The World Bank, under its president of the last year Paul Wolfowitz, has been talking tough in the fight against corruption. But how sincere is Wolfowitz when it comes to dealing with the World Bank’s role in financing corrupt regimes of the past and the cancellation of these illegitimate debts? The answer is simple. He’s not, says Gail Hurley.

One could be forgiven for thinking that Paul Wolfowitz has spoken about corruption and nothing else during the year that he has held the post as World Bank President. Although his predecessor, James Wolfensohn, also highlighted corruption as a serious obstacle to development, Wolfowitz has significantly elevated the issue as a World Bank priority. Wolfowitz’s anti-corruption rhetoric has captured media headlines. But how comprehensive, consistent and effective are the plans and actions behind the talk? How far can the Bank really go with this agenda, in particular where the Bank itself has been the cause of corruption, and odious and illegitimate debts, in the past?

It appears as though the Bank’s focus on anti-corruption looks set to continue. In February, the World Bank, in cooperation with other multilateral development banks and the IMF, agreed to create “a framework for preventing and combating fraud and corruption”. It is to be ready for the Bank/Fund Annual Meetings in September in Singapore. On a recent trip to Indonesia, Wolfowitz presented a “long-term strategy” for using the Bank’s money and expertise to help developing countries rid their governments of bribe-taking and other dishonest practices. A key component will be the deployment of anti-corruption teams in many World Bank country offices. At the World Bank’s 2006 Spring Meetings, Wolfowitz correctly acknowledged that “for every bribe-taker, there is a bribe-giver, and often, that comes from a developed country” and any thorough approach to corruption must examine corruption by companies and individuals in the North, not just the South. In a recent leaked paper obtained by Eurodad, the Bank claims to be “raising the bar on governance and anti-corruption” even further. The paper, entitled “Raising the Bar on Anti-Corruption: Improving Governance and Accountability, Fostering Development” outlines possible ways forward for the Bank, including promoting good governance and accountability and supporting international efforts for the repatriation of stolen wealth.

The story presented so far however focuses very much on the “corruption of today” and pays scant attention to the “corruption of yesterday”. Remarkably absent from the anti-corruption strategy presented by officials so far is any critical examination of the Bank’s lending practices to poor countries in the past. The World Bank has over the years been involved with and lent to some of the world’s most notorious and despised regimes such as Mobutu Seke Seso of Democratic Republic of Congo and Ferdinand Marcos of the Philippines.

Bank documentation at the time of these transactions, or published shortly afterwards, confirms that many Bank officials - at both country-level and in Washington DC - were perfectly aware of the nature of the regimes in place and that many loans were simply transferred into the bank accounts of the dictators and their generals. It was plain therefore that they did not reach the poor or foster economic development. Despite their odious and illegitimate nature most of these debts continue to be serviced today, at the expense of essential investments in poverty reduction and economic development.

How can any approach to weed-out corruption be successful or comprehensive if it does not look critically at the lending practices undertaken by the institution in the past? The Bank should learn the lessons of the past, accept co-responsibility for its mistakes and agree to cancel Bank debts resulting from loans where Bank officials knew much of the money would be diverted by corrupt elites. Wolfowitz says the real issue at stake is “how to promote good governance and accountability”. Accountability must begin at home, by addressing the mistakes - and in some cases downright negligence - of the past.

A serious inquiry into past Bank lending practices and the problem of odious and illegitimate debt will likely be resisted by Wolfowitz (who said as much at the Spring Meetings when I challenged him on this point). He argued that the governments represented in the Bank would not be happy if he raised this issue. But Wolfowitz has already challenged the Bank’s members on a number of issues. And we have seen the Bush administration acknowledge the odiousness of Iraq’s debt burden.

Iraq is a country with a very significant burden of odious and illegitimate debt, a clear case study of lending for geopolitical strategic and ideological purposes rather than any concern for the welfare of the overall population. The US government indeed acknowledged this in 2003 when United States Treasury Secretary John Snow remarked to Fox News that “certainly the people of Iraq shouldn’t be saddled with those debts incurred through the regime of the dictator who is now gone”.

Another country which Wolfowitz knows well is Indonesia, where he served as US Ambassador from 1986-1989 during the General Suharto years. His recent visit to Jakarta provided the World Bank President with an excellent opportunity to pledge to examine Indonesia’s case. Respected Indonesian NGO, the International Forum for Indonesian Development (INFID) argues that “it is widely known that approximately 30% of the World Bank loans during the reign of Suharto were corrupted”. Moreover, the debts were accumulated by an authoritarian regime and no public consultation took place. For years, the World Bank continued making transactions with Indonesia. The Bank supported and strengthened the authoritarian regime, says INFID.

