the Bank’s perspective, anticorruption is best thought of not as a set of
new initiatives but rather as a more explicit integration of the problem (of which
staff and management have long been aware) into country strategy formulation,
Bank lending, economic and sector work, research, and country dialogue.
Economic work
Increasing transparency. The first requirement in mainstreaming a concern for cor-
ruption is for the Bank to bring the issue out of the dark. To a significant extent
this is already happening. Discussions about the effects of corruption on
development have been intensifying within the Bank in recent years, especially
since President Wolfensohn’s 1996 Annual Meetings speech. But corruption needs
to be addressed more systematically in the Bank’s analytical work. Until that hap-
pens corruption will not be sufficiently understood or integrated with management
decisions. And to some extent the Bank is playing “catch-up,” acknowledging that
corruption threatens development but doing so in the wake of media attention and
international recognition of corruption as a major problem.47
Economic and sector work. The Bank will not be able to provide
governments with sound policy advice if it does not make the required intellec-
48 tual investment. Economic and sector work has not dealt with corruption much,
referring to it elliptically with phrases like “rent seeking,” “leakage,” and “misap-
MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES

propriation.” In the future more effort is needed to address corruption directly
and openly in economic and sector work when it is relevant. In particular, poverty
assessments will need to discuss petty corruption, since in many countries the
poor experience extortion by public officials daily. Public expenditure reviews,
with their focus on the allocation of government spending, will also have to grap-
ple with the issue, since corruption may mean that inputs are used to produce
outputs and have outcomes quite different from those represented in budgets
approved by the legislature. And country economic memorandums, sector studies,
and environmental assessments will need to address corruption where it
represents an impediment to sectoral and economywide performance. Private sec-
tor assessments, which already regularly survey corruption issues, should
continue to focus on this dimension. In some countries EDI’s service delivery sur-
veys, which ask beneficiaries about the quality of government services, have also
yielded information on corruption.
Research. Outside the Bank, research on corruption has grown considerably. A
substantial body of academic literature is starting to shed light on the complexities
of corruption and its effects on economic performance. There is also a growing body
of work on how corruption might be controlled. Little of this work is empirical, but
this is beginning to change as survey data accumulate. Inside the Bank little explicit
research on corruption is under way. Still, research in several areas, such as prop-
erty rights and aid effectiveness, touches on the issue.
The Bank will devote more resources to research on corruption. The
Development Research Group and the Poverty Reduction and Economic
Management Network are developing a research program on corruption, which can
be carried out by Bank staff or contracted out. As this research yields insights, they
will be reflected in the Bank’s policy advice and in its contributions to international
discussions on corruption.
Dissemination. As discussion and analysis of corruption becomes more explicit
in economic and sector work, in staff dialogue with country counterparts, and in
project design, a body of best-practice knowledge will be built. It will be important
to capture this knowledge and disseminate it through the Knowledge Networks and
in staff training. An advisory service on anticorruption is being created in the
Poverty Reduction and Economic Management Network, drawing on the knowledge
and insights of other networks. The Network’s staff, with the assistance of the Legal 49
MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES Department, will provide guidance to staff on the treatment of corruption issues in
economic and sector work, on the design of projects, and on how to help countries
design anticorruption strategies.
Country assistance strategies and the country dialogue

A review of current country assistance strategies reveals that they seldom address
corruption as a factor affecting Bank projects or as a development effectiveness
issue. The reasons are similar to those for not addressing corruption in
economic and sector work—the complexity of the subject, the lack of direct evi-
dence, borrower sensitivity, and uncertainty by managers on how to tackle the
issue. In addition, staff are unclear on how to deal with systemic corruption
when it is found. For all these reasons, Bank staff feel more at ease assessing a
government’s economic policy record than whether its programs are affected by
corruption.
But a failure to address corruption in cases in which it undermines a country’s
development prospects and the effectiveness of Bank activities diminishes the value
of the country assistance strategy as a mechanism for programming Bank lending
and economic and sector work and for raising important matters with the govern-
ment. To rectify this, future country assistance strategies will discuss any serious
effect that corruption has on a country’s development prospects and, in turn, define
ways in which the Bank could help mitigate the problem, consistent with the Bank’s
mandate. This does not mean that every strategy should include a paragraph on
corruption, regardless of country circumstances. Rather, there should be a substan-
tive discussion of corruption and its implications for Bank operations in any coun-
try in which corruption affects Bank projects and development prospects more
generally.
Addressing corruption in the country dialogue and the country assistance
strategy requires sensitive handling. It will be important to view corruption not in
moral terms but as a constraint to development. The more corruption can be pre-
sented in terms of its effect on the outcomes of government policies, programs, and
projects, the more constructive the dialogue is likely to be. The objective is not to
rate countries on the extent of corruption but to shed light on how corruption
affects government objectives, particularly in areas that we deem important for sus-
tainable development. Cross-country indices of corruption open up avenues for
50 empirical research but are not themselves a measure of economic impact.
Lending program

