DEBT RELIEF AND CORRUPTION

Corruption undermines and negates development, poverty reduction and the Common Good. Corruption reduces economic growth or even sends it into reverse, steals resources from education and health, rewards the incompetent and the dishonest, penalises enterprising and honest citizens, aggravates political and economic equalities, deters or absorbs private sector investment and deprives ordinary people of responsive and even-handed public administration.

Corruption, by channelling resources – public or private – to the financial or political benefit of public officials, is a violation of the rules that should govern the allocation of resources. For these reasons corruption frequently comes up in debates over debt relief. Some opponents of debt relief argue that venal or openly corrupt governments will misuse the proceeds from debt cancellation for personal or political gain. This belief is based on the observation that many of the countries with the most corrupt administrations are also amongst the poorest and most highly indebted (see Transparency International Index). They usually draw two conclusions:

either, that we should not campaign for the cancellation of unpayable public debts in poor countries because governments with high levels of corruption cannot be trusted to act as “clean” administrators of public finances and debt relief in the best interests of poor people;

or, that debt relief should be channelled only through international agencies, or be given to governments willing to adhere to strict programmes set, monitored and evaluated by outsiders.

CAFOD believes that corruption should not be used as a reason to deny debt relief. Instead the issue of corruption should be tackled head-on as part of a broader strategy of poverty reduction, empowerment of poor people and creation of efficient and effective government. Innovative policies that tackle corruption and its causes are an essential element in the overall task of tackling the impoverishment caused by the burden of unpayable debt.

Debt and poverty: a cause and effect of corruption

Corruption is a global phenomenon. No country is immune. It is true that corruption is more visible and takes a greater share of national income in countries with high levels of poverty. In some cases, corruption is akin to extortion, with corrupt officials making the payment of bribes the price for undertaking official business. This can have damaging consequences to efforts to reduce poverty. But it is a mistake to view corruption only as a cause of poverty. CAFOD's experience shows that corruption is also a direct effect of poverty. The prevalence of corruption in some of the poorest countries is a consequence of indebtedness, abject poverty and the demoralisation and grossly inadequate pay of public servants, including the police, the military and the judiciary. Corruption is also a feature of the overall relationship between poor countries and donor countries. It is a vicious circle – but it can be broken. The biggest obstacle, however, is the lack of targeted resources with which to tackle the causes of corruption.

The CAFOD-funded Structural Adjustment monitoring project in Zambia has shown that the salaries of public officials have gone down in real terms during the World Bank- and IMF-imposed adjustment programmes. These programmes required swinging cuts in public expenditure and included the capping of public sector wages and salaries. A teacher's salary barely covers half the cost of a food basket for a family of six - cost $109. Civil servants' wages range between US$38 and US$45 month, barely above the internationally recognised absolute poverty line of $1 a day. In Zambia such salaries will buy only a third of the basic monthly food basket that they need to feed their families. Other necessities, such as education and health care, costing over $300 a year, are simply out of reach. Corruption thrives where the salaries of public officials will not buy even the most basic necessities.

The privatisation of state industries and services is an integral part of structural adjustment. In some areas, this can assist anti-corruption drives: in economies dominated by the state, all-powerful regulating bureaucracies provide plentiful opportunities for corruption. Privatisation, however, is usually implemented rapidly in order to fulfil conditions for further loans laid down by the World Bank and the IMF, with neither sufficient consideration of the impact on poverty nor the understanding and broad-based support needed to make such policies work successfully. This sort of privatisation in indebted countries has coincided with already high levels of unemployment and poorly-run social safety nets – that is, state-run programmes to cushion the worst impact on the poor. It is this context that has set the scene for bribery and the looting of assets.

This sort of corruption is most often linked to senior and middle ranking public officials. Another more costly form of corruption is associated with senior politicians, and it is at this level that the World Bank and IMF have been directly culpable. IMF lending to President Mobutu of Zaire, for example, continued throughout the 1980s and the 1990s despite reports available to, and sometimes commissioned by, creditors showed that he and his political cronies were among the world's most corrupt rulers. For years to come the ordinary people of Zaire will be repaying the loans approved by international officials and appropriated by the deposed Mobutu family. Just months before the fall of President Suharto of Indonesia in 1998, the IMF was preparing to lend billions of dollars without the appropriate safeguards against his longstanding misuse of public funds. No one in the IMF has been held responsible.

Officials in donor and creditor countries and institutions must bear some of the responsibility for corruption because, in their eagerness to meet disbursement goals and their own performance targets, they have disregarded evidence that loans were likely to be misappropriated or simply wasted. Much of the debt currently owed by the world's poorest countries is the result of loans for failed projects and programmes or “non-performing loans”. Despite the failure of these programmes, the debts are still on the books of the creditor countries and institutions. This failure and lack of accountability of donor officials for their bad lending decisions suggest the problem of corruption cannot be tackled only by adding extra conditions imposed and managed by donor institutions.

Tackling corruption and targeting debt relief towards poverty reduction

CAFOD believes that tackling corruption requires a multi-dimensional approach. Those who offer bribes, "commissions" and kick-backs are as culpable as the officials or politicians who take them. The establishment of competent, representative and accountable government and administration together with internal safeguards to deter and penalise corruption are essential elements of the strategy to reduce corruption and to ensure that the proceeds of debt reduction are actually used for poverty reduction.

Civil Service reform:

Civil servants should be reasonably well-paid so that there is less temptation to supplement inadequate salaries with bribes.

Recruitment to the civil service should be competitive, open and transparent. Recruitment and promotion should reflect ethnic diversity and achieve gender balance at all levels.

Policy decisions, the allocation of the resources needed to implement them and the spending of those resources, should be transparent, accounted for, properly monitored and accompanied by accessible audited reports.

Each country should set up a competent, independent and well-resourced Commission for Anti-Corruption and national Auditing Commission (if necessary with donor aid and capacity-building).

Political Conditions:

A free and independent media is an essential element in the fight against corruption: it can facilitate public debate about decisions regarding the allocation and disbursement of donor aid, new lending and the allocation of funds made available by debt relief. The media must have the freedom to publish and to denounce the misuse of public funds.

Countries benefiting from debt relief should set up guard against irresponsible borrowing and lending by ensuring that they have powerful institutions and mechanisms to manage their borrowing. Irresponsible borrowing – as well as lending – has created the present mountain of unpayable debt.

Civil society organisations must have access by right to transparent records of government finances and be empowered to inspect the use of public funds and to hold to account public officials for the misuse of funds.

The independence of the judiciary should be guaranteed so that it can act as watchdog and upholder of the rules of clean government.

International Conditions:

Responsibility for corruption should be shared equally between corrupt officials and politicians and those who offer them bribes and "commissions". Companies and international financial institutions should be held to account if they engage in corrupt lending and deal-making and for poor and behind-closed-doors lending decisions. Export credit guarantees to low-income countries should be for productive (non-military) expenditures only.

In 1997 the OECD called for the abolition of tax cuts for companies engaged in corrupt practices. This resolution should be enforced in all creditor and donor countries.

All OECD countries should adopt legislation modelled on the US Money Laundering Act 1999 which seeks to prevent America being used as a money laundering safe haven for corrupt and illegally acquired funds. International banking regulations should be reformed to allow for the recovery of ill-gotten funds held by corrupt politicians and officials in offshore holdings.

Henry Northover
Public Policy Unit – CAFOD – November 1999