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Criminal Debt in the Indonesian Context;

 

Jeffrey A. Winters

Jakarta, Indonesia. July 3-5, 2000 

[First draft prepared for the conference, “Reinventing the World Bank: Opportunities

Former Finance Minister, Ghana¹ 

The Scale of the Problem for Indonesia

Indonesia’s total external debt, which includes government and private sector debt, is $144 billion,² an amount roughly equal to the country’s total annual economic production (GDP) of $160 billion. The government’s total debt, which includes external and domestic debt, was $134 billion at the beginning of 2000. This represents an increase of $81 billion in the 2.5 years from the middle of 1997 before the economic crisis until the beginning of 2000. This increase in debt is even more shocking when measured against the size of the Indonesian economy. During the same 2.5 year period, government debt as a percentage of GDP jumped from 23 to 83 percent. No other government in the world has experienced such a massive increase in debt in such a short time period since the end of World War II.³ Indonesia now ranks as the most deeply indebted major country in the world. It is very doubtful that Indonesia will be able to dig itself out of this debt crater. No country was more badly damaged than Indonesia in the financial crisis that hit parts of Asia in 1997 and 1998. As other countries in the region show signs of recovery, Indonesia remains in the firm grip of a severe economic collapse. Even with the most optimistic assumptions, Indonesia’s debt situation for the next five to ten years is grim. The World Bank believes that with effective economic policies and a return to strong growth, Indonesia can reduce the government debt burden to 67% of GDP in five years and 46% of GDP in ten years. Thus by the year 2010, Indonesia can look forward to having a government debt burden twice the 1997 pre-crisis level of 23% of GDP.

And yet even this grim outlook is probably too much to hope for. Government policy, particularly for the economy, is either non-existent or chaotic. Violent conflicts are increasing around the archipelago. The debt burden, which will consume 40% of government revenues for the foreseeable future, is draining the country’s economic potential. And like a vicious circle, the weak economy means the country cannot rely on a sharp increase in investment and rapid growth to solve its debt problem in the future.⁴ Indonesia is in a classic debt trap in which new loans are used to service old ones. A simple Debt Burden Index (DBI) tells much of the story. If we divide the external public debt as a percentage of GDP (a measure of the relative size of the debt) by the GDP growth rate (the capacity to grow out of the debt problem), we can assess how heavy the debt burden is. 

COMPARISON OF DEBT BURDEN INDEX⁵

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The following table provides the latest data available on the levels and composition of Indonesia’s total external debt. 

 

 

 

 

There are several points worth noting in these figures. First, of the total external debt, 60 percent is public debt accumulated by the Indonesian government and state enterprises, while 40 percent is foreign debt of private companies. Second, almost all of the government’s foreign debt is to lenders of official capital, whether bilateral or multilateral. This is significant because it means negotiations on the debt have the potential of being based more on political rather than economic considerations (just as most of the initial lending was politically driven as the West sought to uphold the Suharto dictatorship supposedly to defend democracy during the Cold War). And finally, it is rarely mentioned that almost half of Indonesia’s private sector foreign debt is held by foreign companies operating in Indonesia (PMA, $27.9 billion).

If we look at Indonesia’s balance of payments figures during the last five fiscal years, it is evident that foreign borrowing has played a major role in closing a serious deficit in Indonesia’s external transactions of goods and capital (precisely the same role it played during the late 1960s and again as oil prices collapsed in the early and mid 1980s). A country earns foreign exchange by selling things to the world as exports (column 1), government borrowing from abroad (column 5), or having a positive net flow of foreign private capital (column 6, which shows net direct investment and private loan flows). Likewise, a country spends foreign exchange by buying things from the world as imports (column 2), repaying government debts (column 3), and having a negative net flow of foreign private capital (again, column 6).

Notice first that despite a push to make Indonesia a major exporter, the country consistently imports more goods and services than it exports, thus running a cumulative trade deficit during the five years shown below of $8.0 billion. During the same period, the Indonesian government also paid a total of $22.8 billion in principal and interest on its foreign debt. If this additional amount is subtracted from export earnings, the total shortfall is $30.8 billion over five years. How has Indonesia covered this deficit? The table makes it clear that the huge deficits during 1995/96 and 1996/97 were covered mostly by large positive net flows of private capital, much of which was in the form of commercial loans to corporations. Government borrowing was far too small to cover the deficits. But notice the major change that occurred once the Asian crisis hit. Suddenly private capital flowed out rapidly, showing up in column 6 as net negative flows. At the same time, new borrowing by the government increased dramatically to cover the gap (including $10.4 billion from the IMF). Thus for the five-year period in the table, new borrowing surged to $40.6 billion as net private capital flows ended up as a negative $2.9 billion. This table captures a significant part of the story of how Indonesia sank into its current debt trap. 

 

With this overview of Indonesia’s debt crisis in hand, attention now turns to the question of debt relief, the conditions under which it should be granted, and some strategies for digging Indonesia out of its debt crisis and accelerating the country’s economic recovery. We begin with the important matter of Criminal Debt. 

The interaction between borrowers and lenders is complex and involves issues of trust and power that sometimes reach into the past (when some debts were first accumulated) as well as into the future (when a borrower hopes to have continued access to credit on good terms). Being a good debtor has certain benefits, while being a bad debtor involves certain risks and costs. The inability to repay debts is viewed very negatively in international financial circles. Simply refusing to repay debts is one of the most risky moves an individual country or government can make. In discussions of problems between debtors and creditors, it is usually the debtors who are seen as behaving badly – for instance when they fail or refuse to uphold their side of binding international loan contracts. This paper attempts to shift the focus toward a more balanced perspective, where it is recognized that creditors also engage in direct violations of international laws and norms. In doing so, the perspective also shifts from a simple opposition of debtor governments against creditor agencies in favor of a more revealing optic that positions debtor populations on one side and debtor governments and creditor agencies operating in collusion on the other.

Indonesia has several options for reducing its high debt burden. One is to ask for relief or charity based on poverty and an inability to repay much of the country’s debt burden. This is a key element of the Jubilee 2000 campaign. Another is to claim that a significant portion of the public foreign debt is “odious debt,” and thus illegitimate. This tactic is also partly reflected in the Jubilee 2000 movement, though it goes beyond mere charity because the principle of odious debt is grounded in international law and has been applied in a limited number of cases. A third option is the right to demand debt reduction based on the illegal behavior of creditors, particularly the multilateral development banks (MDBs). This paper develops this third option through a discussion of “criminal debt,” with specific reference to the important Indonesian case. The final section of the paper examines some of the political circumstances that are crucial to achieving effective debt cancellation, as well as some of the conditions that should be imposed by creditors if they agree to cancel significant portions of debt for countries like Indonesia.

Every country has a total stock of public debt. For some governments the debt is incurred directly through issuing bonds, where the purchasers of the bonds (creditors) can be foreign or domestic. Some countries also incur public (“sovereign”) debt by borrowing abroad from commercial and official (multilateral and bilateral) sources. The World Bank is one source of foreign official capital.

“Criminal debt” refers to a repayment burden on a society that is unjust either because sovereign loans were made to a country and then were stolen by officials and business cronies, or because debt was incurred to rescue an economy severely damaged by criminal behavior of powerful actors.⁷ This is different from sovereign debt where the funds provided to a government actually get used for their intended purpose. It is also distinct from government bond debt issued to build schools, pave roads, or provide services. Criminal debt is public debt on the shoulders of a society that is directly linked to illegal business activities or outright appropriation of external loan funds by individuals for their private enrichment.⁸ The public never receives any benefit from these resources.

All the debt must be repaid by the citizens of the country, the great majority of whom are poor in developing countries. But the channels of supply of public debt and the parties involved – foreign or domestic, private or institutional-official – are extremely important factors in determining culpability and fiscal liability as levels of criminal debt accumulate. The reason is that the actors involved and the power relations among them within the chain of debt supply change in crucial ways depending on the source of the debt.

The level of “grand” or “systemic” corruption in a society is related directly to a country’s internal power relations. Military dictatorships, civilian authoritarian regimes, and warlord states present citizens with minimal opportunities for limiting the share of total public debt that ends up as criminal debt. If a dictator borrows domestically by selling bonds for highway improvements, and most of the funds end up in accounts in the Cayman Islands or as a palazzo in Venice, this is an outcome that reflects power relations within the society. The responsibility for the theft and the fiscal liability for the resulting criminal debt burden is wholly between the citizens and their leaders. With a change in power relations and a change in regime, there may be a day of reckoning for the officials and military officers who accumulated the purely domestic component of the country’s total criminal debt.

