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THE FIGHT AGAINST CORRUPTION IN LATIN AMERICA AND THE CARIBBEAN: A WORLD BANK VIEW

(Presented by Mr. Geoffrey Shepherd, Latin America and the Caribbean Region, The World Bank)


Paper Prepared for
The Symposium on Enhancement of Probity in the Hemisphere
November 4-6, 1998
Santiago, Chile

Synopsis

Corruption occurs at the confluence of individual motivations to behave corruptly and opportunities for misuse of public resources. Civil-society institutions operate more strongly in the area of motivation and national governments and international agencies like the World Bank in the area of opportunities (and the policies and institutions that control them).

Many Latin American countries suffer from substantial amounts of corruption. But democratization and economic reform in the region give hope for progress in the fight against corruption.

Corruption is costly to development: it undermines the rule of law, wastes resources, discourages investment and raises the cost of doing business. It is particularly injurious to the poor. And it undermines development assistance.

Endemic corruption is part of a broader and deeper problem of lack of rule of law, and solutions will need to be correspondingly broad-based and long-term. But in the shorter term, governments can fight corruption by:

- Promoting clear property rights and competitive markets (minimizing unnecessary government interventions also minimizes the "premia' that corrupt officials can control);
- Encouraging better governance through market regulation (where this is necessary) and by promoting reforms in the public administration and the judiciary.

The World Bank has recently made a strong commitment to fighting corruption. It has adopted a four-pronged strategy of:

-Preventing malpractice in its own projects;
-Helping with relevant economic and institutional reforms where countries request it;
-Explicitly addressing corruption in the Bank's strategies for, and its dialogue with, client countries;
-Contributing to international initiatives to reduce corruption.

For some time the Bank has been extensively involved in public-sector reform efforts (privatization, decentralization, financial management, tax administration, civil-service and judicial reform) in Latin American and Caribbean countries. These have a direct impact on corruption.

The Bank is now increasingly involved, in the countries of the region, in more direct efforts to stem corruption through the aforesaid four-pronged strategy.


The Fight Against Corruption in Latin America and the Caribbean:
A World Bank View


Introduction: Corruption in Latin America and the Caribbean


Corruption -- the abuse of public office for private gain -- occurs at the intersection of individual and social forces. Corruption occurs when individuals are motivated to act unethically on the one hand, and the opportunity for corruption -- the availability of public resources or public favors for the taking -- is presented on the other.

No country is free of corruption, but its impact varies greatly across the world. It is typically higher in poorer countries. In several independent surveys of domestic and foreign firms' perceptions of levels of corruption, developing countries and transition countries register higher levels of corruption than OECD countries. Latin American countries have typically been perceived as being more corrupt than East Asian countries, but comparable to other developing and transitional countries. (See, for example, Figure 1 reproducing a corruption perception index constructed from survey data by Transparency International, a non-governmental organization.) There is, moreover, a broad range of perceived levels of corruption among Latin American countries.

But Latin America and the Caribbean also provide fertile ground for progress in the fight against corruption. Since the 1980s, profound political and economic reforms have gone hand in hand in the region. The region has seen a resurgence of democracy, accompanied by an extensive decentralization of power to lower levels of government. Ordinary citizens are demanding a public sector more responsive to their needs, better able to account for what it is doing, and able to incorporate civil society into some of its decision-making processes.

Figure 1
Transparency International
1997 Corruption Perception Index
(Higher index values indicate lower levels of corruption)


OECD
Countries

OTHER
Countries

LATIN AMERICAN
Countries


Intertwined with democratization has been a wave of economic reform which stabilized the economy, deregulated much economic activity, and began to remove a bloated state from many spheres of direct involvement in the economy.

This paper provides an overview of the costs that corruption imposes on development. The paper asks what governments (and, by extension, aid agencies like the World Bank) can do to fight corruption. It then describes the Bank's growing commitment to tackle the issue of corruption and provides some examples of how the Bank has been contributing indirectly in the Latin America and Caribbean region by assisting public sector reform and how a strategy is now evolving to contribute more directly to the fight against corruption.

