Tackling the Problem of Corruption: What have we learned Tackling the Problem of Corruption: What have we learned? Cheryl Gray World Bank IACC Prague 10-10-01

1. Tackling corruption is fundamentally about changing institutions…i 1. Tackling corruption is fundamentally about changing institutions…i.e. the “rules of the game” that govern behavior. Corruption is not primarily a legal issue. (New laws do not necessarily change institutions.) Corruption cannot be solved by appealing to morals or culture alone. The challenge is to move from one institutional equilibrium to another.

2. A multi-pronged effort is essential…and we are all partners in that effort Institutions are very resistant to change. A systemic focus is critical … It is unclear how much progress can be made on one dimension without progress on the others.

Structure of government (institutional restraints): Independent and effective judiciary Legislative oversight Independent prosecution, enforcement The international dimension: Restraints on foreign investors, trading partners, donors Political accountability: Political competition, credible political parties Transparency in party financing Disclosure of parliamentary votes Asset declaration, conflict of interest rules Anticorruption Competitive private sector: Economic policy reform Competitive restructuring of monopolies Regulatory simplification for entry Transparency in corporate governance Collective business associations Civil society voice and participation: Freedom of information Public hearings on draft laws Role of media/NGOs Public sector management: Meritocratic civil service with monetized, adequate pay Budget management (coverage, treasury, procurement, audit) Tax and customs Sectoral service delivery (health, education, energy) Decentralization with accountability

3. Good governance and development go hand in hand Wealth of research findings in the 1990s “Assessing Aid” World Development Reports of 1997 (Role of the State), 2000 (Poverty), and 2001 (Institutions) Experience on the ground

Good governance matters for investment and growth Income per capita Growth Rate % Investment share in GDP 20% -1.5% 0% 1% 2% 1.5% -0.5% -1.0% 0.5% 15% 10% High Medium Low High Medium Low Quality of Governance Government Quality measured by perception of 4000 firms in 67 countries on: (i) protection of property rights; (ii) judicial reliability; (iii) predictability of rules; (iv) control of corruption. World Development Report Survey 1997

The World Bank has changed significantly in the past 5 years... A systemic focus, with poverty, governance, and institution-building at the center Increased emphasis on ownership Poverty Reduction Strategies (PRSPs) with full stakeholder input Major increase in lending, non-lending, and staff expertise and support for governance reforms with greater concern for selectivity Heightened focus on empowerment, transparency, and accountability – the “demand” side as well as the “supply” side As the 1990s progressed – with the end of the Cold War, increased openness and a changing political environment within countries -- global concerns about corruption intensified. In addition, evidence of how corruption undermines development also increased. It became clear that the Bank and its other partners in development would need to address the issue more directly than they had done in the past. Corruption as a development issue was explicitly addressed by the Bank for the first time when Mr. Wolfensohn became President in 1995. During the 1996 Annual Meetings, Mr. Wolfensohn captured the world’s attention when he vowed to fight the "cancer of corruption" that undermines development. The 1996 and 1997 WDRs (on transition, and the role of the state, respectively) both discussed the issue of corruption. A further landmark was the Strategic Compact in March 1997-- the Bank’s program for renewal of its entire development effort – which explicitly allocated additional resources for anti-corruption efforts. This was a major step forward in the Bank's thinking about and action on the corruption issue. In the summer of 1997 the Bank’s procurement guidelines were amended to specifically address corruption in Bank projects. Most notably, in September 1997 the Board approved a comprehensive anti-corruption policy framework for the Bank.

CDD: Community decision-making over resources (empowerment and accountability) Northeast Brazil: Rural Poverty Alleviation Project 94% of resources directly to beneficiaries, reaching 7.5 million people in over 30,000 communities, 100,000 additional jobs created, 85,000 hectares increased cultivated area, additional sustainable annual income or savings of US $203 million, increased social capital Indonesia: Kecamatan Development Program (KDP) 27 provinces; 900 subdistricts; 15,000 villages Block-grants to subdistricts, villages prepare proposals, village representatives decide collectively on allocations, monitoring by project facilitators, NGOs, and association of journalists

Public Expenditure Tracking Surveys: Primary Education in Uganda US$ per Student 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1990 1991 1993 1994 1995 1999 Intended Grant Amount Received by School (mean)

E-Government: Chile’s Internet-based Public Procurement All supplier companies register, indicating areas of business (e.g., IT, construction, furniture) Public agencies submit tenders through internet Automatic e-mail to all companies in selected area Online information on name, position of official in-charge Online information on results: who participated, proposals made, scores received, who won bid, historical record of agency’s purchases and contracts

In sum… Reforming institutions … and thereby changing incentives … is key to tackling corruption. Many institutions matter …and a multi-pronged approach is critical. Many groups have complementary roles, and we are all partners in this effort. The World Bank’s focus on governance and its emphasis on empowerment, transparency, and accountability have increased significantly in the past 5 years. Working together, we hope to make a difference… A Need for Realistic Expectations One of the most complex and difficult development challenges Look for improvement, not perfection In sum, we are in the midst of profound change, and there is room for great optimism. The attention given to governance both inside and outside the Bank has increased dramatically, the dialogue is noticeably more open both in the Bank and in our client countries, and new ideas and experiments are emerging daily. We need to continue our strong commitment, because helping governments function more effectively is a fundamental key to long-term development. However, at the same time we need to keep realistic expectations. As was noted at the outset, the need to be vigilant in addressing fraud and corruption never ends, and tackling widespread systemic corruption is a particularly difficult task. We should seek continual progress but not expect perfection.