But only part of all criminal debt originates wholly from within the national context. Another part originates from international sources. For this portion, both the power relations and the burden of legal and fiscal responsibility are different. It is here that the World Bank enters the discussion. Just as there is a power relationship between a government and its people, there is also one between the World Bank and governments that borrow (or, as the Bank terms them, its “clients”). Debt accumulated and stolen domestically is a purely domestic concern. But what of debt accumulated through an institution like the World Bank and systematically stolen by client governments? This foreign-sourced portion of a country’s total criminal debt is borne by its citizens even though they never received the funds and lacked the political power to constrain the kleptocrats enriching themselves. Clearly this is not a purely domestic matter between citizens and their leaders.

The share of criminal debt that originates from sources like the World Bank merits separate treatment because the Bank not only has leverage to prevent (or at least greatly diminish) the accumulation of foreign criminal debt from its own lending, but also a strong legal mandate in its constitution to do so. If it can be shown that the Bank was aware that a share of its resources was systematically being siphoned off as criminal debt, and if it can further be shown that the Bank failed to fulfill its legal mandate to prevent the loss of its loan funds, then according to international law the Bank shares culpability and also must bear some of the fiscal burden for funds transferred and lost. Unlike calls for debt reduction based on charity and compassion, such as Jubilee 2000, demands by indebted populations in Asia, Africa, and Latin America for the World Bank and other MDBs to absorb their fair share of the costs of the criminal debt problem are a right grounded in international law. In the case of Indonesia, for instance, World Bank loans to the corrupt Suharto government totaled about $30 billion between 1966 and 1998. According to the best estimates currently available, approximately a third of this, or $10 billion, was systematically stolen with the Bank’s full knowledge and thus is criminal debt. With the fall of Suharto, ordinary Indonesians through their newly elected government have a legal right to demand that the Bank absorb a fair share of this $10 billion in criminal debt. 

Legal Responsibilities of the World Bank

The Articles of Agreement represent the founding charter of the World Bank, setting forth the Bank’s purpose, membership, operations, rights, limitations, and responsibilities. It is a binding Constitution subject to all the rules and norms of international law. For purposes of the present discussion of corruption and accountability, the most relevant part of the charter is Article III, Section 5, Paragraph (c), which states: “The Bank shall make arrangements to ensure that the proceeds of any loan are used only for the purposes for which the loan was granted, with due attention to considerations of economy and efficiency and without regard to political or other non-economic influences or considerations” (p. 4). This clause was included in the Bank’s constitution to protect loan funds from being stolen or misused. It places a clear burden and responsibility on the Bank to make arrangements that ensure its funds are not corrupted, and it admonishes the Bank to carry out this function in a manner that is economical, efficient, and unbiased.

The legal implications of this Article are profound. The Bank’s charter is silent on what fiscal burden the Bank must bear if it fails to fulfill this fiduciary responsibility and a share of its lending become a significant part of a borrower’s criminal debt burden. But it is obvious that the World Bank is a recognized legal entity under international law and faces legal procedures that range from internal grievance hearings, through international mediation, and end with the jurisdiction of the International Court of Justice (the World Court).⁹ To date, no suit to demand relief of criminal debt linked to Bank loans has ever been brought by a client government that has replaced a kleptocratic dictatorship, nor have any class action suits been brought by aggrieved citizens or Non-Governmental Organizations (NGOs). This remains an untested area of international law.

The legal position of the MDBs, including the World Bank, regarding challenges to loan repayment has been most extensively examined by John W. Head, whose scholarly work builds on the writings of Aron Broches, who was the General Counsel of the World Bank in the 1950s and 1960s.¹⁰ Head writes that any controversy between the World Bank and borrowers shall be submitted to arbitration by an Arbitral Tribunal. A three-person arbitral tribunal is set up to hear the dispute in accordance with procedures it establishes. The tribunal then renders a decision that is enforceable in national courts. Head writes that “the instituting party is to notify the responding party of the claim being made, the relief being sought, and the name of the arbitrator is has appointed. Within 30 days after such notification, the responding party is to name the arbitrator it has appointed.”¹¹ The two sides are then supposed to agree on a third arbitrator (called an “umpire”). If they have not agreed on this third person within 60 days of the initial notification by the instituting party, the umpire will be appointed by the President of the International Court of Justice or the Secretary General of the United Nations.

An important consideration in any discussion of the World Bank’s legal responsibility for stolen funds is the seriousness with which the Bank has interpreted its mandate to “ensure” that its funds are not diverted or stolen. What “arrangements” have been made, how strongly were they enforced, and can the Bank demonstrate concrete results through a declining pattern of corruption in the projects it funds? Here it is relevant not just to look at the procedures the Bank has on paper, but also what is done in practice in the field and the results these practices yield.¹² What does Bank do to guard its funds generally, and what was done specifically in the Indonesian case?

Appendix I at the end of this paper looks in detail at World Bank project supervision in theory and in practice. It presents abundant evidence that corruption of Bank funds was not taken seriously at the Bank until very recently, that project supervision (particularly of financial aspects) has been extremely poor, and that strong attitudes still persist at the Bank at the most senior levels that corruption of development funds is inevitable and that such matters do not deserve a high priority. There does not appear to be much concern among Bank officials that the institution will have to bear part of the financial responsibility for lost loan funds, despite the clear legal provisions in the Articles of Agreement.

The United States Congress was so alarmed by the World Bank’s failures to make arrangements to ensure that loan funds were used for their intended purpose that it made a formal request for an investigation by the General Accounting Office (GAO). The GAO published its findings in a devastating report in April 2000 entitled “Management Controls Stronger, But Challenges in Fighting Corruption Remain.” It was taken as obvious that the Bank’s previous “arrangements” to safeguard loans were weak. The objective of the GAO investigation was to determine if new efforts on the part of the Bank since 1995 were effective. While noting some progress, the GAO found that “challenges remain and further action will be required before the Bank can provide reasonable assurance that project funds are spent according to the Bank’s guidelines” (p. 5). The GAO also concluded that “the Bank and some borrowers do not always comply with Bank procedures on project auditing and Bank supervision of borrowers’ procurement and financial management practices” (p. 6). The investigators report that “Bank studies on the quality of Bank supervision do not fully address key performance problems reported by external and internal auditors” (p. 6). Finally, the GAO found that the Bank “does not publicly report progress in implementing management control improvements” (p. 6-7).

It is apparent from the GAO’s research that Bank officials and staff were aware that their loan supervision was poor. This passage from the GAO report is particularly revealing: 

Although the Bank has long had an internal audit function and a system of management controls, the Bank recognized that its internal oversight mechanisms were weak, according to several officials we spoke to. These officials indicated that the Bank lacked a central focal point for reporting and reviewing allegations of wrongdoing and sufficient expertise to investigate allegations of wrongdoing. In addition, while the Bank expected its staff to exhibit strong ethical behavior, the Bank did not have a strong ethics awareness program. The Bank’s external auditor reported in 1998 that the Bank’s internal audit department – a key management oversight unit – had a fairly restricted scope of audit coverage and played a limited role within the Bank. For example, about 78 percent of the 206 internal audit reports conducted from fiscal years 1995 through 1997 were focused on administrative compliance issues, such as country mission office procedures, rather than on determining whether project funds were being used as intended.¹³

When the GAO report was finished, Senator Mitch McConnell, who had requested the investigation, released a letter criticizing the past practices of the Bank and its slow progress in correcting the most serious problems that lead to criminal debt. Among the problems with the Bank’s efforts at reform, Senator McConnell wrote that “new initiatives introduced [by the Bank] in 1998 to improve financial and procurement procedures only apply to 14% of the Bank’s 1,500 projects. In recent audits, 17 of 25 borrowers showed a lack of understanding or noncompliance with procurement rules. GAO’s review of 12 randomly selected projects identified 5 projects where the borrowing countries implementing agencies had little or no experience managing projects.” He added that “GAO determined that solving [corruption] problems is made more difficult because audits are often late and of poor quality, and the Bank does not evaluate the quality of audits.”

