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Monday, 22 June 2009

World Bank corruption fight drags on

Bretton Woods Project

China lending to Sub-Saharan African countries and debt campaigners' increased emphasis on creditor responsibility poses new challenges for World Bank.

The impact of a rapid rise in Chinese lending to developing countries on anti-corruption efforts, and debt campaigners use of the corruption issue to highlight creditor responsibility for 'illegitimate lending' culminated in a stand-off between board members at the annual meeting of the World Bank and International Monetary Fund in September in Singapore, reports World Bank watchdog, the Bretton Woods Project in their latest issue.

The stand-off was led by the US and Japan who support the Bank's anti-corruption framework, against those who feel the framework jeopardises the development mandate of the Bank, including developing countries and several European board members, most notably the UK. Reports Bretton Woods: a six-hour board discussion ensued over two paragraphs of the Bank's final communiqué referring to the Bank's anti-corruption strategy, with discussion focusing on the extent to which the paper was finalised or still a work in progress. In the end, the block led by the UK gained the upper hand, with the communiqué stressing "the importance of Board oversight of the strategy as it is further developed."

On the issue of China, it is reported that China committed $8.1 billion to Sub-Saharan African countries this year compared with $2.3 billion pledged by the Bank. While recipient governments may see Chinese money as a windfall free from the meddling conditions of Western aid agencies, the World Bank has voiced concerns that corrupt regimes may turn to China to avoid facing anti-corruption measures or environmental and social safeguards.

Speaking ahead of a China-Africa summit held in Beijing in early November, Bank president Paul Wolfowitz said big Chinese banks "do not respect" the Equator Principles – a voluntary code of conduct pledging that projects financed by private bank lending will meet certain social
and environmental standards.

He said that though Chinese banks lending in Africa were "relatively new to this kind of activity, they must not make the same mistakes as France and the US did with Mobutu's Zaire." China's foreign ministry spokesman Liu Jianchao shot back, "in fact, [China's investment] benefits Africa's economic and social development."

Wolfowitz also said he was concerned about lending by China, Venezuela, India and others to poor countries that had benefited from debt relief: "There is a real risk of seeing countries which have benefited from debt relief become heavily indebted once more." In Bank parlance, this is called the 'free rider' problem.

New Bank policy means that poor countries which are found guilty of borrowing from 'free riding' creditors will be punished by having financing cut or made more expensive.

Bank watchers have criticised this approach for punishing poor borrowers while doing nothing to discipline 'opportunistic' lenders. Instead, they say the Bank and donor governments should focus on the systematic shortages in development finance.

The 'free rider' problem also exposes the failure of the international community to establish a fair and transparent arbitration procedure for debt workouts. If there was a way for future governments to question the legitimacy of past borrowing, all lenders – including the Chinese – would likely be more prudent.

Celine Tan, researcher at Warwick University's Centre for the Study of Globalisation and Regionalisation concludes that the measures proposed by the Bank to deal with the 'free riding' problem "are not only operationally flawed but represent instead new mechanisms to continue binding IDA countries to financing flows – and thereby financial discipline."

Meanwhile, all sides agree that the key to rooting out corruption is building better governance institutions; but what institutions and how to measure their effectiveness? Visiting London in October to discuss the Bank's strategy, Daniel Kaufmann, creator of the Bank's governance
assessments, said:

"The call for additional indicators is fine, but let's not get into the pitfall of not using the good things that exist." However, an OECD report published in August suggests severe problems with the construction and use of the Bank's governance indicators, including correlation errors, lack of comparability over time, sample bias, and insufficient transparency.

This may lead the Bank to listen to the "modest proposal" of Cornell University economist Ravi Kanbur to introduce outcomes-based indicators in its governance assessments, a suggestion put forward by the Bretton Woods Project in 2004.

Kanbur argues for the inclusion of a new category of scoring which should evaluate "the evolution of an actual development outcome variable" such as one of the Millennium Development Goal indicators.

On the topic of illegitimate lending, debt campaigners have maintained that northern donors must accept responsibility where they have knowingly entered into loan arrangements which were used for corrupt or other illegitimate purposes, the Bretton Woods report notes.

Referring to the Norwegian government's unconditional cancellation of $80 million in "illegitimate debts" owed by Egypt, Ecuador, Peru, Jamaica and Sierra Leone, the report claims that debt campaigners will use the Norwegian decision to put pressure on other bilateral and multilateral donors to audit their past lending practices. Norway, the report notes, has established a fund for the World Bank to undertake a study of illegitimate debt.

According to Bretton Woods, the arguments will be used to put pressure on donors to cancel Liberia's debts. Jubilee USA claims that Liberian arrears to the World Bank and IMF – made up of lending to the country's former dictator Samuel Doe – amount to more than $1.5 billion

Source:Probe International

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