Lending allocations. The Bank will take corruption into account more explicitly in its
decisions on country operations. In the past, donor agencies, including the Bank,
have been criticized for continuing to support countries in which corruption was per-
vasive and a clear obstacle to development. However, it would be wrong to move from
a position in which little notice was taken of corruption to one in which the level of
corruption alone determined the size of the lending program. The Bank’s interest in
addressing corruption arises because it can be a constraint to development. From this
perspective, corruption, like inadequate skills, is something standing in the way of a
well-performing public sector and the achievement of a country’s development goals.
Assessing corruption’s effect on development will seldom be a precise exercise,
and it will require the exercise of judgment based on the available evidence.
Corruption comes in many forms, and its impact varies greatly among countries,
according to circumstances. One type of bribery may be relatively benign in one set-
ting but economically crippling in another. Moreover, the harm may be mitigated or
magnified by the government’s macroeconomic or sector policies.48 Thus corrup-
tion should always be assessed in the context of other factors affecting development.
Furthermore, if corruption is directly addressed in economic and sector work,
insights will be gained, evidence on its effects will accumulate, judgments will
become more informed, and its costs will be better articulated to governments.49
These tools will help governments prepare and implement strategies to combat cor-
ruption.
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. The
following considerations will guide lending and, with due respect to legal
obligations, disbursement decisions:
• Whether Bank projects are likely to be affected by corruption during design or
implementation, or thereafter.
• The extent to which the achievement of development objectives is compromised
by corruption.
• The willingness of the government to act to control corruption if it threatens the
effectiveness of Bank projects and/or economic and social development.
The response in individual cases should be tailored to the nature of the prob-
lem. If corruption is found to taint a particular Bank project, current Bank proce- 51
MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES dures will be applied and should in general be adequate to address the issue. If cor-
ruption is thought to taint the achievement of development objectives in an entire
sector, the design and size of Bank assistance in that sector should be reconsidered.
In extreme cases of far-reaching systemic corruption that affects most sectors, Bank
assistance may need to be focused on a few unaffected sectors, limited to
institution-building or nonlending activities, or curtailed altogether. This cannot be
a mechanistic assessment but will always call for careful judgment based on accu-
rate information and the specifics of the situation. Every effort will be made to
ensure even-handed treatment of countries. And in all cases, the Bank’s actions will
be governed by the Articles of Agreement and will focus on the economic issues
within its mandate.
Within this broad framework and consistent with existing loan agreements
country operations may need to be adjusted according to the extent to which cor-
ruption affects both Bank projects and development objectives and to reflect the
efforts of government to control it. This can be done without changing IDA and
IBRD allocation criteria, which are based on country and portfolio performance.50
However, this revised approach does imply a greater capacity on the part of staff to
acknowledge the costs of corruption and factor them into performance assessments
when they are significant. In some cases corruption may be a country risk factor
that will require special Bank attention.
Project design and portfolio management. Projects need to be prepared in a
way that integrates institutional considerations and assesses corruption risks more
explicitly at the design stage. Many Bank staff already do this, but experience is not
widely shared, and thus institutional learning has been low.
The control of corruption can be supported through portfolio management.
The increased emphasis by staff on looking at the Bank’s portfolio on a countrywide
basis and regularly discussing portfolio implementation issues with borrower gov-
ernments provides an opportunity for raising corruption issues and agreeing on
actions to address them.
Lending instruments. The Bank should be prepared to use a wide range of
lending instruments to support countries that are seeking to control corruption.
The Institutional Development Fund has been used extensively to finance innovative
public management activities, and we expect this to extend into anticorruption
work under the umbrella of the proposed new Development Grant Facility.
52 Technical assistance loans, often accompanying structural adjustment loans and
sectoral adjustment loans, have been a mainstay of Bank efforts to help countries

implement public management reforms.
Structural adjustment loans and sectoral adjustment loans can continue to be
used to support economic policy reform. New lending approaches—such as slow-
disbursing fiscal support lending—might also be considered to help the Bank more
effectively support the broad institutional changes needed to improve public sector
performance. Within a clearly articulated medium-term framework, such loans
could support the restructuring of government policies and programs consistent
with a changed role of the state and foster transparency and accountability in finan-
cial management and in the conduct of public business.
Procurement and financial management

Procurement. The Bank is redesigning its Country Procurement Assessment
Reviews (CPARs), so that these can become more effective tools for helping coun-
tries strengthen public procurement systems. Strengthening capacity to procure
goods, works, and services is good not just for the control of corruption but for gov-
ernment performance in general.
Financial management. In keeping with the changes under way in the Bank’s
disbursement systems, greater emphasis will be placed on borrower accountability
and government financial management systems. This means increasing the inten-
sity of Bank work on financial management and carrying out Country Financial
Accountability Assessments (CFAAs) for a wider range of countries. These
assessments look at financial management capacity, skills, and standards in both the
private and public sectors and offer governments recommendations on how capacity
in this critical area could be strengthened.
As the Bank places more responsibility on managers for achieving results on
the ground, simplifies internal processes, and shifts functions to resident missions,
the Bank must ensure that the risks of fraud and corruption in Bank-financed pro-
jects remain well controlled. As noted above, review of large-scale procurement
decisions will remain a headquarters function, while more staff based in the field
should strengthen project supervision and portfolio management.
External agency practices and public sector management