Senator McConnell also raised the problem of corruption in Indonesia, particularly his “concern about flagrant abuses which compromised the World Bank’s program in Indonesia.” According to the senator, “The Bank’s Country Director [Dennis DeTray] ignored internal reports detailing program kickbacks, skimming and fraud because he was unwilling to upset the Suharto family and their cronies whom he believed were responsible for Indonesia’s economic boom.”¹⁴ 

The Indonesian Case

Indonesia has the potential to be a test case for discovering if legal challenges are a viable channel through which to win relief of high levels of criminal debt accumulated through Bank projects and to influence the Bank to more quickly bring its project supervision in line with Article III. The government responsible for stealing public funds has been pushed out and a legitimate democratic government is in power.¹⁵ The Indonesians can also show that Bank funds were systematically stolen and that the Bank or the governments controlling the Bank were aware of the rampant corruption pervading the Indonesian state. Indonesians are potentially well positioned to plead at the International Court of Justice that they are burdened by a staggering level of criminal debt that accumulated in part because the Bank violated Article III and negligently loaned billions to the Suharto regime despite their knowledge not just of corruption throughout the system, but also of corruption within their own project portfolio.

The World Bank has tried to evade responsibility for and knowledge of corruption in their project in Indonesia. But their defense is weak. In their history of the Bank, based on access to tens of thousands of internal documents and files, Kapur et. al. write that with regard to an early awareness of corruption in the Suharto government, “the Bank clearly had this issue in view from the beginning of its (1968) renewed relationship with the country. But the relevant documents convey little sense that the phenomenon had to or could be fully eradicated. Indeed, McNamara himself did not warm to the issue until late in his tenure, at which time he became quite vociferous.” The authors continue: 

In his final presidential visit [in 1979] he gave almost the same message verbatim to assembled ministers then to Vice President Malik, and finally to President Suharto, face to face. McNamara explained that “it was also necessary to maintain the emphasis on reducing corruption. Outside Indonesia, this was much talked about and the world had the impression, rightly or wrongly, that it was greater in Indonesia than in any but perhaps one other country…. It was like a cancer eating away at the society.”¹⁶

There is no hint that this lecture from McNamara resulted in any tightening of Bank supervision of projects in Indonesia. Indeed, although his plan was not adopted, the Bank’s resident director proposed moving away from projects and providing Indonesia with large sector loans that would leave control over disbursement entirely to a government the Bank’s own top management viewed as among the most corrupt on the planet. Perhaps recognizing that McNamara was unlikely to shift the Bank’s posture toward Indonesia, President Suharto “is recorded as making no trace of a response to the demarche on corruption.”¹⁷ Suharto certainly recognized that his country had a uniquely close relationship with the Bank and McNamara – “Indonesia was the presidentially designated jewel in the Bank’s operational crown.”¹⁸ At a minimum, it is apparent that there was an early appreciation in the World Bank of the ruinous levels of corruption being perpetrated in Indonesia under Suharto’s military-backed rule.

It would not be until the late 1990s that the corruption issue would erupt into full public view in Indonesia. At the end of July 1997, the World Bank’s country director, Dennis de Tray, and the vice president for East Asia and the Pacific region, Jean-Michel Severino, issued an angry press release denying that roughly a third of the Bank’s loans to Indonesia routinely leaked into the hands of corrupt officials in the Indonesian government. They were responding directly to a press conference in Jakarta at which it was claimed that the conventional wisdom inside the Bank, both in Indonesia and among Indonesia hands in Washington, was that such levels of corruption were common. The angry press release from the Bank characterized the statements made in the press conference as dishonest, saying they had “misrepresented” the Bank’s work on behalf of Indonesia’s poor. Severino said that the Bank had checked the accusations and had “found nothing to support such an estimate” of corruption of Bank funds. The estimates had, however, been based on interviews with Bank officials both in Jakarta and the U.S. spanning the period 1990 through 1997. The Bank’s denial, carried on newswires around the globe, said the accusations were “demonstrably untrue” and that the Bank’s staff “know exactly” where all the loan money goes. It added: “We do not tolerate corruption in our programs. On this principle there is no compromise.”¹⁹

Even as these misleading statements were being distributed, Bank staff in Jakarta were at work on a secret document that would not be leaked until nearly a year later. Entitled “Summary of RSI Staff Views Regarding the Problem of ‘Leakage’ from World Bank Project Budgets,” and dated August 1997, the document presents what it terms an “operational overview” of the corruption problem in Bank projects in Indonesia.²⁰ The document opens with this “unequivocal statement of fact”: 

Documentation of procurement, implementation, disbursement and audits for Bank-financed projects are generally complete and conform to all Bank requirements; we have moved aggressively to resolve each and every irregularity for which we have documents (as well as many cases of preventive action and informal corrections of problems).

This declaration is followed immediately by a direct admission that in Indonesia the Bank had not made arrangements that ensured that the funds it loaned were used for their intended purpose: 

In aggregate we estimate that at least 20-30% of GOI [government of Indonesia] development budget funds are diverted through informal payments to GOI staff and politicians, and there is no basis to claim a smaller “leakage” for Bank projects as our controls have little practical effect on the methods generally used. [My emphasis]

Among other things, the document makes the following points: 

a) that some officials were expected to pay bribes in order to be placed in “wet” (lucrative) positions in the bureaucracy linked to development projects. 

b) that leakage pressures increased during the two years leading up to the 1997 national elections, and that Suharto’s political party machine, GOLKAR, was the culprit behind the additional squeeze on the system. 

c) audits by government officials at the ministerial and provincial levels are designed mainly to find issues or “mistakes” in project implementation, which can then be fixed or ignored for a fee ranging up to 10% of the project value. 

d) corruption across Indonesian government ministries is not uniform, in the experience of Bank staff, and ranges from relatively low (less than 15%, although on very large loans) in the Ministry of Health and the Ministry of Mines and Energy; moderate (15-25%) in eight ministries, including agriculture, education, public works, and religious affairs; and high (over 25%) in an additional four ministries, including forestry and home affairs.

Over the course of the New Order, the Bank loaned Indonesia roughly $30 billion. If a consensus figure is that a third was stolen, then Indonesia’s criminal debt linked to World Bank sources is roughly $10 billion. During the military dictatorship of Suharto, Indonesian citizens were extremely limited in their abilities to expose and stop corruption by government officials from Suharto down through the bureaucracy. The same cannot be said for the Bank. If it had the commitment to fulfill its fiduciary mandate in Article III, it could have raised the corruption problem as a matter that by law the Bank could not tolerate. It could have taken a variety of measures, including intensifying the supervision of its projects, thereby reducing the levels of corruption in its own operations, even if it could not stop the rampant corruption across the government. It could have threatened to gradually reduce its lending to Indonesia over a period of years if the leakage of Bank project funds was not progressively curtailed. It could have halted lending completely on the grounds that continued lending under circumstances of persistently high levels of theft violated the Bank’s fiduciary mandate contained in its charter.

In an article published in Indonesia’s main English language daily, the Jakarta Post, the Bank’s resident director attempted to deny any Bank responsibility for Indonesia’s criminal debt burden by shifting all the responsibility to the Indonesian side. He invokes the Bank’s notion of “ownership” of projects – a concept designed to get governments to embrace Bank projects more thoroughly in the partnership between the Bank and borrowers. 

The development projects and reform programs the Bank finances do not belong to us: they are owned by the government. It is the government that is responsible for ensuring that the money it borrows is spent for the purposes intended and that it is protected from leakage through bribery and corruption. This is not to say that we take no action ourselves in this regard. We have always audited, reviewed and monitored our projects to try to safeguard them. We have the strongest and strictest procedures of any development institution. We are continuously seeking ways of strengthening our controls.

The idea that a client state should “own” Bank projects makes perfect sense from the perspective of augmenting a government’s commitment to the project. On my reading, however, this notion of ownership never appears in the Articles of Agreement. And it is fair to ask if such a development approach can legally nullify Article III’s mandate on fiduciary responsibility.

The evidence is abundant that the Bank knew Indonesia was seriously corrupt as far back as the late 1960s. Moreover, the Bank’s resident staff in Jakarta argued in their confidential 1997 assessment that although Bank procedures were followed, the procedures did not put a dent in the accumulation of criminal debt burden on Indonesian society from Bank operations. A clear legal potential exists the new democratic government in Indonesia to sue for relief of part or all of the $10 billion in criminal debt that accrued to the Indonesian population on the grounds that they never received the funds and the Bank continued to supply new loans over three decades despite full knowledge that a significant share of the funds was being stolen.

