FIRST THINGS FIRST

FIRST THINGS FIRST

he International Monetary Fund's biggest borrowers rank high in the corruption index published by Transparency International, a watchdog group. This raises the issue of whether IMF lending can promote corruption, an affliction that can poison a nation's entire economy.

A new Joint Economic Committee study said the evidence suggests the IMF knowingly makes loans to corrupt governments while recognizing that some of its loan conditions and procedures can create circumstances that promote additional corruption. Yet no important safeguards or preventive conditions have been attached to these loans. Thus, IMF lending operations may be consistent with subsidizing corruption, the study found.IMF funds can be distributed to corrupt public bureaucracies and elites and are often unwittingly used to promote conditions that foster additional corruption. The JEC study suggested several remedies: reducing or reforming IMF lending, imposing strict contingency standards, and establishing reliable monitoring methods.

But while all of these proposals seem reasonable, few, if any, have been taken seriously or successfully implemented. The time has come to reconsider the roles of the IMF and the World Bank, the twin world financial institutions created at the Bretton Woods international monetary conference of 1944.

The IMF has strayed well beyond the limits of emergency lending for balance-of-payments crises. It is no longer just the global lender of last resort, but also the lender of first and second resort. Minimizing IMF lending would probably be the most effective way to prevent IMF assistance from promoting corruption.

A less drastic approach would be to turn the focus away from long-term structural lending and toward the short-term, balance-of-payments lending that characterized the IMF in its earlier days. The longer-term development issues should be left to the World Bank, which is making substantial efforts to work with governments to root out corruption.

Prudent lending limits and smaller-scale lending by the IMF would help. Elimination of pervasive IMF interest subsidies also would work to reduce the potential for corruption, according to the JEC.

It should be possible to impose strong requirements and what-if conditions on the receipt of IMF loans. The institution should require borrowers to meet certain legal standards, anti-corruption codes and accounting practices before obtaining IMF funds.

Also needed is a system to reliably track IMF funds to ensure they are used in ways consistent with the wishes of donors. This may require the establishment of separate accounts used exclusively for IMF funds, according to the JEC report.

Research into corruption indicates that the more pervasive the public sector's role in the economy, the more likely corruption is to flourish, according to various IMF working papers.

Foreign aid strengthens the government sector relative to the private sector, since it is usually provided from centralized government sources to centralized government recipients. Such aid is financed by taxing the private sector of donor countries and transferring the proceeds to recipient governments.

Foreign aid, however well-intentioned, can perpetuate or strengthen existing corruption. It is usually disbursed on the basis of strategic and geo-political considerations instead of on the basis of need.

Recognizing the growing importance of private capital and investment to developing countries, the World Bank Group has been restructured. It is shifting its focus toward promoting small businesses instead of building huge projects. The World Bank is helping governments to create policy frameworks that encourage a positive environment for business to function as a primary engine of growth in developing countries.

Calls for a merger of the IMF and World Bank to create a single regulatory super-agency to supervise the world economic system don't make much sense. The roles of the IMF and World Bank, as envisioned by the Bretton Woods conference, are quite different.

The IMF should handle short-term emergencies, and the World Bank should promote development through strengthening the private sector. We need the IMF to put out the fires, and we need the World Bank to help build solid, fire-resistant economies. The two institutions have complementary roles.

The United States has been a leader in the effort to end bribery and corruption in international businesses practices. To succeed, however, the effort must be a multinational one.

To be sure, both private capital flows and official development assistance are increasingly mindful of integrity issues. Countries with high levels of corruption risk being marginalized in the global economy. Investors have too many options and can easily move their money elsewhere.

Bribery feeds the growth of excessive regulation while it lines the pockets of the bureaucrats. Good governance and the elimination of corruption are essential for economic efficiency and growth. The IMF and World Bank should take the lead in seeing that corruption is ended, or they will have no hope of ending poverty and promoting development.