Some of the Bank’s (and bilateral donors’) modes of operation might impede
national anticorruption efforts, and certain Bank practices associated with “enclav- 53
MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES ing” may need to be changed. In a broader sense, it is also possible that high levels
of aid to poor countries may, in ways not fully understood, slow the emergence of
institutions of state accountability that otherwise might develop (as they did in
industrial countries) if states were more dependent on local revenue sources. This is
not an argument against aid but rather a caution about the risks of externalizing
accountability where aid flows are a significant part of government revenues.
Enclaving. A frequently debated issue in the Bank is the tendency to
“enclave”—safeguarding Bank operations from the weaknesses of a borrower’s pub-
lic sector by insisting on an implementation environment separate from prevailing
government management systems. A long-acknowledged (and now less common)
example is the project implementation unit, appropriate in some circumstances but
now viewed as overused. An egregious example is salary supplements (or “leave of
absence” contracts). Social funds, if they are used for what properly are central gov-
ernment functions, may weaken public management.51 The reasons for enclaving
are understandable, given the Bank’s fiduciary responsibilities and the desire for
smoothly running projects in situations in which government budgeting, account-
ing, auditing, procurement, and personnel management systems are weak. To some
extent these reasons are inherent in any project-centered approach to lending. But
they reduce the pressure on government to reform, and they may weaken domestic
systems by replacing them with donor-mandated procedures.
This tension may never be fully resolved, but it needs to be better recognized.
Bank staff need to pay more attention to the government’s budgeting, accounting,
auditing, procurement, and personnel management systems and to how they affect
the sustainability of Bank projects. Doing so would focus management and staff
attention more explicitly on the condition of those systems and on how the Bank
might help governments improve them. In turn, this would help governments con-
trol fraud and corruption.
Soft budget effects of aid. Concern has been voiced that the way aid tradition-
ally has been provided by the Bank and bilateral donors may undermine governance
in countries receiving large amounts of aid, by expanding government’s reach, soft-
ening budget constraints, and discouraging a rationalization of functions and rede-
ployment of resources. Donor preferences for funding projects in public investment
programs, channeled through a dual budget structure, may have helped bloat gov-
ernment spending when coupled with increasing aid flows. Although donor projects
54 now support the rehabilitation of existing services more than their expansion, the
de facto fragmentation of budgets in aid-dependent countries resulting from dual

budgeting still discourages a full consideration of the tradeoffs involved in the allo-
cation of resources. Furthermore, when poorly managed, aid softens the budget
constraints that should discipline policy choice.52 When accountability is external-
ized, national accountability mechanisms are weakened, which may allow corrup-
tion to flourish.
One way to promote discipline in policymaking and better financial manage-
ment in countries that depend on aid could be to shift a portion of aid flows from
project- to program-based financing and to conditional general budgetary support,
within a medium-term expenditure framework. Such budget support lending could
be conditioned on the installation and operation of transparent budgeting and
financial management systems (with the control of corruption as one objective),
just as earlier policy-based lending supported economic policy reform. As part of its
efforts to consider new lending instruments, the Bank will consider the feasibility of
such an approach.
Staffing implications
Staff training. The experience and expertise of staff are vital for the success of the
Bank’s efforts against corruption. Experience will build over time as staff begin
helping countries, and it can be augmented through training. Addressing corrup-
tion is not an additional set of activities but an underlying factor in the Bank’s
assessment of development prospects, and it should be integrated into Bank work.
Current training proposals for mainstreaming the control of corruption involve
adapting existing training courses as well as launching new ones.
• Training programs oriented to a particular sector progressively will include
material showing how projects can be designed to minimize the scope for corrup-
tion. Case studies will need to be developed over time, building on regional experi-
ence and using the network anchors to assemble the material.
• Public sector management training programs will be modified to include a
module on anticorruption, to sensitize staff, and to show how corruption can be
addressed within a public sector management and governance framework.
• Workshops on the analysis of corruption and the development of anticorrup-
tion strategies will be organized, aimed initially at Bank staff working on countries
that have approached the Bank for assistance in combating corruption.53 Diagnostic
frameworks will be developed and provided to staff. Guidance on dealing with this 55
MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES sensitive subject will be included in staff media training. And training courses
should help Bank staff understand the political as well as the economic and social
dimensions of corruption.
• Staff guidelines on addressing corruption have been prepared and are being
distributed to all staff.
Staffing implications. The bulk of the responsibility for mainstreaming corrup-
tion in Bank work will fall on existing staff. Thus the additional staff required to
implement the recommendations are limited, and many needs can be
accommodated through training.
In three areas, however, staffing levels are inadequate and will be increased.
• The number of skilled financial management specialists in operational units
has declined in recent years, a trend the 1994 Financial Reporting and Auditing
Task Force Report drew attention to. Specialists are overloaded, and new staff are
needed to enable the Bank to assess borrowers’ financial management systems and
to provide assistance to countries seeking to improve them.
• The Bank also needs more procurement specialists. In theory, some relief
may be obtained by shifting the emphasis from prior review to post-audits. But
these, too, require budget funds to hire local external auditors. If the Bank is to
help more governments improve their procurement systems, there will inevitably
be additional staff costs.
• Additional expertise is needed in public sector reform. Building better insti-
tutions helps control corruption. This means that the demands placed on public
management and institutional specialists are likely to grow, requiring an increase in
their numbers. Lessons of experience and best practice should be duly collected and
disseminated through the Knowledge Networks.
Personal security and risks. Finally, this chapter ends with a warning on per-
sonal risks to Bank staff, consultants, and counterparts working with them.
Previous initiatives of the Bank—on poverty, participation, the environment or pri-
vate sector development—have not resulted in Bank staff and consultants being
directly threatened by those engaged in criminal activities. Anticorruption work is
different. Not only is the bribing of public officials illegal in all borrower countries,
but in many countries there are close links between systemic corruption and orga-
nized crime. The risk to the personal security of Bank staff and consultants and
those working with them cannot be lightly dismissed. Close inspection of substan-
56 dard construction, the persistent checking of project accounts that have been sub-
ject to large-scale fraud, pressure on governments to abandon white elephant pro-