What are the prospects for forcing the Bank to act legally and responsibly? When the new Indonesian government was installed in October of 1999, it was immediately apparent that Indonesia’s relations with the IMF and World Bank would have to be mended. Both institutions had suspended their fund transfers to Indonesia because of the Bank Bali scandal (IMF money) and because of the East Timor brutality in the summer of 1999. The economic situation in Indonesia remained dire, and there was an almost six percent shortfall for the national budget. The gap would have to be filled through the Consultative Group on Indonesia, chaired by the World Bank. The structural power of a capital controller like the Bank in such circumstances is enormous. Not surprisingly, there has not been one word uttered from the new government about the lost $10 billion. Indeed, during their first six months in office, Indonesia’s top economic ministers went out of their way to reassure the Bank and the IMF that Indonesia will only ask for debt rescheduling, not write-offs. As pressure mounted and Indonesia’s top economic minister finally raised the matter of debt reduction, the results were disappointing. According the Kwik Kian Gie, the Coordinating Minister for the Economy, “I have tried several times [to get debt relief] but I got only a scolding from the IMF, the World Bank, and the ADB. They even threatened to stop dealing with Indonesia.” The minister added: “We could not go against [the] IMF as in fact we still need their assistance. If the IMF decides they are through with us we would not get assistance from other international agencies. We would be lucky if we could get loans bilaterally.”²¹

It is evident that the only way to prevent the World Bank from avoiding its responsibilities for helping create a huge criminal debt burden for Indonesia’s poor is through popular political action aimed at the Bank and at the new government itself. Demonstrations, lobbying, and protests would have the potential of opening up a political space in which Indonesian officials could turn to the Bank and claim that for reasons of domestic political stability, there must be some relief. There are signs that pressure is beginning, though it still is at too low a level to have an impact. In January 2000, a thousand demonstrators gathered outside the World Bank mission in Jakarta demanding relief for stolen debt. When World Bank President Wolfensohn visited Indonesia in February of 2000, he was met with angry protests and had his minivan pelted with rotten eggs. An important difference between the structural power of private capital and that of the World Bank is that it is, in market and legal terms, completely legitimate for private investors to withdraw or withhold their capital when they find an investment climate unresponsive or hostile to their interests. But the same cannot be said of the World Bank, which is an international body subject to the norms and principles of international law and its own charter. It is very difficult to end the impunity of private capital for their economic crimes, but with a strong domestic movement in Indonesia and a solid legal team, the impunity of the World Bank could be reversed through proper legal channels. 

A Postscript on the Conditions on Debt Relief

It would be a mistake to push for debt relief and not take into consideration what is done with the funds that are saved. The purpose of debt relief is not to benefit the government, the military, the rich, or some abstraction called “the nation.” The purpose is to improve the conditions of the many poor living in developing countries. Thus it is important to assess, for example, whether funds from debt relief might themselves be stolen by the new government. Although the elimination of collusion, corruption, and nepotism is an important objective of Indonesia’s new government, evidence available both publicly and privately indicates that KKN is still pervasive in the Indonesian system.

This suggests that safeguards for any debt relief funds must be put in place. Moreover, both the World Bank and Indonesian NGOs should demand as a condition of debt relief that the freed resources be tied to specific programs and budget increases – for example, for education and health care. Likewise, increases in military budgets should not rise faster than overall increases in tax revenues to prevent savings from debt relief being diverted to military spending. Debt relief should also be tied to specific reforms by both the Indonesian government and the MDBs that will prevent repeating the same criminal debt problem in the future. The struggle for debt relief represents a moment of potential leverage not only to reduce the drain on the economy and country, but also to bring changes that will have an impact far into the future. 

 

APPENDIX I

Project Supervision in Theory and in Practice 

The Bank produces a tremendous volume of booklets and procedures associated with its operations (and even more in its research and public relations divisions). One key booklet is titled “The Project Cycle,”²² which sets forth the six stages of a Bank project, from “Identification” through “Negotiation and Board Approval,” and finishing with “Evaluation” once the project is completed. The penultimate stage is “Implementation and Supervision,” which the booklet describes as the “least glamorous part of project work,” though it admits that it is “the most important” (p. 7).

Troubling issues arise even in the description of the implementation and supervision stage, much less in actual practice. “Once a loan for a particular project is signed,” the document says, “attention in the borrowing country [and, the evidence will show, at the Bank itself] shifts to new projects that are coming along.” It adds that “this attitude is understandable” (p. 7). Turning to the question of fiduciary responsibilities, the document is surprisingly cavalier in downplaying the watchdog role of the Bank: 

The Bank is required by its Articles of Agreement to make arrangements to “ensure that the proceeds of any loan are used only for the purposes for which the loan was granted.” While this “watchdog” function has been and remains important, the main purpose of supervision is to help ensure that projects achieve their development objectives and, in particular, to work with the borrowers in identifying and dealing with problems that arise during implementation (p. 8).

In a document reproduced by the tens of thousands and circulated to every development ministry in every client country of the Bank around the world, lip service is paid here to project supervision in general and to fiscal accountability of loans in particular. At the level of signals the Bank sends on paper, such “while this” clauses send a clear message that the Bank’s commitment to following the money is half-hearted at best.

A fair response from the Bank would be that the project cycle document was last revised in 1982 and the Bank’s position on supervision, and particularly its culture and seriousness about corruption, has changed dramatically in recent years. But in an interview in April 1999 with two senior Bank officials who knew I was writing on corruption (and who were specifically designated to discuss the Bank’s current views and practices with me) it was apparent that the position had not changed. “We look more than anything else at what the project achieves,” one official said, “not really the money. We look, for instance, at whether schools get built, not how the money was spent to build them.” The other official went even further, making direct reference to the estimate that a third of the Bank’s funds loaned to Indonesia was stolen and became criminal debt. “If you take the amount of 30 percent loss,” said the official, “it means 70 cents [on the dollar] got used for development after all. That’s a lot better than some places with only 10 cents on the dollar.”²³

The Bank produced its first systematic framework for addressing corruption only in 1997.²⁴ Entitled “Helping Countries Combat Corruption: The Role of the World Bank,” the document admits that the Bank “should address corruption more explicitly than in the past,” adding that the Bank was “often reluctant to confront corruption openly because of the issue’s political sensitivity and the lack of demand from borrowers for assistance in this area.” [My emphasis]. The document further notes that in the Bank’s “vast store of country reports” and its many thousands of economic and sector studies accumulated over decades of studying, analyzing, working deeply within blatant kleptocracies, the subject of corruption is almost never addressed directly, but “can be inferred (even if the term is seldom used).” Were the Bank to find itself in court attempting to defend its record of due diligence with regard to Article III and its fiduciary responsibilities, the documentary evidence would, by the Bank’s own admission, provide a weak basis. The unwillingness even to utter the word “corruption” before 1996, opting instead for obsfucating terms like “rent-seeking” (which 99% of the planet’s population would interpret as “seeking to rent something”), demonstrates a profound reluctance on the part of the Bank not only at the level of concrete action, but even at the level of discourse. 

Project Supervision in Practice

The 1997 framework on corruption states that preventing fraud and corruption in Bank-financed projects is one of four levels at which the Bank is now combating corruption. Although this element is crowded out by the much larger discussion of the Banks plans for new projects and lending to fight corruption, it is worth discussing actual project supervision for two reasons: first, to assess whether changes proposed in the framework or announced by the Bank will be effective, and second, to gauge the vulnerability of the Bank to legal action. It is not difficult to demonstrate that the fiduciary mandates in the Articles of Agreement were seriously neglected in the Bank’s voluminous paper trail – whether in its reports or in its procedure booklets. But a much more important indicator of Bank culpability or innocence on the charge of collusion in allowing criminal debt to accumulate in its own operations is in the routine supervision practices on the ground and in the field. Even if the procedures on paper were carried out to the letter in practice, were the safeguards adequate and did they meet the standards of the mandate in the Articles? In the parlance of development specialists, who speak of a “results orientation,” can the Bank point to concrete results in the form of evidence of a low or declining rate of theft of the resources it loaned?

