World Bank finds corruption is costing billions in lost development power

While the U.S. Senate Foreign Relations Committee has been inquiring into combating corruption in the multilateral development banks, the World Bank has been attempting to compute the scale and cost of widespread corruption in the developing countries.

This is against a background where the Bank acknowledges that the current levels of aid required to meet the major developmental challenges as set out in the Millennium Development Goals are inadequate and that a significant scaling up in aid is required.

The counterpart of this is action against firms found to have violated the fraud and corruption provisions of the Bank’s procurement guidelines. The Senate hearings seem to have had some influence on the timing if not the substance of such disbarments: a few days before chairman Senator Richard Lugar held the first of three hearings on the affairs of the multilateral development banks (2004-05-13), the World Bank issued letters of rebuke and disbarment for one, two or three years against more than 40 Indonesian contractors and suppliers. n every one of the 42 cases the cause of the trouble was a breach of the Bank’s procurement guidelines. In each case the operative date was 2004-05-12.

Likewise the three-year disbarment notice issued to Acres International was announced just before Senator Lugar held his second inquiry hearing on 2004-07-21.

The third such hearing was due for 2004-09-28 but its effectiveness was curtailed by the last-minute withdrawal of witness statements by the European Bank for Reconstruction and Development and the Asian Development Bank. Previously the Presidents of the World Bank, the Inter-American Development Bank and the African Development Bank declined invitations to testify before the Senate Foreign Relations Committee.

The main purpose of these hearings as Senator Lugar expressed it was to give his committee an opportunity to examine ways in which the United States Congress and Government could contribute to the anti-corruption efforts already under way.

From the refusals of their chiefs to appear before the committee it would appear that the banks are none too keen on accepting help from this quarter. Meanwhile Senator Lugar is anxious to know how the development banks’ ability to limit the misuse of loans can be improved and to ensure that audits are conducted in a thorough manner.

Annual bribery toll of $1,000 billion

Questioned about the cost of corruption, Daniel Kaufman, the World Bank Institute’s global governance director, said that until very recently it was virtually impossible to venture an estimate of the extent of annual corrupt transactions.

In fact, he said, only a few years ago, corruption was regarded as impossible to measure. But thanks to the explosion in measurement approaches and actual data in this field, it is now possible to estimate rough orders of magnitude. The focus is on measuring the extent of bribery from the private sector to the public sector.

“A conservative approach to such measurement”, said Mr. Kaufman, “gives an estimate for annual worldwide bribery of about U.S. $1,000 billion. We obtain figures on bribes from worldwide surveys of enterprises, which ask questions about bribes paid for the operations of the firm (licences, regulations, etc), as well as bribes paid to get favourable decisions on public procurement.

Further, an estimate of bribes paid by household users of public services is derived from governance and ant-corruption diagnostic surveys. “There is a margin of error in all these estimates”, he went on. “So we should regard them as preliminary orders of magnitude. But the main point is that this is not a relatively small phenomenon of a few billion dollars “far from it.”

Moreover, Mr. Kaufman added, the $1,000 billion estimate does not include the extent of embezzlement in the public sector. “While there are no worldwide estimates of embezzled funds, we do know that it is a very serious issue in many settings. We do know that in countries where there is widespread corruption, embezzlement [theft of money placed in trust] can be a serious problem.

“For instance, focusing exclusively on the top leadership, Transparency International estimates that Suharto embezzled anywhere between US$ 15-35 billions in Indonesia, while Marcos in the Philippines, Mobutu in Zaire and Abacha in Nigeria may have embezzled up to US$ 5 billion each.

“Furthermore, the $1,000 billion estimate does not include the full extent of ‘tainted procurement’, but only the bribe fees associated with such procurement. While the estimates of bribery exchanging hands for public procurement bids can be estimated in the vicinity of US$200 billion per year, the overall annual volume estimate of the ‘tainted procurement’ projects may be close to US$1,500 billion or so. Finally, there is no attempt to include the extent of fraud within the private sector, but only bribery transactions between the private and public sectors.”

He added that the $1,000 billion estimate for worldwide annual bribery does not include bribes between firms or public officials and politicians in the industrialised world, nor between multinational corporations and the public sector in emerging economies. Nor does it account for significant losses in investment, development and economic growth.

Economic gains from good governance

Mr. Kaufman said that World Bank research had revealed a 400 per cent governance dividend where there was good governance and corruption was under control. Countries that improve on corruption and the rule of law could expect in the long run a four-fold average increase in incomes per capita. Thus a country with income per capita of US$2,000 could expect to attain $8,000 in the long run by making strides in controlling corruption. Similarly, such a country could expect on average a 75 per cent reduction in child mortality.

“We have also found” he said, “that the business sector grows significantly faster where corruption is lower, and property rights and the rule of law are safeguarded. On average, it can make a difference of about 3 per cent per year in annual growth for the enterprises.”

Another way of looking at the problem is that corruption and bribery is a regressive tax. Not only do smaller enterprises pay a higher share of their revenue in bribes than their larger counterparts, but poorer households bear a disproportionate share of the burden, often paying for public services they expected to be provided free of charge.

In the course of these inquiries, the World Bank has also found out more about the phenomenon of ‘state capture’ by which powerful corporations exert undue influence on State institutions, its laws, regulations and policies, often through illicit means.

To balance this, Mr. Kaufman said that many multinational and domestic corporations were making a contribution to good governance and integrity, and were prepared to work with governments to have an investment climate with less corruption.

The Bank is currently working on an ambitious program to curb corruption in Indonesia where the practice is said to be ingrained at all levels of the system. “Even government Ministers talk openly to the press of the problem of corruption”, said Joe Hellman, leader of the project. “There has been a general feeling of, where do you begin?” The Bank is hoping to capitalise on Indonesia’s program of decentralising power to more than 400 local governments, wherever local administrators can be found receptive to improving governance outcomes and tackling systemic corruption.

The Chartered Institute of Building (CIOB), September 29, 2004

Categories: Corruption, Odious Debts

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