jects in which politically powerful figures have a financial stake, or work on the
banking system in countries experiencing large-scale money laundering can be haz-
ardous activities for Bank staff and local counterparts. Managers need to be sensi-
tive to these risks. They must avoid placing staff in potentially dangerous situations
and be prepared to support them, if necessary by withdrawal, in the face of threats.
Staff need to be aware of possible danger and to know that managers will support
them.
Notes
47. An outstanding example of how open governments have become in acknowledging the
problem and their preparedness to discuss it is the communiqué of the Summit of the Americas,
held in Miami in 1995.
48. A 10 percent bribe on the cost of a good public investment project depresses the pro-
ject’s economic rate of return only slightly. A bribe that saddles the country with a white elephant
investment may result in economic costs far exceeding the corrupt payment, particularly if the
policy environment causes a value-subtracting investment to appear nominally profitable.
49. As noted elsewhere in this report, private sector assessments are yielding information
on the extent to which entrepreneurs see bribery as a constraint to business development.
Service delivery surveys are starting to provide insights into whether beneficiaries have to pay
bribes to receive government services. International price benchmarking can point to whether
procurement is affected by corruption. And in one country, Bank staff were able to bring major
fraud to the authorities’ attention by comparing customs revenue receipts with central bank bal-
ance of payments data.
50. IDA resources are allocated to eligible countries mainly on the basis of their
performance in meeting economic and social goals. Countries are rated according to three sets of
criteria: macroeconomic stability, structural policies, and portfolio management. Pervasive cor-
ruption will have an impact on all three criteria.
51. It is appropriate to create a social fund if the activities to be performed are, in public-
management terms, best handled by relatively autonomous agencies with separate governance
structures at arms length from the government department with portfolio responsibility. Credit
to small entrepreneurs or grants to community schemes without recourse to further government
funding can be administered effectively by stand-alone agencies. But when the financing of an
activity (for example, building a public primary school) results in recurring departmental staffing
and maintenance responsibilities or involves policymaking, a social fund may not be appropriate.
52. Faced with an offer of concessional project aid, a government in a poor country has
every incentive to accept it even when the government doubts that the domestic budget can sus-
tain project operating costs. Governments have been right so far in their assumption that donors
will meet the shortfall, perhaps disguised in a “rehabilitation” project.
53. A pilot workshop took place in the beginning of February 1997, coordinated jointly by
the Poverty Reduction and Economic Management Network and the Learning and Leadership
Center. This workshop has been evaluated for lessons that can be reflected in future training
events.
57
CHAPTER 8
International Efforts
C
orruption is an international problem that requires international solu-
tions. Much corruption occurs in international business, including inter-
national government procurement, where the Bank has a special
interest. To be successful, efforts to reduce this kind of corruption must
deal with it at its source in capital-exporting countries as well as in developing
countries. Work along these lines is being carried out by international
organizations, particularly regional organizations, and by international business
groups. Acts of internal corruption often have international ramifications, as is the
case when their authors flee to another country to avoid detection or prosecution or
try to launder the proceeds abroad. Bank secrecy laws in some countries may hin-
der efforts of national investigators to trace the proceeds of bribery or other corrupt
actions. Efforts are under way to improve international cooperation in the detection
and prosecution of corruption and money laundering. Governments that are start-
ing to deal with corruption have much to learn from those that have already
mounted successful campaigns against it. Here too international organizations have
started to collect the experiences of their members and to organize training and
other programs aimed at sharing these experiences and developing the skills of the
officials charged with dealing with corruption in their member countries.
Most of the efforts of international organizations are directed at the criminal-
ization of corruption. Only to the extent that bribery is punished as a crime can the
full government machinery, including police and the judiciary, be mobilized to fight
it. Most common forms of corruption, such as bribery of public officials, are a crim-
58 inal offense in most countries. Only the United States has enacted a statute specifi-
cally to criminalize international bribery. Regional international organizations,
INTERNATIONAL EFFORTS
such as the Organization of American States and the Council of Europe, are draft-
ing international conventions to establish minimum standards in defining corrup-
tion as a criminal offense. In addition, the OECD is drafting an international
convention whose signatories would criminalize international bribery of foreign
public officials.
As has been explained in the preceding chapters, the Bank’s efforts to help its
member countries combat corruption will focus on economic and policy reform and
institutional strengthening. These efforts will complement those of other interna-
tional organizations and business groups. The Bank’s borrowers can benefit from
the mutually reinforcing combination of the assistance the Bank is offering on eco-
nomic and sector reform and institutional strengthening and the assistance the
other organizations are offering on detecting and prosecuting corruption and
related matters.
Current international initiatives