This review of past and current project supervision procedures draws on the author’s extensive field research on the Indonesian case, and numerous confidential interviews with Bank officials in Jakarta and Washington beginning in January 1990 and ending in April 1999. The most recent interviews were with Bank staff that worked on more than one hundred projects in several African countries. The interviews and field visits are supplemented by documentation and reports, some of which were leaked by Bank staff frustrated by what they describe as a dominant culture of indifference to corruption and eager to accelerate the pace of reforms. Pushing the pace of reforms has included revealing internal information that is potentially quite damaging to the Bank’s reputation and undermines its denials of culpability for the accumulation of criminal debt (and by extension supports its fiscal liability to absorb some portion of the losses represented by criminal debt).

This section will make liberal use of quotes from Bank staff with extensive experience in Bank operations, project supervision and implementation, and internal efforts to challenge the culture of indifference on corruption inside the Bank. It should be noted up front that these internal sources see a mixed picture in the Bank at the moment. On the one hand, the problem of corruption is receiving more attention now than at any time in the Bank’s history. But on the other hand, supervision budgets are smaller for projects while new schemes are being hatched to facilitate disbursing money faster to client countries. The intense pressure to disburse loans conflicts not only with project quality, but also with any efforts to ensure that funds get used for their intended purpose.

The supervision of projects consists of many components. For fiscal purposes, the most widely-used instrument for the Bank is audits. “We insist that all projects are audited by accredited agencies in the countries concerned,” a senior Bank official pointed out when pressed on whether the Bank was fulfilling its fiduciary mandate set forth in Article III.²⁵ The fact that the Bank requires audits by accredited agencies certainly signals that the institution is both serious about and effective in meeting the fiduciary mandate of its charter. But what counts is not procedures on the books or hoops jumped through. What matters is what actually happens on the ground and whether those activities constitute effective arrangements to ensure that Bank funds get used for their intended purpose.

The people in the Bank who know the most about this are its “task managers,” the individuals who oversee more closely than anyone else the design, implementation, supervision, and evaluation of Bank projects. Starting with procurements, it happens that all task managers are required to fill out Form 384 for all procurements over a certain threshold. Although potentially a useful instrument for accountants to follow the money in a project, in fact these forms have another purpose. According an individual with extensive project experience: 

There are certain levels of procurement, and if you go above certain levels, you have to fill this form out. It involves certain procedures, bidding procedures, competitive aspects of the process, and so on. I always thought this 384 was primarily for us [the Bank, project managers]. I came to find out that basically it's a form for reporting to the EDs [executive directors] so that they know how much business is coming or going through their countries. Because I would say, "well you know this [384] form isn't filled out..." and they [the speaker’s superiors] would say "well that's ok, it's really just for the EDs." And here I thought we were using it as more of a management tool. But it was really to help the EDs report back about what they were getting, where it was going, etc.²⁶

Although Bank officials regularly state that effective systems of financial management and documentation are in place and functioning, current and former task managers who watch billions of dollars disappear tell a very different story. On how well project expenditures are documented, a seasoned task manager explained the situation this way: 

They’re documented in a very weak way. There's so much of it where we just don't know. We're trying to make progress [in following the money], and it's happening now. It never happened before, with some rare exceptions. It is happening, but it's a long way from achieving critical mass [as a standard Bank mode of operation] in terms of being able to step back and say "we've got a reasonably tight program here, we're on top of it."

In response to senior management’s assurances that reliable audits are conducted, this individual disagreed: 

They've always had that [local accredited audits]. But the big pressure for the longest time, and it still exists to a large degree, is [that] the audit has to be done on time. But the quality of the audit? Whether they do anything about it afterwards? That for a long time was irrelevant. The only thing that came up on the radar screen [in the project management process or cycle] was “the audit hasn't been submitted, the audit's overdue.” That would come up. In many cases, you get an audit in – and this was the past, and I'm sure they've cut down the time lag on it – in many cases the audit would come in a year and a half, sometimes two years, after the fiscal year in question. It's too damn late – because whatever was wrong, forget it.

The real opportunity for an auditor to call attention to serious irregularities in a project is not through the standard boiler-plate numeric report, but through what the Bank calls a “management letter.” A task manager with extensive project experience explained: 

Even assuming the audit points to serious errors, in many cases they don't submit “management letters,” which are basically, apart from the number crunching, letters that gives the auditor’s opinion on the fiscal management of the project. Either you don't get them [the letters], or if you do get them you don't pay attention. The auditors themselves – and I've talked to a number of them – they admit freely that all they do is look at the books. If the books balance, they say “we've looked at it according to international auditing standards, and we find that the records are in order.” But the records themselves could be fraudulent. Auditors will tell you it's not their job.

Apart from these routine and arguably ineffectual audits, there is a stronger weapon in the task manager’s supervision arsenal known as a post-procurement audit.  

[T]hat's when you bring in what we call a post-procurement audit, and you actually go out and check [the validity of invoices]. Typically, “you bought three hundred air conditioners? Where are they?” You look at a couple. “There's three in this building? Let me see them.” Check the price. This is a class A air conditioner and you were billed for a class B air conditioner at twice the price – you know, whatever it is, you go out and check. So the [routine] audits don't tell you a thing. In fact, I can tell you from my own personal experience that in many cases, really good book keeping where the records are impeccable, you found flagrant fraud being committed. The books are beautiful. The weird thing is why the corrupt borrowers don't make a better effort to produce a really good set of books, because that wows everyone. "You want something?" Bing, you can access it. "Oh this contract? Here are the records on it. Here's the contract." You got the whole thing. And I've gone in, it's all there, but it's all fraud.²⁷

Thus it is fair to ask, has the Bank reasonably satisfied its Article III mandate if it claims that it conducted routine annual assessments of project books by accredited auditors? According to a task manager who worked on more than a hundred projects in Africa, such claims fall short. 

You've got to go beyond what's on paper. It's only paper. We've had cases when we go out in the field. You go to the [project] accounting office and you ask for documents. "Oh we don't have them. They're over at the ministry. They're somewhere else. We'll have them for you next week." I swear to God, some guy sits up all night writing up invoices. You can see, it's the same handwriting. Fifty different suppliers and it's all the same handwriting. And sometimes they're so saturated with writing that they put the same thing down on five different invoices without knowing it or picking it up. And it goes through the system. And then our guys [back at Bank headquarters] look at it and don't even pick it up.

The accredited auditors conduct narrow assessments that are almost pro forma and which do not detect fraud that ranges from the subtle to the blatant. The task manager concludes: “And so, money gone. In the accounting sense, everything is fine.” In direct response to the assurances from senior management that responsible audits were being conducted on projects, this individual added, “But you have to keep in mind, if they said they're doing post-procurement audits, fine. If they're doing a spot audit of the books, it's next to useless. […] The whole thing is a farce. If somebody tells me a project has been audited, I say, ‘So what? Let me see the audit.’”²⁸

One argument worthy of careful consideration is that tighter supervision is expensive, and that reaching a high degree of certainty that Bank funds are not being stolen could be even more costly to the Bank and its clients than the resources currently being lost. “You’re always balancing efficiency against stopping leakage,” a senior Bank official points out.²⁹ Article III explicitly requires that in carrying out its fiduciary responsibilities on projects that the Bank give serious consideration to matters of economy and efficiency. Is it really feasible to conduct post-procurement audits more aggressively, to price air-conditioners, or to absorb and follow up on management letters from auditors that raise troubling patterns of corruption? The 1997 framework document explains: 

The extent to which the Bank can check statements of expenditure is constrained by several factors. At headquarters it is often difficult to match items claimed for reimbursement with line items in the project accounts and to determine whether the items are eligible for Bank financing. Moreover, Bank staff conducting supervision missions carry out only limited on-site reviews of documentation due to claims on their time for resolving other project management and implementation problems. (24)³⁰

The number of transactions involved is not small. 

The stocks of IBRD and IDA projects currently disbursing are $88.4 billion and $42.5 billion, respectively, against an annual flow of new loan approvals of $14.5 billion and $6.9 billion, respectively, in FY96. This stock of projects collectively generates about 40,000 individual procurement contracts annually, of which 10,000 (60 percent of value) are conducted under international competitive bidding rules, and 20,000 (30 percent of value) are conducted under local bidding rules. About 10,000 contracts undergo prior review by Bank staff (60 percent of value). The remainder are subject to what is termed “post-audit” selective checking after the event to verify that procurement followed the procedures specified in loan documents. (24)³¹

It is not clear whether in claiming the remaining 30,000 contracts are “subject to” post-audit selective checking that the Bank means that the audits are actually carried out, or that the contracts are simply eligible for such oversight. A source who worked for years as a task manager argues that post-audits are, in fact, rarely carried out. 

