Corruption, Development, and the World Bank

Corruption - the misuse of entrusted power for private gains - is a complex and worldwide phenomenon that has been prevalent in both public (government) and private sectors; and it occurs in all countries - developed as well as developing - but its impacts vary depending on the country's culture, institutions, and stage of economic development (Germain 2020). As the World Bank Group (WBG) has decided to establish an Academy that aims to "help build a cadre of development leaders and practitioners by training and helping them implement effective social and economic policies" (https://www.dhirubhai.net/pulse/transforming-world-bank-group-jclaude-germain-ph-d-2cime/), this article examines the World Bank's position on the crucial issue of corruption, considered by many as a major handicap to development. Has the World Bank taken a position on corruption? If so, what has it done to combat corruption or at least mitigate its impacts? And why is it important to know where the World Bank stands on the issue of corruption?

Before addressing the questions posed, let us first consider the two main schools of thought on corruption: "Greasing the Wheels" and "Sanding the Wheels".

Greasing the Wheels vs. Sanding the Wheels.

There has been a debate on whether corruption "greases the wheels" or "sands the wheels" of economies worldwide, meaning whether it is "beneficial" or "harmful". The proponents of greasing the wheels, including some academics, argue that corruption is beneficial because "in some highly regulated countries without effective government institutions and government systems, corruption can compensate for red tapes and institutional weaknesses and grease the wheels of the economy" (see Germain 2020).

Some proponents view corruption as an "efficient" economic tool. They argue, for instance, that bribery can allow an economy to grow in the presence of 'bad' laws or regulations. They also suggest that corruption might raise economic growth through corrupt practices, such as 'speed money', which would enable individuals to avoid bureaucratic delay. They further argue that corruption could serve as an incentive by stating that "government employees who are allowed to levy bribes would work harder, especially in the case where briberies act as a 'piece rate'" (Germain 2020).Bribery was considered as an integral part of doing business and a way to'grease the wheels' of an economy. In fact, some countries used to allow business owners to deduct the amount of money paid in bribes as business expenses (see Germain 2020 for more details).

The above arguments in support of "efficient corruption" appear to have some validity, but they ignore the fact that corruption has been institutionalized precisely to perpetuate a practice that is lucrative to corrupt officials and detrimental to the welfare of myriad of people within and across countries (Germain 2020). Regarding the impact of corruption on economic activity, Krugman and Obstfeld posit that "government regulations that promote corruption harm economic prosperity, and statistical studies have found that corruption tends to have net negative effects on economic efficiency and growth".

In his study on the relationship between corruption and development at the global level and a country-specific level, Germain (2020) found that corruption "sands the wheels" of economies around the world instead of "greasing" them. And he has provided quantitative and qualitative data to support his finding. Comparing "benefit" and "harm", he concludes that the societal cost of corruption is so high that it outweighs the private gain of corrupt actors.

That said, let us now turn to the three questions posed in the introduction.

1, Has the World Bank taken a position on corruption?

First, it is worth noting that the World Bank considers corruption as a "scourge" that manifests in several ways: from petty bribes and kickbacks to grand theft of public resources, and that it has become a transnational challenge without respect for borders. In other words, corruption is a global problem. In regard to the relationship between corruption and development, the World Bank considers corruption as a fundamendal problem for development because it harms the poor and the vulnerable the most by "increasing costs and reducing access to basic services, such as healthcare, education, social programs, and even justice". It also stresses that corruption exacerbates inequality and reduces private sector investment to the detriment of markets, job opportunities, and economies.

The World Bank clearly states its position when it says: while the costs may vary and systemic corruption may coexist with strong economic performance, experience suggests that corruption is bad for development because it leads governments to intervene where they need not, and it undermines their ability to enact and implement policies in areas in which government intervention is clearly needed, such as healthcare and macroeconomic stability (Germain 2020).

2. What has the World Bank done to combat corruption or at least mitigate its impact?

In addition to recognizing that corruption is bad for development, the World Bank also acknowledges that corruption is a scourge that we cannot fail to confront. (Germain 2020) has provided a detailed account of actions taken by the WBG to combat this "scourge".

As "greases the wheels" was (is) a modus operandi in many countries, most national political leaders have been reluctant to tackle the issue of corruption because they do not want to become victims of their own initiative (Germain 2020). Aware of this fact, the World Bank - in conjunction with other organizations - has decided to fight corruption for several reasons. The principal one is the fact that it is convinced that corruption will prevent the Organization from achieving its twin goals of ending extreme poverty and boosting shared prosperity for the poorest 40 percent of people in developing countries.

To combat corruption and recover stolen assets by government officials worldwide, the World Bank and the United Nations Office on Drugs and Crimes (UNDOC) have formed a partnership called the Stolen Asset Recovery Inititiative (StAR) whose aim is to support "international efforts to end safe havens for corrupt funds". According to the World Bank, StAR works with developing countries and financial centers to prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets to their 'rightful owners'.

Has the World Bank been successful in recovering stolen funds?

The WBG was able to recover several millions of dollars and other stolen assets. (Those who are interested in specific cases are encouraged to refer to Germain 2020). Nonetheless, the WBG has provided its own assessment of the situation as follows: the StAR Initiative to recover stolen assets has not been as successful as it could have been 'despite the advances in international efforts since the United Nations Convention against Corruption [UNCAC] went into force in 2005 because of many barriers', including the lack of political will to investigate and charge corrupt officials (Germain 2020).

3. Why ist it important to know where the World Bank stands on the issue of Corruption?

Due to the negative impacts of corruption on growth and development - especially in low-income countries -, and the WBG's plan to train participants in its Academy as development leaders and practitioners capable of implementing effective social and economic policies, it is important to be aware of the Group's position in order to have an idea on how it might approach the issue. Fighting corruption is a sine qua non condition for development in those countries.

References:

Germain, JC (2020). The Impact of Corruption on Growth and Development. Columbia, SC (USA). KDP Publishing.