Although corruption of national officials is a criminal offense in most countries,
transnational bribery generally is not. Making international corruption a crime will
require changing laws or adopting new ones, as well as mechanisms to enforce
them. Both will require parliamentary support and enforcement machinery. Except
for the United States, which adopted the Foreign Corrupt Practices Act in 1977,
countries have been reluctant to act unilaterally for fear of jeopardizing the
business interests of their nationals by subjecting them to more stringent standards
of behavior than their foreign competitors. International organizations provide a
forum in which to agree on common definitions and standards and to coordinate
actions. Regional organizations have sponsored international conventions making
bribery (including international bribery) a crime.The Bank will lend its voice in
support of these efforts.
The Organization of American States’ Convention. The most advanced effort
so far is the Organization of American States’ (OAS) Inter-American Convention
Against Corruption, adopted in Caracas, Venezuela, March 29, 1996. Twenty-three of
the OAS’ thirty-five members have signed the convention. The convention is now in
force between the countries that have ratified it: Bolivia, Costa Rica, Ecuador,
Mexico, Paraguay, Peru, and Venezuela. The convention is open to ratification by all
OAS member states, and any other state may accede to it. 59
INTERNATIONAL EFFORTS Building on the convention, the OAS General Assembly adopted a comprehen-
sive Plan Against Corruption at its meeting in Lima, Peru, in June 1997. Under this
plan the OAS will provide support to its member countries and cooperate with local
populations and other international organizations—including the Bank, the Inter-
American Development Bank (which is also preparing a plan of action), and the
OECD—in preventing and controlling corruption.
OECD Working Group on Bribery. The OECD initiative, begun in 1994,
encourages member states to end the tax deductibility of bribes and criminalize the
bribing of foreign officials. In 1996 the OECD Council adopted a recommendation
on ending tax deductibility for foreign bribery, and member states, within the
framework of their laws, are now amending legislation to reflect this recommenda-
tion. At its ministerial-level meeting in May 1997, the OECD Council endorsed the
Revised Recommendation on Combating Bribery in International Business
Transactions, prepared by the OECD Working Group on Corruption (in which the
Bank participates as an observer). In particular, the ministers reaffirmed their com-
mitment to criminalizing bribery of foreign public officials in an effective and coor-
dinated manner. They recommended that member countries submit criminalization
proposals to their legislative bodies by April 1, 1998, and seek their enactment by
the end of 1998. They also decided to open negotiations on a convention to be com-
pleted by the end of 1997 with a view to its entry into force as soon as possible in
1998. Ministers also urged the prompt implementation of the 1996 recommenda-
tion on ending tax deductibility for foreign bribery.
In related work, at the May 1996 High Level Meeting the OECD’s Development
Assistance Committee recommended that members “introduce or require anti-
corruption provisions governing bilateral aid-funded procurement.” Many countries
have followed the same path as the Bank in making more explicit the action that
will be taken if bribery is found.
The European Union. On May 21, 1997, the European Commission (EC)
adopted a Communication to the Council and the European Parliament on a Union
Policy against Corruption. This communication sets out the EC’s comprehensive
policy on corruption inside the EU as well as in its relations with nonmember coun-
tries. The communication deals with a wide range of actions, including the ratifica-
tion of conventions criminalizing the corruption of EC officials and officials of
member countries, eliminating the tax deductibility of bribes, reforming public pro-
60 curement, accounting, and auditing systems, and so on. In the case of nonmember
countries, the communication proposes to “establish a coherent anticorruption
strategy in the area of its cooperation with third countries which benefit from EC
assistance or have concluded cooperation or assistance agreements with the EC,”
and to establish special anticorruption programs, particularly in the applicant coun-
tries of Central and Eastern Europe.
The Council of Europe. The Council of Europe Programme of Action Against
Corruption, prepared by the Multidisciplinary Group on Corruption and adopted by
the Committee of Ministers in November 1996, serves as the basis for the prepara-
tion of a convention on corruption under which parties would agree to legislate (if
necessary) to criminalize certain corrupt behavior. In addition, the Multidisciplinary
Group on Corruption has undertaken work on the administrative and civil law
aspects of corruption. The Council of Europe also provides technical assistance to
its Eastern European member countries, and the Bank will participate in some of
its activities.
The United Nations. In December 1996 the United Nations (UN) General
Assembly adopted a Declaration against Corruption and Bribery in International
Commercial Transactions, as recommended by the UN Economic and Social
Council. Although not legally binding, the declaration’s wording on criminalizing
foreign bribery and ending its tax deductibility signifies broad political agreement in
the international community on this matter. In February 1996 the UN General
Assembly recommended that the Economic and Social Council take steps to prevent
illicit payments.
Financial Action Task Force. The Financial Action Task Force on Money
Laundering has been active in addressing money laundering and expanding the list
of offenses, including corruption, that constitute money laundering. The task force’s
forty recommendations include nondrug predicate offenses and require the crimi-
nalization of money laundering based on “serious offenses.” This recognizes that it
is practically impossible to distinguish between drug trafficking proceeds and their
laundering and any other type of dirty money. Each jurisdiction is responsible for
determining which crimes should be designated as money laundering offenses. This
opens the way for countries to include corruption as an offense. Originally targeted
at OECD countries, the forty recommendations are now also being addressed to
middle-income countries in the hope that governments adopt them and cooperate
with other authorities in international efforts to control money laundering. In this
way national efforts can be supported by international action and vice versa. 61
INTERNATIONAL EFFORTS International Business Initiatives. In March 1996 the International Chamber of
Commerce (ICC) issued revised Rules of Conduct to Combat Extortion and Bribery
in International Business Transactions. The rules prohibit extortion and bribery for
any purpose. They also recommend implementation of the 1994 OECD recommenda-
tion on curbing bribery in international business. The rules are not binding on ICC
members, but corporations may endorse them voluntarily. To promote the new rules,
the ICC has set up a standing committee of business executives, lawyers, and acade-
mics. ICC national committees mobilize support for the rules in their countries.
Nongovernmental organizations. NGOs around the world are participating in
the efforts of local governments and other entities to curb corruption. Among the
international NGOs, Transparency International (TI), based in Berlin, Germany,
aims to curb corruption through international and national coalitions encouraging
governments to establish and implement effective laws, policies, and anticorruption
programs; build public support for anticorruption programs and enhance public
transparency and accountability in international business transactions and public
procurement; and encourage all parties to international business transactions to
operate at the highest levels of integrity, guided by TI’s Standards of Conduct.
Transparency International has more than seventy national chapters that fight cor-
ruption at the national level, has contributed significantly to making corruption a
public issue in the press and elsewhere, and is cooperating with international orga-
nizations (including the Bank) in actions against corruption.
Bank actions at the international level