In a post-procurement check, you take a transaction from A to Z. How can we, a banking institution, claiming to be the financial partners in an operation, and having the right of supervising the project in the physical sense, how can we go out there in a two-week supervision mission and not spend a day with the accountant? I can assure you, it does not happen. It is only the rare occasion that it does.³²

On the trade-off between cost and effectiveness, the former task manager agreed that one needs to be realistic. “There's no question that any institution is going to have inefficiency and money stolen,” he said. “The point is, do you just sit back and say ‘oh it's all right,’ or do you make the best effort to contain it?” As a practical matter, he argued that the key was to target the worst cases to set a tone: “You take the most egregious cases and you deal with it.” He continued: 

I always like to point out, you've got speed limit signs on the highway, and these represent all the safeguards on paper that Bank people talk about putting in place. But if you don't have a cop behind a billboard every so often, and if they don't see someone pulled over every so often, then people don't obey the speed laws.

He drew an additional parallel to the Internal Revenue Service in the United States. Tax payment is the U.S. is similar to local Bank project management in that both involve self reporting. The I.R.S. enforces honest reporting by in-depth and aggressive audits of only 1 to 3 percent of all corporate and individual tax payers. There are cash penalties for errors and jail penalties for fraud. Although the actual risk of being audited is low, many tax payers fear they will be caught if they cheat. The issue is not whether a large number of audits is conducted, but that tax payers know there is a real chance their fraud will be detected and that there will be real and even serious consequences for committing fraud. It is this concern with being caught or paying a price that is most lacking in the Bank’s approach.

Many task managers at the Bank complain that in many instances corruption is so pervasive in Bank projects that after decades of developmental effort in which corruption is tolerated, there are very few positive results that can be shown from the lending and projects. One task manager with more than a decade of experience on projects across a variety of sectors and in numerous countries rejected the claim by the senior Bank official (quoted above) that while a 30 percent loss to corruption is a problem, there is still a significant and positive impact from the other 70 percent: 

That’s the old argument, isn’t it? They’ve been saying that for years. […] There are a couple fallacies there, and it is much too cavalier an attitude. That's because, in fact, my experience has been – and it's the experience of a lot of other people there [on the operations side of the Bank] – if they're busy stealing 30 percent, they're not paying any real attention to the other 70, even assuming 30 percent is all they're taking. What you're really doing is really ruining the whole effectiveness of the investment itself. I try to tell people […] it's like giving the money to buy a car but they're stealing the money that would buy the gasoline. So what good is the car? It is a fact, I can demonstrate it, and I'll stand by it. I'll prove it anytime.

She offered the following example: 

You cut corners and nobody cares. If you let out a contract for $2 million, and you get the few civil servants at the top sharing $600,000 or 30 percent, do they care if the contractor puts in concrete that is just sand and water? Do they care if the contractor doesn't put reinforcing steel in the structures? They don't care. So when Bank people say we're at least getting 70 cents of good development on the dollar, no you don't. Because the contractor either has to make back the money that he's kicked back, or he just figures, “hey, it's open season, I do what I want and no one is going to challenge me.” And so you have this feeding frenzy, and the end result is you get very little development.³³

Putting aside who is fiscally responsible to repay the lost 30 percent, she questioned what genuine value a country or the poor really get from projects conducted in ways where such levels of theft are tolerated. 

If you get only one dollar out of ten that goes to the poor, is that really worth it? And have you done anything to strengthen the economy for the long term? No. You've only nourished a corrupt government that has no intention of providing services. To me, those arguments are hollow.

She points to a startling pattern in the African projects the Bank funded for decades, and in which she participated directly as a task manager. 

All you have to do in the case of Africa is travel the length of the continent and see how many derelict projects, buildings rotting, infrastructure rotting because we financed it. […] I can't remember one project in Nigeria, out of all the ones I worked on, that you could look back and say, "Well, hey, we did a good job" – we, us and the Nigerians.

As of the mid-1990s, she explained, the Bank had done about 2,200 projects in sub-Saharan Africa, with nearly all of them being seriously undermined by the lack of Bank supervision. 

Ask anybody to tell you how many they can think of that really succeeded out of 2,200 projects. Even when you take out the calamities, the drought that has destroyed or hindered progress, or you take out the civil wars. Even when you take all those other factors out, you've still got an awful lot of things that have been done that have gotten nowhere. The money is spent and the debt is incurred. Is the infrastructure there? No. Is it being maintained? No. It's just an endless parade of failure.

She is cautiously optimistic about recent signs of progress. 

It is happening but it has yet to change the culture of the Bank to a considerable extent. I do see beginnings of it. People are using the word “fraud” in meetings. It’s cropping up in memos on the operations side. I’m not talking about the PR side of the anti-corruption battle, where we have our EDI [Economic Development Institute] going out and conducting workshops, where they're training journalists how to expose corruption, or what to look for and how to deal with it in the press. These are all very positive things.

But she adds that too often the Bank adjusts to criticisms and problems more with public relations campaigns than with substance. 

The thing that troubles me a lot is the Bank's way of dealing with issues – and I think this is still a major part of the Bank's culture – is reorganize, shuffle around, change the names, do anything but actually deal with the issues. There's all this appearance – and appearances are everything – that we're doing something when in fact you see in a number of instances where not only are we not doing anything, but we're going backwards. I'm sure a lot of people would challenge me on that, but I don't think that their challenges would stand up.

At root, according to one task manager, the obstacles to dealing effectively with corruption today are the same ones identified in the Wapenhans Report in the early 1990s. The most important problem is the “culture of approvals,” a tremendous pressure manifested within the Bank (though rooted also in political-economic pressures from lending states that want the business and sales generated by Bank projects). President Wolfensohn has elevated the status of improving project quality and challenging corruption within the Bank. But, explains the operations specialist, there is still a basic inconsistency even in Wolfensohn’s approach: 

Although Wolfensohn came on board and there was more emphasis on supervision, there is still this schizophrenia. If you talk to task managers today, they have less budget for supervision now than they did five years ago. It's saying one thing and doing something else. We've got all these anti-corruption activities, and that's positive and long overdue. But at the same time there is still high pressure to lend, and we have things like this [the new draft certification proposal for disbursements] coming up that are going to make it easier to steal, and [provide] less budget for supervision. We're going in two contradictory directions.<³⁴

Wolfensohn’s impact at the Bank has been mixed. There is no doubt that corruption has a higher public profile than at any time in the Bank’s history. Many task managers in Operations, who struggled in vain for decades to try to inject a higher awareness of corruption and its corrosive impact on projects and the Bank’s broader goals, now feel the tide is turning. But the incessant pressure to lend coming from the Executive Directors pulls in the opposite direction. According to one well-positioned task manager: 

I think Wolfensohn has opened the door now. You hear so many stories about him. My sense when I walk down the halls is that one in five may be positive about Wolfensohn, but the other four are not. One way or another he's turned their world upside down, some of them more than others. He is unfortunately sending some mixed signals, and frankly that's the biggest complaint I hear. When I talk to people in the hall, they say "anti-corruption, right, but then he's pushing us for lending." I think the biggest complaint I hear about him is that he's sending these contradictory signals. It's a fair and true complaint. But I also think that if I were in his shoes, knowing the Bank as I do, I'm amazed that he's done what he's done. You're talking about an entrenched bureaucracy that has not only been accountable to no one in the past, but has had so much wealth to play with that nobody could touch them, no one was able to touch them, no one wanted to touch them. And here this upstart comes in and starts screaming and jumping up and down, and swearing and everything else. And this is just a total shock. He has turned their world upside down. But at the same time, how do you change a huge bureaucracy with the kind of history the Bank has, and the power that it has? I'm surprised he's been able to do what he's done. I have a feeling if it were entirely up to him, that we wouldn't be getting these mixed signals quite so much. But he's got to play ball with some people some of the time. This is not a one man show, as much as he tries to make it so.

