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Much ado about...conditionality? Corruption?

This morning, Hilary Benn, the UK Secretary of State for International Development, announced that Britain would withhold £50m from the World Bank. There were two – rather different – reasons cited for this move, which coincides with the start of the annual meeting of the IMF and the World Bank in Singapore: the UK opposes the economic conditions which have been attached to World Bank loans to poor countries; and Britain is critical of the World Bank’s new anti-corruption policies, which the Bank will officially publish in Singapore next week. As two rather different arguments are given for withholding the funds, there are questions about the real motivation and aims of this announcement.

The first rationale is a long standing demand of British NGOs: they think that the World Bank’s practice of conditionality such as demanding privatisation and trade liberalisation are unduly restricting the choices of developing countries, and often have a negative impact on the poor. However, as Mr Benn has previously pointed out, the World Bank and the IMF have been revising their conditionality regimes over the past years; and Britain has taken an active role in the process. Furthermore, trade liberalisation has become entrenched as the result of WTO accession of an increasing number of poor countries. Their lowered tariff rates have become part of agreements with the WTO and all its members. As a result, the IMF and the World Bank are by now the wrong targets. Actual practice on conditionality may still be lagging behind headquarter principles; but such a big splash about it at this point in time rather comes as a surprise.


Importantly, it is part of a wider re-thinking about the ‘right’ policies to promote development. The 1980s and early 1990s were dominated by a strong and coherent view of the ‘Washington Consensus’ – which strongly espoused neo-liberal principles of how to run an economy. This consensus has since been replaced by a concern about poverty reduction – but a new approach about how to generate the growth that is ultimately necessary to reduce poverty has remained vague. Putting more money into schools and hospitals is very valuable in itself, but on its own has proven insufficient to stimulate growth.

The World Bank still predominantly embraces liberalism, with an added concern about poverty and greater caution about the poverty impact of liberalising policies (such as raising energy tariffs, or opening markets). However, a different school of thought – most forcefully formulated by scholars originally working on East Asia such as Mushtaq Khan and Ha Joon Chang – argues that liberalism on its own is not a pathway for poor countries to develop industries and to acquire technologies; and that some more tangible state interventionism is needed. They point to China, Vietnam and earlier ‘Asian tigers’ as examples. The problem which these scholars have so far tended to ignore, however, is that previous attempts at state-led development in Africa in the 1960s and 70s have failed rather miserably due to widespread rent-seeking and corruption. Debt crisis and very painful periods of structural adjustment were the consequences.


This brings us to the second argument: Britain’s apparent opposition to the new anti-corruption policies of the World Bank. Essentially, all development agencies agree that corruption is a major problem for development. However, there is considerable disagreement – and uncertainty – regarding what to do about it; and how corruption should be weighted against other considerations. One problem is that it is often the poorest countries where corruption is most widespread, thus pitting the concern about poverty and need for aid against the concern to be serious about promoting better governance – which is a key reason for the UK’s opposition to the World Bank’s new policies on corruption. A second problem is that anti-corruption efforts – which have become a significant part of development assistance over the past ten years – have not been very successful in most cases (see also ODI Opinions How to move forward on governance and corruption and Governance and aid effectiveness: Has the White Paper got it right?).

Importantly, corruption is not a cause in itself – it is a symptom of underlying governance and socio-economic problems, and it is driven by domestic as well as external factors. While it is primarily linked to weak domestic accountability, the international environment powerfully contributes to corruption in poor countries: from bribes paid by multinational companies, to a Northern banking sector which has assisted in laundering stolen funds, to foreign policy support for corrupt or otherwise unaccountable governments in the past and in the present. The UK government has been involved in launching some efforts at tackling the international sources of corruption, most notably the Extractive Industries Transparency Initiative (although this still has a long way to go to be fully effective).

So what could be wrong with the imminent new World Bank policy on combating corruption. In recent months, the World Bank has stopped a number of loans due to corruption risks; and its new policy is expected to formalise the criteria for doing so in the future. However, the policy is perceived as having been developed behind closed doors within the World Bank; while there is a real need for an approach that is coordinated among aid providers. Also, there is a concern that attaching more safeguards to aid may drive up administrative burdens for governments, and result in lucrative work for international auditors, but without effectively strengthening domestic accountability in recipient countries, and without tackling the underlying causes for poor governance.

DfID has been particularly engaged in looking at these deeper causes through its Drivers of Change studies; and it has emphasised corruption as a major issue in its recently published White Paper Making Governance Work for the Poor. However, this does not yet amount to an alternative strategy for the moment. The need for a more strategic approach to governance issues was demonstrated earlier this year when the UK government reacted to political crises in Ethiopia and Uganda – in both cases reacting ad hoc to problems which had been building over a considerable time. Any overall anti-corruption strategy for the international aid community will have to consider five areas:

(i)                  aid allocations across countries – by need? By likely effectiveness of aid? By commitment to improving governance? With a view to providing incentives to improve governance?

(ii)                aid modalities – what modalities and ‘best practices’ of different modalities in various contexts – including the governance context;

(iii)               how to ensure that aid does not fuel rent-seeking and corruption (which is a risk across all modalities) – while promoting domestic rather than externally oriented accountability?

(iv)              how to tackle poor governance through direct interventions – from promoting PFM reforms to strengthening local communities; considering accumulating experience that many such interventions have remained ineffective in the past;

(v)                how to reduce the international factors that fuel corruption – including the tricky fact that some rather corrupt governments receive substantial development funds for foreign policy reasons.

In the best case, withholding money from the World Bank for a few weeks can stimulate greater and more hard-headed debate on how the international community can and should address the problem of corruption and wider misgovernment; and it can bring the more academic debate about feasible economic policies for poor countries into a wider public domain. The results of anti-corruption efforts of the past ten years have been disappointing in most countries; and thus the time for a more fundamental re-think is ripe. Furthermore, it can open up the discussion about the right policies of donors on corruption, which in the case of the World Bank’s new policy has been rather led behind closed  doors. In the worst case, it sends a muddled signal based on two rather different arguments; and will soon be quietly forgotten.