World Bank, IMF Taking Steps Against Corruption

Mexicans once smiled about the prevalence of corruption in their society, so much so that a bakery ran a television ad 25 years ago that depicted a motorcycle policeman stopping a motorist for a bribe.

“When he asks you for a mordida,” said the announcer, playing on the Mexican word for bribe that literally means “bite,” “give him our bread.”

No one runs such ads in Mexico anymore. Corruption is no longer a joke. “We used to say that corruption greased the bureaucratic system in Mexico and made it work better,” says Mexican journalist Cesar Romero. “But now we see that it is drowning the system.”

Mexico is not alone. Corruption has become so endemic in developing nations and elsewhere that the World Bank and the International Monetary Fund have decided to tackle the issue head-on.

These two pillars of the world’s financial and economic development systems, which have tried for half a century to stay out of the internal politics of nations, have concluded that corruption has grown too large to ignore.

The two institutions have adopted guidelines under which they can refuse to pay for or lend to programs or governments tainted by corruption, while doing what they can to help those countries fight the abuses.

While that step may seem like little more than a dose of long-overdue common sense, it is a major shift for institutions that operate in an arena where corruption is so commonplace that many nations allow businesses to take tax deductions for bribes they pay.

“In country after country, it is the people who are demanding action on this issue,” World Bank President James D. Wolfensohn said a year ago in a surprise announcement signaling the campaign against corruption. “They know that corruption diverts resources from the poor to the rich, increases the cost of running businesses, distorts public expenditures and deters foreign investors.”

Kenya felt the castigation first. The IMF, an agency that shores up the currency of countries through loans and other aid, suspended a $220-million loan to Kenya in August because of a scandal in the gold and diamond export trade.

The government, as part of a program encouraging exports, had paid almost $90 million in subsidies to a firm for supposed exports of gold and diamonds to Dubai and Switzerland. These exports did not exist, however, and the $90-million disbursed amounted to embezzlement.

IMF officials were also furious that the Kenya government had fired its commissioner of customs and excises after he began investigating the smuggling of a massive amount of sugar into the country by a member of parliament, who had thus cheated the government of a fortune in lost duties.

The IMF action hurt Kenya’s economy, sending the Kenyan shilling down 18% and raising the price of all imported goods.

Shortly after the IMF acted, the World Bank suspended a $76-million loan to Kenya for energy development because it could not ensure that contracts would be awarded fairly and openly.

World Bank suspicions were aroused by the Kenyan government’s awarding of the first two emergency contracts under the loan for the construction of diesel plants to relieve the country’s severe power shortages. The World Bank could not figure out why the government chose the contractors it did. Bribery was suspected.

Masood Ahmed, who heads the World Bank campaign against corruption, said the bank took the action not out of moral outrage but out of a practical assessment of the chances for the project to succeed.

“What we are now saying is that corruption is one of the reasons that projects don’t meet their objectives,” Ahmed said. “It’s not because we have a moral view on this. . . . In Kenya, we just couldn’t be sure that the funds could achieve the objectives they were supposed to.”

For years, the World Bank and IMF steered clear of interfering in the internal politics of the countries receiving aid. The new anti-corruption campaign is sure to make some governments feel that the two international agencies have started to meddle.

But World Bank and IMF officials deny this. They insist that battling corruption is an economic issue, not a political one.

In the 1970s and early 1980s, some economists argued that corruption could speed up the bureaucracies of Third World countries and make them more efficient. But as corruption grew from small change to huge operations, many economists began to see it as an impediment to development. On top of this, many investors, finding it easier to deal with honest bureaucrats, now tend to avoid corrupt societies.

The world’s most corrupt nations today are Nigeria, Bolivia, Colombia, Russia, Pakistan and Mexico, according to Transparency International, a private organization formed in 1993 to assess the degree of corruption throughout the world based on the perception of international businesspeople.

In Nigeria, for example, one study says that $12.2 billion of government revenue from 1988 to 1994 was diverted to “extra-budgetary accounts” for which there are no records. In short, billions of dollars that should have been spent on the public good probably ended up in the pockets of corrupt officials.

To discourage this kind of abuse, the Organization for Economic Cooperation and Development (OECD), made up of the most industrialized countries, has recommended that its members make it illegal for their businesspeople to pay bribes to foreign bureaucrats. That would put them in line with U.S. law. At present, however, half of the OECD countries allow businesspeople to deduct the cost of bribes on their tax returns.

While World Bank and IMF officials say it is their duty to try to address corruption, their new guidelines may prove more striking in rhetoric than in action--and may be fraught with contradictions.

It is easier, for example, to bully a faraway country like Kenya than a more strategically located country like Mexico. So far, no other country besides Kenya has been punished.

In August, the executive board of the IMF issued guidelines urging its worldwide staff to strengthen “the hands of those in the government seeking to improve governance.”

But some IMF fieldworkers are troubled. “I really don’t know what to do with the guidelines,” said one. “We all know that two of the biggest loans go to Mexico and Thailand, two of the world’s most corrupt countries. And we all know that no one is going to punish them.”

No international official, the field worker continued, wants to take steps that might chop down the value of the currency of these countries, cripple their economies and destabilize their regions.

The World Bank’s approach is to punish sparingly, preferring instead to provide countries with assistance to develop better accounting services and decrease government control of the economy.

Accordingly, the World Bank this year disbursed loans to modernize auditing and financial management in Bolivia, improve the legal system in Russia, make regulation of financial markets more efficient in Colombia and allow the public more scrutiny of auditing procedures in Pakistan.

Many officials believe that those steps and others have struck a significant blow against corruption--simply by raising the issue.

Times staff writer Ann Simmons in Nairobi contributed to this report.