The answer, this individual agrees, is to reduce lending until the quality of administration and supervision in projects, both on the Bank’s part and on the borrower’s side, is improved to a degree that the resources are not squandered. He concludes: “We're a long way from turning the corner on the Bank's culture. There will not be real progress until there's a genuine slowing down of the lending program. Historically, but certainly over the last 20 years, you could demonstrate with ease that the Bank has lent more money than the borrowers could absorb.” 

 

Selected Works on Corruption 

Bardhan, Pranab. 1997. "Corruption and Development: A Review of Issues." Journal of Economic Literature 35 (Sept): 1320-1346. 

Bayart, Jean-François. 1997. "Le ‘capital social’ de l'État malfaiteur, ou les ruses de l'intelligence politique," in La criminalisation de l'État en Afrique, 55-76. Edited by Jean-François Bayart, Stephen Ellis, and Béatrice Hibou. Paris: Édition Complexe. 

Bayart, Jean-François, Stephen Ellis, and Béatrice Hibou. 1997. "De l'État kleptocrate à l'État malfaiteur?" in La criminalisation de l'État en Afrique, 17-54. Edited by Jean-François Bayart, Stephen Ellis, and Béatrice Hibou. Paris: Édition Complexe. 

Becker, Gary S. 1968. "Crime and Punishment: An Economic Approach." The Journal of Political Economy 76, 2 (March-April): 169-217. 

Berkman, Steve. 1996. "The Impact of Corruption on Technical Cooperation Projects in Africa." The International Journal of Technical Cooperation 2, 2 (Winter): 67-82. 

Bigsten, Arne and Karl Ove Moene. 1997. "Growth and Rent Dissipation: the Case of Kenya." Journal of African Economies 5, 2 (June): 177-198. 

Bliss, Christopher and Rafael Di Tella. 1997. "Does Competition Kill Corruption?" Journal of Political Economy 105, 51 (October): 1001-1023. 

Caiden, Gerald E. 1993. "From the Specific to the General: Reflections on the Sudan." Corruption and Reform 7, (3): 205-213. 

Gillespie, Kate and Gwenn Okruhlik. 1991. "The Political Dimensions of Corruption Cleanups: A Framework for Analysis." Comparative Politics (October): 77-95. 

Harriss-White, Barbara and Gordon White. 1996. "Corruption, Liberalization, and Democracy." IDS Bulletin: Liberalization and the New Corruption 27, 2 (April): 1-6. 

Heidenheimer, Arnold J., Michael Johnston, and Victor T. LeVine, eds.. 1997 (Fourth edition). Political Corruption: A Handbook. New Brunswick, NJ: Transaction Publishers. 

Johnston, Michael. 1997. "Public Officials, Private Interests, and Sustainable Democracy: When Politics and Corruption Meet." In Corruption and the Global Economy, 61-82. Edited by Kimberly Ann Elliot. Washington: The Institute for International Economics. 

____. 1997. "What Can Be Done About Entrenched Corruption?" Paper prepared for the Annual World Bank Conference on Development Economics. Washington, April 30 - May 1. 

Kaufmann, Daniel. 1996. "Listening to Stakeholders Spell the C..... Word: The 'Trackling-Corruption-is-Taboo' Myth meets some Evidence." Mimeo. Cambridge: Harvard Institute of International Development (September). 

____. 1997. "Corruption: the Facts." Foreign Policy 107 (Summer): 114-13 1. 

Khan, Mushtaq. 1996. "A Typology of Corrupt Practices in Developing Countries." IDS Bulletin: Liberalization and the New Corruption 27, 2 (April): 12-2 1. 

____. N.d. "Corruption in South Asia: Patterns of Development and Change." Mimeo. University of London, SOAS. 

Klitgaard, Robert. 1996. "Cleaning Up and Invigorating the Civil Service." Background Paper prepared for the Civil Service Reform Study. Mimeo. Washington: The World Bank (November). 

____. 1988. Controlling Corruption. Berkeley and Los Angeles: University of California Press. 

Krueger, Anne 0. 1974. "The Political Economy of the Rent-Seeking Society." The American Economic Review 64, 3 (June): 291-303. 

Kurer, Oskar. 1993. "Clientelism, Corruption, and the Allocation of Resources." Public Choice 77, (2): 259-273. 

Leiken, Robert S. 1996-1997. "Controlling the Global Corruption Epidemic." Foreign Policy 105 (Winter): 55-73 

Lewis, Peter. 1996. "From Prebendalism to Predation: The Political Economy of Decline in Nigeria." The Journal of Modern African Studies 34, (1): 79-103. 

Leys, Colin. 1965. "What is the Problem About Corruption?" The Journal of Modern African Studies 3, (2): 215-230. 

Médard, J.-F. 1986. "Public Corruption in Africa: A Comparative Perspective." Corruption and Reform (1): 115-131. 

Root, Hilton. 1996. "Corruption in China: Has it Become Systemic?" Asian Survey 36 (August): 741-757. 

Rose-Ackerman, Susan. 1997. "Corruption and Development." Paper prepared for the Annual World Bank Conference on Development Economics. Washington, April 30 - May 1. 

____. 1997. "The Political Economy of Corruption." In Corruption and the Global Economy, 31-60. Edited by Kimberly Ann Elliot. Washington: The Institute for International Economics. 

____. 1996. "When is Corruption Harmful?" Background paper for the World Bank's 1997 World Development Report, The State in a Changing World. Washington: The World Bank (August). 

Waterbury, John. 1976. "Corruption, Political Stability and Development: Comparative Evidence from Egypt and Morocco." Government and Opposition 11, 4 (Autumn): 426-443.

¹ Peter Masebu, “Another Call To Write Off Africa's Bilateral Debts,” Africa News, November 2, 1999. Botchwey is a member of the Global Coalition for Africa, an NGO based in Washington, D.C., and he heads the coalition's unit on the African debt. The total African debt owed to bilateral and multilateral lenders at the end of 1999 was approximately $300 billion.

² As of March 2000, public sector debt was $85.9 billion and private sector debt was $58.5 billion. For clarification, it might be useful to explain some terms. “Total external debt” refers all debt owed to all foreign creditors by “Indonesia.” This includes foreign debt owed by the Indonesian government (public sector) and by all firms operating in Indonesia (private sector, whether domestic or foreign firms). “Total government debt” (also called “public sector debt”) refers to all debt owed by the Indonesian government and consists of external (“foreign”) debt and domestic debt. Before the Asian crisis of 1997 and 1998, Indonesia had very little domestic debt. But to recapitalize the banking system, the government was forced to issue between Rp 530-610 trillion in Central Bank bonds (SBIs). In dollars, this is roughly $80 billion in new domestic debt on which the government pays about 12% in interest (a rate far higher than interest paid on foreign debts). As of June 2000, roughly 85% of the bonds issued to rescue that banking system had floating rates.

³ The World Bank noted in its June 2000 annual report on Indonesia that three-quarters of the $81 billion increase was domestic government debt to finance Indonesia’s banking rescue program. What the Bank failed to mention was the important role the IMF and World Bank played in the 1980s to push through a highly risky banking deregulation (especially Pakto 1988) that opened up the banking system without any protections in place for supervision and control. That irresponsible set of reforms was a time bomb that was finally triggered when the financial storm hit Asia in 1997.

⁴ It should be noted that the external environment, particularly in the Asian arena, is growing increasingly challenging for the countries of Southeast Asia, especially Indonesia. A high cost will be paid for moving too slowly, and many ASEAN countries could get left far behind. The reasons for this include 1) the fact that China, long secluded during the Cold War, has entered the Asian theater as a major competitor, 2) reduced tensions between China and Taiwan will increase foreign investment in Northeast Asia, 3) reduced tensions between North and South Korea since the Pyongyang summit will also encourage investors, 4) the U.S. approved Permanent Normal Trade Relations (PNTR) with China, and 4) China will soon enter the WTO. Southeast Asia faces a real danger of being swept over by an economic tsunami from the increased attractiveness of countries in Northeast Asia. Indonesia and possibly Vietnam, the two most populous countries in ASEAN, are the two major economic basket cases in Southeast Asia and will likely be hardest hit by the growing competitive pressures in the region.

⁵ Source: Data in Tom Holland, “Asia’s New Fissure,” Far Eastern Economic Review, 163(26) June 29, 2000, p. 14, with updated data from Bank of Indonesia.