The Bank’s efforts to fight international corruption will focus on ensuring that its
member countries derive the greatest benefit from the synergy between its activities
and those of other international actors. To this end the Bank will work closely with
other development finance institutions and the IMF and bring its experience to bear
in deliberations with other organizations active in the fight against corruption. The
Bank will:
• Cooperate with the other multilateral development banks and with bilateral
donors by informing them of how it plans to help its member countries in this area,
and undertaking joint or coordinated activities as appropriate.
• Cooperate closely with the IMF, recognizing the complementary roles of the
Bank and the Fund, with each institution focusing on its area of expertise.
62 Especially important is the IMF’s work with member countries to establish sound
macroeconomic policies and strengthen government budgeting and financial man-
agement. Support for central bank supervision of the banking system is another
vital area, which complements the Bank’s work on financial policy.
• Continue to contribute to the work of the regional organizations engaged
in the fight against corruption, including the OECD, the Council of Europe, and
the OAS, and participate in technical assistance and other activities as appropriate.
• Develop and maintain contacts with other agencies active in this area, such
as the UN Development Programme, the UN Drug Control Program, the UN Center
for Crime Prevention and Control, the World Customs Organization, the World
Trade Organization, the Commonwealth Secretariat, and professional bodies such as
the International Commission of Jurists, the International Organization of Supreme
Audit Institutions, the International Bar Association and the International
Federation of Accountants, and the Financial Action Task Force, which coordinates
international efforts against money laundering.
• Consult with the business community to better understand its perspective
on corruption. For many firms bribery is a reality of the business environment.
How firms cope with corruption, the influence it has on business decisions, and the
measures they believe will be effective in controlling it are of considerable interest
to the Bank and its borrowers.
• Consult with NGOs to gain their insights and exchange views on the Bank’s
approach. The World Bank/NGO Committee can organize such consultations.
• Explain in the country dialogue how international efforts complement
domestic action. Borrowers embarking on domestic programs should know they are
not acting alone but are supported by international efforts to control transnational
bribery and money laundering. They will also be interested in the experiences of
other countries combating corruption.
• Use conferences and the media to explain the need to control fraud and
corruption and to maintain international public awareness of the Bank’s contribu-
tion to this effort. The Bank can explain the costs of corruption and actions coun-
tries can take to address its causes. In particular, the Bank is well placed to
demonstrate how economic policy reform can reduce rents and thus contribute sig-
nificantly to the control of corruption.
• Research transnational aspects of bribery. There is scope for empirical
research on the effects of corruption on foreign direct investment, trading patterns,
and the prices countries pay for imported goods. 63
CHAPTER 9
Concluding Thoughts
T
his final chapter offers some concluding thoughts as the Bank moves for-
ward in helping countries and international bodies address the problem
of corruption.
First, there is both a growing awareness of the costs of corruption
and a growing demand for Bank support for national and international efforts to
combat this problem. The time is right for a more active and higher profile Bank
role in this area, which respects the institution’s mandate and builds on its compar-
ative advantage.
Second, for the Bank anticorruption work is best thought of not as a set of
new initiatives but rather as a more explicit integration of the problem (of which
staff and management have long been aware) in country strategy formulation, Bank
lending, economic and sector work, research, and country dialogue.
Third, if the Bank is to help its member countries, it has some catching up to
do. It will have to learn more about what works and what does not in the fight
against corruption. Notwithstanding longstanding efforts to control corruption in
the projects it finances and a strong record of policy advice, the Bank is at an early
stage in building up the knowledge it requires to help countries develop and imple-
ment broader anticorruption strategies. This report provides a framework, not a
blueprint. This framework must now be filled in with research, policy work, project
design, country studies, open dialogue with governments, learning from country
experience, participation in international efforts, and interaction with other bodies
active in this field. The Bank’s new knowledge management systems will be crucial
64 in gathering and disseminating this information.
Fourth, while corruption has clear economic costs, it is also a dimension of
CONCLUDING THOUGHTS
the way power is exercised, and it is thus a sensitive issue of governance. Although
many governments are more open to discussing corruption than they were several
years ago, the subject still requires careful handling. Thus the Bank’s management
is not making a blanket recommendation for regional action plans. While this
approach may be appropriate for some regions, it is by no means the choice for all.
Nevertheless, corruption is no longer a taboo subject in the Bank, and it will be
dealt with in its operational work in ways that support borrowers’ development
objectives.
Fifth, institutions are central in the fight against corruption. Getting
economic policy right, enforcing laws, maintaining financial management systems,
and practicing sound procurement across the public sector require well-functioning
institutions. Seen in this way, corruption is as much a symptom as a cause of
malaise. The Bank needs to deepen its understanding of how institutions evolve and
of what external agencies can do to help countries develop strong institutions. It
needs to place more emphasis on high-quality public sector management and gov-
ernance work. This has implications for staff skills and for the resources the Bank
devotes to this area.
Finally, the Bank should not think of itself as working alone in this area. If
countries are to make progress in combating corruption, it will come about only
through national efforts that external agents like the Bank can support with policy
advice and financial resources. In providing this support, the Bank needs to develop
partnerships with other agencies and NGOs that are active in this area.
65
APPENDIX
The International Finance Corporation’s approach to combating fraud and

