The Next Big Scandal: Foreign Aid is Fueling Corruption

As you read this commentary, a highly predictable scandal is developing that may embarrass leaders, including President Bush, British Prime Minister Blair, and other heads of government, severely damage the reputations, or worse, of many bureaucrats, and cost American and European taxpayers billions.

A summit meeting of the leaders of the “G8” nations (U.S., U.K., France, Germany, Russia, Japan, Italy, and Canada) was held last July in Gleneagles, Scotland. The major decision of the summit, widely applauded by the world's press, was to write off the debts of many highly indebted poor countries, most of which are in Africa.

Writeoff of these debts owed to the International Monetary Fund, World Bank and governments was justified because many of these poor countries were unable to repay them, and in many cases the debts were incurred by corrupt rulers who used the money for their own pleasures. Thus the borrowed funds did not benefit the people now obligated to make repayment.

To ensure the cycle was not repeated, the indebted countries were required to make reforms, including government accounts’ transparency and leave their corrupt ways behind.

In addition to writing off the debts, the G8 nations and their allies committed to greatly increase development aid and other forms of government assistance to these poor nations.

Most serious analysts of the failures of development aid, including a number of government commissions, not only identified corruption in recipient governments as a reason the aid programs failed but, in fact, found the projects actually fueled additional corruption and increased the plight of the people. The only responsible course the donor nations could take was to make future aid and debt writeoff conditional on first cleaning up corruption.

Hence, the IMF, World Bank and the donor nations were charged with certifying that the debtor nations had cleaned up their acts before relief was provided.

Now, for the developing scandal: Many nations slated for debt relief have nowhere nearly purged themselves of massive corruption. Nevertheless, they pressure for relief by charging the “rich nations are not fulfilling their obligations” or by directly lobbying (and perhaps even bribing) those who make the actual decisions about debt relief.

The poster child for this bad behavior is the Republic of Congo (not to be confused with the larger Democratic Republic of Congo next door). Despite articles in the international media about continuing massive corruption in Congo – certified by U.K. High Court judgments – there are reports U.S. and European governments are likely to give this corrupt African nation a pass in the next few weeks.

Anti-corruption organizations, such as Global Witness and Publish What You Pay (a coalition of 280 NGOs), oppose Congo’s petition for debt relief, because it is corrupt, impoverishes its people and probably no longer meets the definition of a “Highly Indebted Poor Country.” Congo claims it meets the definition based on 2003 income data; but most of its income derives from oil. Given the massive increase in oil prices of the last two years, shipping records show the country’s gross income is up about fourfold. If the IMF, World Bank, U.S. and European governments accept the 2003 data, they will be complicit in the Enronization of development aid.

The independent auditors, KPMG, cannot certify Congo’s accounts because the country will not provide access to books and records; and it appears about a third of the oil revenue has not been properly accounted for. Congo’s prime minister admitted after the London court judgments use of “unorthodox” accounting procedures (i.e., theft).

To no great surprise, the French are behind the effort to certify Congo, because it is a French client state, the French oil company “Total” lifts most of the oil, and France has other strong commercial and banking interests there.

If the U.S. and European countries certify Congo for debt relief, the scandal is likely to play out as follows: There will be many more press stories about how a highly corrupt regime (and there may be others) was given debt relief, greatly undermining the anti-corruption efforts in development aid, while costing the European and American taxpayers tens of billions of dollars. (Another oil-for-food type scandal – but this time directly implicating the U.S. and European governments.)

The political opposition in each country will have an incentive to paint as corrupt those in their own governments who sold out the impoverished people in Africa. In the U.S., the Democrats will almost certainly call for congressional hearings and use Congo as part of their campaign theme that the Republicans are fostering a “culture of corruption” and do not care about poor blacks in both Africa and America.

The Bush administration still can come out as the clean hero by publicly rejecting Congo’s petition, and serving notice debt relief and additional aid will not be given to corrupt governments. We now watch a real world thriller, where in a matter of weeks, we will know whether the good guys or bad guys win. I, for one, am not ready to place my bet.

This article was originally published in the Washington Times on February 16, 2006.

And More On the World Bank's New President in yesterday's WP

The Washington Post

Wolfowitz's Corruption Agenda

By Sebastian Mallaby

Monday, February 20, 2006;

Nine months into his tenure as president of the World Bank, Paul Wolfowitz has made headlines mainly by provoking a staff backlash. Neoconservative commissars are seizing control! (Actually, Wolfowitz has a grand total of four Republicans in his entourage.) The World Bank's agenda is being hijacked by a Bush man! (Actually, Wolfowitz has resisted the Bush administration's bad policies on debt relief and climate change.) The previous World Bank president, James Wolfensohn, made no secret of his intention to blow up the institution when he arrived in 1995. Wolfowitz's accession has been comparatively mild, but his reputation as the architect of the Iraq war colors the response to him.