A leaked 1997 World Bank report supports these allegations. The report found that as much as 20 to 30% of the budgets linked to development funds were embezzled and World Bank loans were clearly involved. Other internal reports attest to staff knowledge of the regime in place and the fraud taking place. Despite this clear awareness, loans increased. There was also an increase in World Bank loans to the Indonesian Government during the occupation of East Timor.

Indonesia’s total external debt stands at US$134 billion. Of this sum, public and publicly guaranteed debt amounts to US$ 80 billion. To pay this debt, the government put aside 26% of the 2006 state budget. In contrast, education was allocated only 5% and health 2%. Poverty levels are high and increasing in Indonesia: 50% of the population lives in poverty and earns less than US$ 2 per day. The World Bank is one of the country's largest creditors with approximately US$12 billion in claims.

Instead Wolfowitz chose not to use this opportunity to critically reexamine the loans that Indonesians argue involved corruption and fraud and yet which they are required to service under the current system.

One World Bank shareholder which is taking action on this is Norway. It is one of the first Northern countries to open dialogue on odious and illegitimate debt and to call for an international focus on this critical issue. Firstly, Norway has asked the World Bank to undertake a study of odious and illegitimate debt and has put money aside to support this research. Secondly, Norway’s Development Minister Erik Solheim has committed to more closely examine the illegitimate debts claimed by Norway, notably those incurred through the Shipping Export Credit Campaign of the 1970’s.

The débacle involves the export of Norwegian ships to developing countries (such as Ecuador, Peru and Jamaica) between 1977 and 1980. It exported these ships mainly to secure employment for a ship-building industry in crisis. In the case of Ecuador, the Norwegian authorities demanded state guarantees for the ships and when, after the first four years, the company stopped paying the remaining debt was transferred to the state. Ecuador has been servicing the debt for 16 years and its value today is five times the original amount. Minister Solheim has made the very welcome statement that he wishes to draw a line across this mistaken and damaging low point in Norway’s development cooperation policy and in the context of next year’s budget will look to take unilateral action to cancel these claims, citing the lending as irresponsible. All eyes will be on Norway over the coming months to see if the country will indeed cancel these claims and NGOs will push for a clear and public acknowledgement of the injustice and illegitimacy of these debts. Kjetil Abildsnes of the Norwegian Debt Campaign said in a recent statement to the press: “It remains to be seen if Solheim is tough enough to declare these debts illegitimate. We hope to get an answer [soon]. Norway can then become the first creditor in the world to recognise parts of developing country debt as illegitimate.” 

The World Bank - and other bilateral and private creditors - should take a leaf out of Norway’s book and take a critical look at the past. The Bank in particular has no excuse: Norway has put aside money to support research into this issue and it would seem to fit logically and perfectly within the anti-corruption theme that Wolfowitz is so keen to take forward. Indeed Wolfowitz must recognise that any comprehensive approach to corruption must necessarily involve a frank and open critique of past Bank lending practices leading to the cancellation of debts found to be odious and illegitimate.

Cancellation of odious and illegitimate debts has the power to transform the lives of the world’s poor as well as foster reform of an international financial architecture skewed in favour of creditors. Developing countries such as the Democratic Republic of Congo, the Philippines, Indonesia and others continue to service debts of highly questionable origin when the benefits of debt cancellation have been clearly recognised.

Wolfowitz and World Bank Executive Directors need to place this issue firmly on the Bank Board agenda. NGOs will continue to press the Bank to do so and we hope that Norway will also do the same in particular because Minister Solheim has stated that “there can be no doubt that Norway wishes to be in front on this issue”. In the meantime, Wolfowitz should stop labelling his approach to the corruption problem as comprehensive. It is not.

It is not a question of being “stuck in the past”: the debt service on illegitimate loans has an impact on poor people today. Urgent action is needed at the international level. The funds the Norwegian Government has pledged to the World Bank and UN to support further research should not sit idly in the coffers of either the Norwegian Treasury or the World Bank but be put to good use to develop an international consensus – in equal partnership with relevant stakeholders – on how to tackle the issue of odious and illegitimate debt.

* Gail Hurley is with the European Network on Debt and Development (Eurodad) [email][email protected]

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