corruption in project finance
As the world’s largest source of financing for private sector projects in developing
countries, International Finance Corporation (IFC) is deeply concerned about the
potential for corruption in the projects it finances. In congruence with the World
Bank’s perspective, the IFC must act to fight corruption in order to retain the
confidence of its shareholders and the financial markets on which it relies.
Moreover, the avoidance of corruption is necessary to ensure that the IFC’s invest-
ments are successful, that its resources are being used effectively, and that its
developmental objectives are met.
The IFC’s strategy to combat corruption in its operations is concentrated in the
following two areas identified in the Bank’s strategy:
• Control of fraud and corruption in projects.
• Institutional strengthening.
The IFC’s efforts to combat corruption in the private sector will complement
those of the Bank in the public sector to the extent that the IFC’s activities focus
in the private sector.
Control of fraud and corruption in projects. The IFC controls fraud and cor-
ruption in the projects in which it invests by employing appropriate methods and
procedures at every stage of the investment process.
The IFC’s investment staff conduct a due diligence review of the individuals
involved and their primary businesses. On-site visits are made to both project and
nonproject installations to obtain a first-hand impression of the sponsor/operator
66 and its affiliated companies. The IFC generally will not invest in a project if it
does not know the identity of its partners, or if it believes that a sponsor/operator
APPENDIX
may be controlled by an undisclosed third party, or if the project may be
sponsored, directly or indirectly, by individuals holding public office.
Before making an investment, IFC staff perform an investment appraisal in
which the IFC must be persuaded that the interests of the sponsor/operator in
undertaking the project are compatible with those of other investors. The
appraisal must establish to the IFC’s satisfaction that the contractual
undertakings made to structure the project (such as supply, distribution, and off-
take agreements) do not unfairly benefit some of the parties to the transaction at
the expense of others. Each party’s share of the investment’s rewards must be
known by the IFC and judged to be commensurate with the risks taken and the
contributions made by the party. This analysis is a necessary step to uncovering
potential conflicts of interest, as a project typically brings together both strategic
and passive investors with different agendas and motivations.
The IFC’s first line of defense against corrupt costing is its extensive experi-
ence and familiarity with industry best practices, technologies, and capital costs
in a broad range of industrial sectors. The IFC’s project team of investment offi-
cers, engineers, and lawyers—which sometimes includes outside specialist con-
sultants—will be familiar with best practices, time to completion, and current
world prices of capital goods in the major industries. Thus the team can identify
significant price anomalies and distortions that may mask corrupt practices. The
IFC will not finance a project if material deviations from fair pricing cannot be
explained by specific, acceptable circumstances.
The IFC will not invest in a project if a lack of transparency in the awarding
of a concession or a contract makes it impossible to determine that business is
being conducted on an arm’s-length basis between a government and a project
company. At an early stage in the process of evaluating a proposed project—the
initial project summary—IFC management reviews the structure of the project
and examines the relationships between the parties. If a project is found wanting
in any of these areas, management directs staff to agree on improvements with
the various parties to the transaction.
After making its investments, the IFC supervises them closely and on a regu-
lar basis. The IFC consults periodically with the management of investee compa-
nies, sends field missions to visit the enterprises, and requires quarterly progress
reports during project implementation. In some projects a full-time, on-site 67
APPENDIX lender’s representative may be required during the project’s construction phase.
The IFC requires, in its capacity as lender, that investee companies provide it with
quarterly and annual financial statements (the latter are audited) and insurance
reports and give it direct access to the company’s external auditors for the
purpose of reviewing the company’s accounts, operations, and the management
letter.
The IFC’s direct presence and relationships in developing countries also aid
in supervision by alerting it to problems that may indicate the occurrence of a
corrupt practice in an IFC-financed project. Staff of the IFC’s resident and
regional missions assist in this process by maintaining direct contacts with vari-
ous government agencies, NGOs, and other parties in local financial business
communities. Outside counsel employed by the IFC to help prepare legal
documentation and negotiating terms and conditions for an IFC investment also
may transmit information to the IFC that they are uniquely positioned to obtain
because of their contacts in local legal and business communities.
Institutional Strengthening. The strengthening of institutions in developing
countries sometimes occurs as a secondary effect of the IFC’s efforts to control
fraud and corruption in projects. However, the IFC also engages in activities
whose primary purpose is to build and strengthen institutions—and these activi-
ties help combat corruption. In this regard the IFC advises its member
governments on how to create new institutions and strengthen existing institu-
tions so that disclosure and transparency in the conduct of financial transactions
will be improved and administrative discretion conducive to corruption will be
eliminated. The IFC’s Capital Markets Department plays an important role in this
area—for example, providing advisory services for the establishment of stock
exchanges and securities commissions in IFC member countries.
The IFC also combats corruption through operations of the Foreign
Investment Advisory Service (FIAS), a joint service of the IFC and the Bank. FIAS
works at the request of IFC member governments, helping them to build effective
institutional frameworks for investment promotion strategies and to interact with
potential foreign investors. FIAS helps governments achieve their foreign direct
investment objectives. Its advisory services seek to stimulate inflows of foreign
direct investment by creating a more favorable investment climate in the member
country. FIAS’s advice typically focuses on reforming laws, policies, and
68 procedures needed to increase those inflows.
The Multilateral Investment Guarantee Agency’s approach to combating fraud
APPENDIX
and corruption in guarantees
With a mandate to encourage the flows of foreign direct investment (FDI) to devel-
oping member countries and transition economies, the Multilateral Investment
Guarantee Agency (MIGA) has a natural interest in the issue of corruption as an
inhibitor of FDI flows. While there may not be hard and fast evidence on the role
corruption plays in deterring FDI, anecdotal evidence suggests that it is an impor-
tant factor. Companies are often concerned not only about the initial payments to
be made to make a deal but also about their inability to predict the scope and extent
of future possible payments. Moreover, as noted elsewhere in the report, companies
from some countries, such as the United States are prohibited from paying bribes or
offering other extraordinary incentives in order to make a deal. Thus they are at a
disadvantage in doing business in countries in which corruption is endemic.
MIGA’s focus on corruption comes through both its guarantees activity and its
technical assistance programs. In terms of guarantees, MIGA can cancel a contract
with an investor if it learns that the investor is not complying with the legislation of
the host country. Moreover, MIGA is not legally obliged to pay compensation on a
claim against its insurance if it can prove that the investor did not comply with the
laws of the country receiving the FDI.
As part of its technical assistance to member countries on attracting FDI,
MIGA’s technical assistance arm, Investment Marketing Services, includes corrup-
tion in its training sessions on attracting and retaining foreign investment. The
topic is treated under the heading of investor decisionmaking, stressing the need
for transparency and clearly identifying the payment of bribes as an important issue
that needs to be addressed.
69