The economic and social costs of corruption

Corruption imposes massive costs on countries and ordinary citizens. First, it corrodes public institutions by subverting laws, regulations and institutional checks and balances. Consequently, it undermines the legitimacy and credibility of the state, causing serious problems in governance. Second, it affects macro-economic stability by encouraging wasteful, ineffective government expenditures and tax evasion. Third, it discourages investment, especially foreign direct investment. It has been estimated that the ratio of investment to GDP is 16 percent lower in countries with high and unpredictable levels of corruption than those with low levels of corruption. Fourth, corruption raises the cost of doing business. In a World bank survey of 3,600 firms in 69 countries, more than 40 percent of entrepreneurs reported having to pay bribes routinely to get things done. In addition to the financial burden it imposes, corruption also leads to other inefficiencies by entangling firms in time-consuming and economically unproductive interactions with the public sector.

As a result, of these factors, corruption obstructs economic growth and development. Also, countries with high levels of corruption face a serious risk of marginalization in the global economy. Unfortunately, the burden of corruption falls disproportionately on the poor. The siphoning off of public resources for private gain dries up anti-poverty programs, while the demand for bribes effectively shuts off the poor from access to public goods and services.

From the point of view of international development agencies such as the World Bank, corruption reduces the development impact of international assistance to developing countries. At the same time, the perception, that in many developing countries aid resources are misappropriated by corrupt public officials, weakens the long-standing consensus on aid programs.

Corruption: What is the Way Forward?

Corruption is not an independent phenomenon, but a sign of broader governance problems. Where investors perceive corruption problems, they also typically perceive greater risks of doing business because of unpredictable changes in policies and laws, more insecure property rights, more unreliable judiciaries, and poorer bureaucracies. In short, corruption is associated with a broader weakness in the rule of law.

There is much that we still do not know about the roots of corruption and poor governance, but this deep-rootedness of corruption indicates that solutions must be correspondingly broad, that they will take a long time, and that progress in the fight against corruption will be difficult and irregular. The rule of law is likely to be fostered by fundamental political changes which go in the direction of increased democratic participation, better public information, and better government accountability. Such changes are brought about by society as a whole, not just by governments. Short cuts in this process will be difficult: for instance, narrowly focused initiatives, such as anti-corruption laws or commissions, are less likely to take root where the rule of law is weak.

But this is not to say that countries are condemned to being passive about corruption. Governments can act, and are acting, in several areas.

First, promoting private ownership of productive resources and allowing competitive markets to work reduces the opportunity for corruption because it removes the discretion that public officials wield. For instance, the central licensing of foreign exchange formerly practiced by many Latin American countries often created an artificial scarcity of foreign exchange leading to black markets and huge "premia" which led to substantial corruption. State ownership of firms, in many countries, allowed public officials to use public resources for private ends, rather than serve the public interest. Latin America has made much progress in reducing these kinds of distortions, but there is still substantial room for further reforms by reducing levels of protection, eliminating privileges and inequalities in trade and tax regimes, simplifying rules, reducing, where possible, the discretion of public officials, and further privatizing state-owned firms.

Second, a more honest and capable state is necessary, not only to ensure that the strong do not exploit the weak in a regime of private markets and property, but also to provide the public services that underpin the rule of law and provide services that help the less privileged.

The World Bank and the Fight Against Corruption

The Bank has a long history of supporting economic policies and projects in developing countries that have indirectly helped reduce corruption. Also, it has always been concerned with controlling fraud and corruption in projects financed by it. However, given the seriousness of the problem, the Bank has recently decided to deal with corruption explicitly and make the fight against it an important part of its development agenda. Accordingly, in his speech to the World Bank's Board of Governors, in October 1997, the Bank's President, Mr. Wolfensohn emphasized the need to deal with the cancer of corruption and offered the Bank Group's assistance to our member countries to implement national programs to discourage corrupt practices. He reiterated this commitment in the Keynote address delivered at the Eighth International Anti-corruption Conference, in Lima, Peru, in September 1997. Combating corruption has also been included as one of the key elements in the World Bank's Strategic Compact to Renew the Bank's Effectiveness to Fight Poverty.

