West targets Third World corruption

Diane Coyle reports on the ethical new stance of the World Bank and IMF

Which pair of Imelda Marcos's shoes would you like to have bought for her? That is the embarrassing question behind a radical shift of direction under way at the World Bank and International Monetary Fund. These two global financial institutions, bankers to the world courtesy of tax contributions paid by voters in Britain and elsewhere, have decided that they will no longer lend money to corrupt regimes.

About time, you might think. By 1986, when the Marcos regime in the Philippines was at last ousted, the country had accumulated $26 billion (pounds 17bn) in foreign debt. An estimated $10bn of that was personally appropriated and sent out of the country to be invested in Swiss bank accounts and Manhattan property by the Marcos family.

The figures are not yet available for the amount skimmed off international loans to Zaire by the late Mobutu Sese Seko until he was ousted this summer, but as early as the mid-1980s IMF officials in the country were warning their Washington HQ about the regime of "kleptocracy". Mobutu nevertheless got fresh loans for more than a decade longer. The country's overseas debts had climbed from $1.5bn in 1980 to $6bn by 1995 as the regime went further and further into the red.

In a recent document, the World Bank admits that the same thing went on in the Uganda of Idi Amin. "Cleaning up the civil service will take years," the report, written 11 years after the formation of a post-dictatorship government in Uganda, admits.

The struggle against corruption is one of the themes being emphasised by the Bank and Fund at this year's annual meeting in Hong Kong. Both institutions have issued new sets of guidelines that in theory will limit lending to unsavoury regimes, or even savoury ones where business backhanders are nevertheless common. They have taken the first steps: three weeks ago, a joint loan worth more than $200m to Kenya was suspended until the Fund and Bank were satisfied about the country's progress towards a more open electoral system. It has not yet been restored.

The campaign against corruption takes the two institutions into a political minefield. The conflict is between the moral and economic sense of refusing to make loans that will be dissipated on the personal enrichment of a few individuals, and the sensitive politics of Western donors appearing to dictate to the Third World how to behave.

"The IMF especially is getting into waters where we think it has neither the experience nor the mandate," says Andrew Simms, a lobbyist for Christian Aid. Aid charities reckon the apparent interference in domestic matters will prove unwelcome - especially when China, the World Bank's biggest borrower, appears immune from the same pressure to meet ethical standards.

The new guidelines both organisations have drawn up emphasise the economics rather than the politics or morality of corruption. The World Bank's annual World Development Report contains rafts of figures showing the extent to which corruption - anything from standard business "commissions" to large-scale theft by dictators - deters investment and damages the economy.

James Wolfensohn, World Bank President, says: "Only 18 months ago, the word corruption was never mentioned. Today, there is a publicly expressed revulsion, on moral, on social, and on economic grounds." The Bank, he said, has tightened up its lending procedures. Individuals or companies involved in corrupt practices would be blacklisted, and projects cancelled. It has stepped in to help a handful of countries in eastern Europe and Latin America clean up their act - at their own request.

The IMF has set out its own guidelines, saying that if necessary honest and transparent practices will be a condition of receiving loans. Programmes can be suspended if poor "governance" - the codeword for corrupt practices - "puts in doubt the use of IMF resources".

But both organisations claim that this does not represent political interference. The IMF document stresses repeatedly that it is only concerned with bribery and corruption to the extent that they damage economic performance, saying: "The IMF's judgments should not be influenced by the nature of a political regime in a country, nor should it interfere in the domestic or foreign politics of any country."

Mr Wolfensohn sends out the same message for the World Bank. "The line between governance and politics is a fine one," he says. But he adds a very political message: "If you do not get the governance right, it is the poor who suffer. It is a central element of poverty alleviation." His own views become clear when he cites Plato's maxim that in a stable society the richest cannot earn more than four times the income of the poorest.

Senior World Bank officials admit that it is in practice impossible to take the politics out of the battle against corruption. "This is exactly why it has taken the Bank so long to face up to this issue," according to one. Even so, the Bank might yet be taken aback by the implications of its new anti-corruption drive. Many campaigners for the reduction of Third World interest payments on debts argue that there should be no requirement to repay money borrowed and squandered by corrupt regimes.

The Archbishop of Cape Town, Njongonkulu Ndungane, has argued that the international community should write off South Africa's debt because it was incurred by the apartheid regime. "The external debt of the developing countries has become an eternal debt, and stands as the largest immediate obstacle to growth and sustainable development," he said. Christian Aid is campaigning for the forgiveness of such debts by the Bank and the IMF. "The current plans to reduce interest payments do not cover what we would refer to as odious debt incurred by illegitimate regimes," says Mr Simms.

The IMF and World Bank are walking a tightrope between this moral stance and the resentment their conditionsprovoke. Montek Singh Ahluwalia, India's finance secretary and a fan of IMF involvement in his country's affairs, says of one successful intervention: "A lot of people resented the fact that we were subject to any kind of external scrutiny."

These sensitivities mean that officials are emphasising that there are two parties to a bribe. They hope to put as much pressure on Western companies paying "commissions" as on the recipients, and welcome a recent OECD deal to end the tax deductibility of bribes paid in the course of securing contracts.

But the dilemma remains. Western lenders face a choice between keeping a future Marcos or Papa Doc Duvalier in the style to which they are accustomed, and telling developing countries how they should run their affairs. Either way, they will get no thanks.