⁶ See “Value of IBRA-held assets down 30pc since 1998,” South China Morning Post, 26 June, 2000, p.1.

⁷ Criminal debt is distinct from “odious debt.” Odious debt in international law is defined as loans accumulated by an unrepresentative and oppressive government which are used to repress a country’s citizens. It does not matter if the loans were used according to prevailing law or were stolen or misallocated by officials. Most criminal debt is also odious debt, but not all odious debt is criminal debt. Also, odious debts are exclusively external. Criminal debts can consist of both foreign and domestic debt. In the Indonesian case, significant parts of the country’s foreign debts are criminal. But much of the public debt to bail out the domestic banking sector is also criminal debt because the debt was caused by criminal behavior by bankers and corporations.

⁸

⁹ The World Bank does open the door for the International Court of Justice and the U.N. to play a role in disputes involving the Bank and its clients. See Article X, Section 10.03, Paragraph ( c ), in “General Conditions Applicable to Development Credit Agreements,” International Development Association (a component of the World Bank Group), Washington, D.C., January 1, 1985. In September, 1993, the Bank created its “Inspection Panel,” which was designed to provide an independent forum for people directly and adversely affected by a Bank-financed project. Aggrieved parties can use the Panel to request the Bank to act in accordance with its own policies and procedures for a specific project. The scope of the Panel is severely limited by the condition that no requests can be made after the closing date of a project or once 95% of a project loan has been disbursed. In short, the Inspection Panel is useless as a forum for redress on criminal debt already accumulated.

¹⁰ See John W. Head, “Evolution of the Governing Law for Loan Agreements of the World Bank and Other Multilateral Development Banks,” American Journal of International Law, 90(2) April 1996, pp. 214-234. Also see Aron Broches, “International Legal Aspects of the Operations of the World Bank,” 98 Recueil des Cours 297 (1959, III) and Aron Broches, Selected Essays – World Bank, ICSID, and Other Subjects of Public and Private International Law (1995).

¹¹ See Head, p. 220, n. 50.

¹² Part of the explanation for why the Bank has not lived up to its fiduciary mandates rests with the geopolitical motives of major powers like the United States. A remarkably candid 1996 U.S. Government Accounting Office study observed that “much of the impetus behind U.S. participation in the Bank during the Cold War era was derived from the perceived utility of the Bank in containing communist expansionism in the developing world. One Bank official commented, for example, that because of U.S. concern about communist insurgency in the area, the Bank remained active in several sub-Saharan African countries long after the corrupt nature of these governments became evident.” (Chapter 2).

¹³ GAO report, April 2000, p. 11.

¹⁴ All of these quotes are from Mitch McConnell, “Statement of U.S. Senator Mitch McConnell on FY2001 Appropriations for International Financial Institutions,” press release, April 6, 2000.

¹⁵ Recent evidence that corruption continues to be a major problem despite a change of national leadership weakens the new government’s ability to legitimately demand relief for criminal debt.

¹⁶ Devesh Kapur, John P. Lewis, and Richard Webb, The World Bank: Its First Half Century (Washington, D.C.: Brookings Institution Press, 1997), Vol. I, p.492. The authors quoted from a memorandum of the then director of the Resident Staff, Indonesia, Jean Baneth.

¹⁷ Ibid.

¹⁸ Ibid., p. 493.

¹⁹ Press Release No. 98/1426/EAP, The World Bank.

²⁰ In January of 1999 another Bank document on Indonesia was leaked. This one cited corruption as one of a set of “serious structural problems which were well known to the Bank.” “Indonesia Country Assistance Review,” revised draft, the World Bank, January 6, 1999, p.1.

²¹ Asia Pulse, June 28, 2000.

²² “Warren C. Baum, “The Project Cycle,” The World Bank, 1982 (first edition 1979, revised edition 1982, ninth printing 1996).

²³ Interview with two senior Bank officials (K and J), World Bank Headquarters, Washington, D.C., April 10, 1999.

²⁴ “1997 Framework,” p. _.

²⁵ Interview with a senior Bank official (K), World Bank Headquarters, Washington, D.C., April 10, 1999.

²⁶ Unless otherwise noted, the quotes used in this section are from confidential interviews conducted in Washington, D.C. in April 1999.

²⁷ The respondent continued: “I've argued for years that having a system is fine. Having an accounting system and having safeguards and audits -- it's all fine in principle. But if you don't have people who are running the system who are trustworthy, you're in bad shape.” He said that spot-checking is needed all the way through a project. “When I used to go out in the field on a project, and very few task managers would do this, I would spend a day with the accountant on the project. And I would just randomly say ‘let me see this, this and that [invoice],’ and then I would take those transactions and go from A to Z with them. Go out and see whether in fact this vendor exists. And I've had cases where they didn't exist. You have an invoice, a name of a company, and they supplied office machines. You go look, there's some office machines sitting there, and you can't count all of them. They've never been used. They're just sitting there. So you have this sense they were just bought for the sake of buying them. You go out and you check at a store that sells office machines -- the same make and model number. You price it and you find it's half the price of what we're billed for. You go to the address [of the vendor] and they don't exist. You ask around the neighborhood and they never did exist. So here I've got a fraudulent invoice for equipment that isn't really being used at twice the market price. I mean if that isn't fraud, I don't know what is. And so you come back with that information, and you find that it's a pattern, you know you've got a serious problem on your hands. The auditors don't pick that stuff up.”

²⁸ The source added: “They never really audited the lending operations. They audited the Bank's own internal budget. We had the Operations Evaluation Department auditing the projects, but not necessarily from a financial point of view, just from a goals point of view. It was indeed required every year to have a local audit done. But if the audits don't uncover the problems sufficiently, or if they skirt the problems, and if they don't submit a management letter, which would detail in written form the problems, then you've only got a paper exercise that doesn't bring about any changes.” One task manager I interviewed pointed out that there are also serious conflicts of interest within the international auditing profession that cast doubts on the reliability of audits of the books for Bank projects. She explained: “I had a case where an independent auditor performed audits on a project. They had probably ten times more business on that [same] project – setting up a management information system, setting up accounts, and so on. I asked [a professional accountant at a major firm] if there's a conflict of interest if I'm an accountant-auditor, and I've set up the books, and I've assisted the client in financial management, and now I come in and audit that same client. [He] said, “yeah it is, but it happens all the time.” He said it's something that the industry has never tried to address. The accounting industry, like the banking industry, is not going to jeopardize their relationships with their clients. If you're Price Waterhouse Coopers Librand, are you going to go in and audit the books of your client and say that things are in atrocious shape with all kinds of fraud and embezzlement? All you can do is say the books are in order. It's very difficult to get somebody who can do it in an unbiased way. And even when those firms are not directly involved with a particular project or company, they often have the government or a ministry as a client. For them it's a business decision. He told me that it is a conflict, but we don't look at it as a conflict.”

²⁹ Interview with a senior Bank official (J), World Bank Headquarters, Washington, D.C., April 10, 1999.

³⁰ “1997 Framework,” p_.

³¹ Ibid., note 27. Thus 30,000 out of 40,000 procurement contracts, representing three-fourths of total purchases and 40 percent of total value, are not carried out under international competitive bidding rules. It is overwhelmingly in this realm that some 30 percent of the value gets stolen inside Indonesia. Note that a single project could have hundreds and even thousands of procurement contracts within it in any given year. Although 40,000 sounds like a staggering number, the number of active projects is much smaller.

³² Confidential interview, Washington, D.C., April 1999.

³³ She also rejected arguments that small-scale corruption does not seriously undermine projects. “If you see that happening [on a small scale],” she said, “you can almost bet that with every bit of procurement there's some hanky panky going on one way or another. It adds up and it's a constant blood-letting, every day, money's going out, $500 here, $1,000 there, $3,000 there. It's a constant blood-letting. How can the project function?”

³⁴ The idea behind the new disbursement plan is that a country’s domestic project management capability will be evaluated, upgraded, and then certified by the Bank as fiscally qualified, and thus responsible. The task manager found this approach alarming. “And they say now we will lend to you. Not only that, but because you have a system in place that we've approved, we'll give you the money in tranches. If you report back every quarter, or whatever, we'll just keep releasing the money. In my opinion, and a number of other people at the Bank – certainly people at the operational level – it’s just inviting more problems because even with the controls we have in place now, this spot-checking and so on, we can't begin to do justice to proper fiscal management.”