The Bank recently undertook an in-depth study of corruption with a view to developing an institutional strategy to deal with it. The report, Helping Countries Combat Corruption: The Role of the World Bank, published last year, proposes a four-pronged strategy including:

The World Bank and Public-Sector Reform in Latin America and the Caribbean

The Bank has, for many years, been assisting its member countries in the Latin America and Caribbean region to modernize the State. Spurred by fiscal crises, the imperatives of globalization and rising expectations created by the democratization process, most countries of the region have carried out major economic policy reforms, involving structural adjustment, economic liberalization, and deregulation. By removing distortions in economic policy, the reforms have helped these countries in making a transition to a market economy. They have also helped close a number of avenues for corruption.

In parallel with economic policy reforms, the Bank has been at the forefront of efforts to strength institutional capacity of the public sector (See Figure 2 which provides an indicative listing of countries and areas where the Bank has assisted public sector reforms). Several countries have carried out impressive programs of privatization to match the scope of the public sector to its capability and comparative advantage. Some countries are contracting out services in areas where, although the State has responsibility for providing the services, these services can be purchased competitively from the private sector. Further, in an effort to take government closer to the people and improve service delivery at the local level, a number of countries of the region are decentralizing responsibilities to regional and municipal governments, accompanied by substantial transfer of resources.

The Bank is also helping countries improve public financial management. Many countries are making efforts to reform the budgeting and investment processes to improve the quality of public spending decisions. The Bank is assisting a few countries to put in place a system for regular evaluation of policies, programs and projects to link policy-making, implementation and evaluation in a virtuous cycle. Integrated Financial Management Systems are being implemented and audit institutions are being strengthened in a number of countries to enhance transparency and accountability in public expenditure management. In order to ensure value for money and reduce possibilities of fraud and corruption in public procurement of goods and services, many countries are strengthening their laws and procedures relating to procurement and contracting.

Several countries have launched extensive efforts to modernize tax and customs administrations in order to improve resource mobilization. Some countries of the Region are actively trying to adapt concepts underlying public sector reforms carried out by the UK and

Figure 2
Public Sector Reforms in Latin America and the Caribbean:
An Indicative Listing of Reforms Supported by the Bank

Arge.

Chile

Brazil

Bolivia

Colom.

Vene.

Ecuador

Peru

Nica.

Guate.

Mexico

Jamaica

Privatization

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Contracting Out

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Decentralization

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Executive Agencies

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Public
Financial
Management

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Internal Audit and Independent Audit strengthening

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Tax and Customs Administration Reform

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Judicial Reform

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Civil Service Reform

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Procurement Reform

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Evaluation System

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New Zealand in order to increase contestability in the functioning of core government entities and create results-oriented, autonomous executive agencies. Several countries have down-sized their public services and undertaken reforms to strengthen their civil services. To improve the judiciary's capacity to enforce laws and resolve disputes expeditiously, innovative judicial reform projects are being undertaken. Finally, various initiatives have been taken to improve the legal and regulatory framework to facilitate the development of a robust and competitive private sector.

All these reform efforts have, no doubt, reduced opportunities for extracting rents, fostered competition and enhanced the degree of openness and accountability in the public sector. Thus, although fighting corruption was not the explicit objective of most of these reforms, they have diminished the scope for corruption, while strengthening mechanisms for its prevention and detection.

Notwithstanding these efforts, corruption continues to be a serious problem for the countries of region, as it is for many countries in other parts of the world. In order to overcome it, we need to sharpen existing strategies for the reform of the state, venture into new areas and mobilize allies within and outside the public sector.