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Helping Countries Combat

Poverty Reduction and Economic Management

2. Corruption and Economic Development 8

3. A Bank Strategy for Tackling Corruption 23

4. Controlling Corruption in Bank-financed Projects 29

5. Helping Countries Reform Economic and Sector Policies 35

7. Mainstreaming a Concern for Corruption in Bank Activities 48

Corruption and Economic

How do we define corruption?

CORRUPTION AND ECONOMIC DEVELOPMENT

CORRUPTION AND ECONOMIC DEVELOPMENT

What are the causes of corruption?

CORRUPTION AND ECONOMIC DEVELOPMENT

What do economics and political science tell us?

CORRUPTION AND ECONOMIC DEVELOPMENT

CORRUPTION AND ECONOMIC DEVELOPMENT

What is the Bank’s experience?

CORRUPTION AND ECONOMIC DEVELOPMENT

CORRUPTION AND ECONOMIC DEVELOPMENT

A Bank Strategy for

The Bank’s legal mandate

A BANK STRATEGY FOR TACKLING CORRUPTION

The Bank’s fiduciary responsibility

Helping countries combat corruption

A BANK STRATEGY FOR TACKLING CORRUPTION

Contributing to international efforts

CONTROLLING CORRUPTION IN BANK-FINANCED PROJECTS

Codes, pacts, and pledges

CONTROLLING CORRUPTION IN BANK-FINANCED PROJECTS

Helping Countries Reform

Deregulation and the expansion of markets

Policy advice when government continues to play a role

HELPING COUNTRIES REFORM ECONOMIC AND SECTOR POLICIES

HELPING COUNTRIES STRENGTHEN INSTITUTIONS

HELPING COUNTRIES STRENGTHEN INSTITUTIONS

Legal and judicial reform

Civil society and the media

HELPING COUNTRIES STRENGTHEN INSTITUTIONS

MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES

Country assistance strategies and the country dialogue

MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES

MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES

Procurement and financial management

External agency practices and public sector management

MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES

MAINSTREAMING A CONCERN FOR CORRUPTION IN BANK ACTIVITIES

Current international initiatives

Bank actions at the international level

The International Finance Corporation’s approach to combating fraud and

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