Meanwhile, the staff backlash is obscuring something interesting. In the past few months, there have been hints of fresh thinking on corruption. Now the evidence has reached critical mass: The change appears to be genuine.

First, a bit of context. The World Bank used to avoid all mention of corruption, believing it should stay out of "politics." This was absurd: The bank had long been telling borrowers how to structure their budgets -- a clearly political subject -- and corruption can't be separated from the bank's development mission. Then, with the arrival of the bomb-throwing Wolfensohn, things began to change. Wolfensohn denounced the "cancer of corruption" in 1996; and the bank's even bomb-happier chief economist, the Nobel laureate Joe Stiglitz, gave speeches attacking the narrow economic understanding of development and proclaiming the centrality of politics.

Speeches are one thing, action quite another. The Wolfensohn bank developed state-of-the-art corruption indexes, which are now used by the U.S. government to identify which countries deserve extra foreign assistance; it created a department to investigate malfeasance in bank projects. But the anti-corruption unit was understaffed and ineffectual, and the bank did not build on Wolfensohn's cancer talk by cutting off corrupt borrowers consistently. Excuses were found. Lending frequently continued.

In a series of tough decisions, some of which have been widely reported and some of which have not, Wolfowitz has challenged this culture.

The bank has held up $800 million in lending to Indian health projects. This is a vast sum, and India is one of the bank's most formidable clients: It borrows a lot, has a good economic record and tells development organizations to get lost if they behave condescendingly. But Indian politicians were said to have their hands on the health funds, so Wolfowitz blocked the loans anyway.

The bank has frozen lending to Chad, whose government had reneged on a promise to spend its oil revenue on poverty reduction. Although Chad is a small country, the frozen loans were high-profile: They were an attempt to defy the "curse of oil" and make petrodollars serve development. It took some courage to admit that the curse of oil remained unbroken.

The bank has canceled 14 road contracts in Bangladesh because of corrupt bidding. Two government officials have since been fired, and Wolfowitz plans to ban the private firms involved from future World Bank contracts.

The bank has frozen five loans to Kenya because of corruption, though it did go ahead with a project to improve Kenya's financial management. On a recent stopover in London, Wolfowitz made a point of having dinner with John Githongo, a senior Kenyan official who left the country after issuing a report exposing cabinet ministers' corruption.

The bank has interrupted a project in Argentina that topped up the wages of poor workers. Some of the money seems to have greased the ruling Peronist Party's electoral machine before elections in 2003, and the government has brought charges against one senior official and fired 10 others. The bank's Argentina team responded by building in a few corruption safeguards and pressing to resume lending. But Wolfowitz has demanded that the safeguards be expanded further still. The project has yet to be reauthorized.

Finally, the bank has postponed debt relief for Congo. A team from the International Monetary Fund had certified that the country deserved relief, and the bank was supposed to fall in line last Thursday. But a newspaper report about the Congolese president's extravagant hotel bills was passed around by Wolfowitz's top staff, who noted that KPMG, the firm that audits Congo's state oil company, had refused for three years running to sign off on its financial statements. On Tuesday Wolfowitz called the IMF's boss and asked whether Congo really merited debt relief. On Thursday he refused to go ahead with it.

In sum, Wolfowitz's World Bank presidency, which had seemed to lack an organizing theme, has acquired one. The new boss is going to be tough on corruption, and he's going to push this campaign beyond the confines of the World Bank; on Saturday he persuaded the heads of several regional development banks to join his anti-corruption effort. It's amusing to see the Wolfensohn-Stiglitz left-liberal critique of narrowly economic development policy being championed by this neoconservative icon; and it's encouraging as well. After a decade of stagnant aid budgets in the 1990s, the rich world's development spending is finally expanding. Using the money effectively has become doubly important.

[email protected]

"The Associated Press

"The Associated Press reports that the World Bank's board on Thursday discussed potential eligibility requirements that Congo would need to satisfy in return for debt relief. World Bank President Paul Wolfowitz described the talks as productive. "Relief is not something that we give just on the basis of promises, it has to be earned on the basis of performance," he told reporters."

I don't think Wolfowitz will be a push over in this case. And by the way, the World Bank (IBRD) is not funded by tax payers but finances itself on the financial international markets...  A bit of nuance might be appropriate here.


Aid and corruption

Interesting piece, Richard. I expect the result will be the usual fudge and muddle, but at least governments and NGOs are talking about these issues and not just handing over the cash like they used to.

When I read your opening sentence I thought you'd be talking about the Palestine Authority - another money-pit where the aid has done as much harm as good.

Bob Doney