The Bank's Emerging Anti-corruption Agenda for Latin America and the Caribbean

In line with its global anti-corruption strategy, the Bank has undertaken a number of initiatives to help in the fight against corruption in the region.

To minimize the scope of corruption in the projects it finances, the Bank is being meticulous in implementing its guidelines relating to project financial management, auditing and procurement. The Bank's capacity to ensure the full discharge of its fiduciary responsibilities relating to its projects has also been augmented by recruitment of specialists in financial management and procurement.

In response to requests for assistance in anti-corruption efforts, the Bank has approved an Institutional Development Fund (IDF) Grant for Colombia. A study to develop strategies for preventing and controlling corruption in the Colombian tax and customs administration has already been initiated. The Economic Development Institute (EDI) of the Bank is in the process of facilitating a National Integrity Workshop in Bolivia to develop a National Integrity Plan (see Box). Similar activities at the local and regional levels are being planned for Nicaragua, and the province of Mendoza in Argentina. A conference on "Building a Better Public Sector in Mexico" was organized recently. Countering corruption within the Mexican Public Sector was one of the major themes of the conference. In addition, Bank projects pertaining to public sector management have begun to incorporate specific anti-corruption features in their design. Leading examples are the Bolivia: Financial Decentralization and Accountability Project; Guatemala: Judicial Reform Project (under preparation); and the Bolivia Institutional Reform Project (under preparation).

The Bank's concern for corruption is also being incorporated in the policy dialogue and analytical work being undertaken by the Latin America and Caribbean Region. In 1997, the Region published a study, The Long March, which set forth its view on the remaining economic reform agenda for the region. Anti-corruption figured, along with judicial reform and public sector reform, as one of the several "institutional" reform priorities. The recent Country Assistance Strategy for Colombia has promotion of transparency and integrity in the management of public affairs as one of its Strategic Objectives. This is proposed to be achieved, inter alia, through the Anti-corruption IDF Grant mentioned above. Similarly, the Bolivia Country Assistance Strategy also includes reduction of corruption as a major strategic objective.

The Region has been vigorously supporting international efforts, such as the Eighth International Anti-corruption Conference in Lima, to intensify the fight against corruption. The conference was addressed both by Mr. Wolfensohn and Mr. Shahid Javed Burki, Regional Vice President.

Box 1:
Bolivia's National Integrity System

The new government that came to office in August 1997 has made the fight against corruption one of its major priorities. The EDI is helping the Government organize a National Integrity Workshop (NIW) designed to develop a wide national consensus on the need to control corruption and the specific actions required for the purpose.

In preparation of the NIW, two Ministerial workshops were held in November 1997 to discuss the problems facing Bolivia in building a National Integrity System and the experience of other Latin American Countries in curbing corruption. To gather information about the nature and intensity of the problem, two extensive surveys have just been concluded. The National Household Survey covered 6, 851 households and the Private Sector Integrity Survey sampled 1,599 firms. These surveys sought to: determine the perceptions of the public and the private sector about corruption in the public sector; identify public services where the problem was perceived to be the severest; and establish baselines to measure future progress.

The NIW, with participants drawn from the Government, the Congress, the Judiciary, the Office of the Auditor General, the private sector, the media, and civil society will be held in 1998. It is expected that its deliberations will result in a National Integrity Action Plan. The implementation of the Action Plan would be supported, inter alia, by an Institutional Reform Project under preparation.


Concluding Remarks

Minimizing the corrosive impact of corruption on society in Latin America and the Caribbean is a big challenge, and one that will not be answered overnight. But progress is being made. This can be seen not only in the important political and economic reforms that governments have been undertaking in Latin America, but also in the growing efforts of civil society and the international aid community to enter the struggle. It is in this spirit that the World Bank's places great importance on making a continuing common cause with governments, which have a central role in controlling the opportunities for corruption, and the institutions of civil society, which are central to helping change the way people behave. 

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