WB responsible for abused loans

By Jeffrey A. Winters

LONDON (JP): The current debate over the World Bank, corruption, and Indonesia has come down to a single key question: is the Bank justified in washing its hands of responsibility for the corruption of almost US$10 billion in Bank loan funds and shifting all blame and costs to the Indonesians?

On moral grounds the answer is obvious. It would be dishonorable and unjustified for the Bank to shirk its responsibility. But what about on legal grounds?

Here we get to the true heart of the debate. Dennis de Tray, the country director for Indonesia, recently made the position of the Bank perfectly clear. He said, "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 purpose intended and that it is protected from leakage through bribery and corruption."

In other words, the Bank is saying that although it knew a large share of the money it was providing was being systematically stolen, and although it took no effective steps to stop or even reduce the theft of funds, the legal burden lies with the Indonesian government while the financial burden, including the many billions in debt that never went for development, lies with the Indonesian people.

And with the recent initiatives on corruption just announced, the Bank is also saying that while it agrees that $10 billion stolen during the New Order is regrettable, the best it can offer now is more loans and more debt to try to reform the system in the hope that corruption can be reduced in the future.

In fact, de Tray is not on solid legal grounds in arguing that all responsibility lies with the Indonesians. The "Articles of Agreement" is the founding charter of the World Bank and sets forth the legal provisions for the Bank's conduct and responsibilities. It is a detailed document covering all aspects of the Bank's operations, its relationship to member countries, voting rights, and even rules on the withdrawal and suspension of membership. The "Articles" have been amended at regular intervals since the Bank was founded at Bretton Woods in July, 1944.

If we look closely at Article III, Section 5, Paragraph (b), it is immediately apparent where de Tray got the inspiration for the language he used above to try to shift all blame and all financial burdens to the Indonesian side.

Article III deals with "General Provisions Relating to Loans and Guarantees." Section 5 deals more specifically with "Use of Loans Guaranteed, Participated in or Made by the Bank." It is Paragraph (b) that is of crucial interest for determining if the Bank can legally claim that all responsibility lies with the Indonesian side.

Paragraph (b) reads: "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."

What does this mean? It means that putting aside political and other distorting considerations, the Bank is charged with the responsibility to take steps that "ensure," which means guarantee, that loan funds are spent only for their intended purpose (which presumably does not include buying luxury cars and houses for officials). And it stipulates that the Bank should achieve this objective in the most economical and efficient manner possible.

Nowhere does it say that the Bank should stop at merely lecturing a government about rampant corruption, even though this has no effect. Nowhere does it say that the Bank should keep loaning larger and larger amounts of money every year, even though there is abundant evidence that, as the Bank's own leaked confidential memo admits, 20-30 percent was routinely stolen. It says the Bank bears a legal burden of ensuring funds get used as they should.

Given the language of Paragraph (b), which provides us with a clear understanding of the legal responsibilities of the World Bank regarding the funds it loans, we are only left with the factual question of whether the Bank conducted its operations in Indonesia according to its legal mandate.

There are two ways to approach this question. One is to assess what the Bank proactively did to meet its responsibilities. The other is let the results speak for themselves. On both counts, the evidence is overwhelming that the Bank did not make the arrangements necessary to ensure funds were not stolen and diverted.

The Bank's supervisory activity for on-going projects was never designed to ensure the integrity of funds. Bank task managers relied almost entirely on local project managers who self-report. As any tax specialist knows, self-reporting systems work cleanly only if there are random and surprise audits. Even if you conduct detailed audits of only 5 percent of all projects, managers would be much less likely to cheat because they never know if they might get caught. The Bank does conduct evaluations of projects after they are finished, but these never involve detailed investigations of the use of funds.

The best proof that the Bank failed to operate according to Paragraph (b) is that corruption was rampant in Bank projects for years, and there is no evidence that the levels of corruption were being reduced from year to year.

The Bank's culpability in the loss of $10 billion in loan funds is compounded by the fact that there was widespread awareness among Bank staff that the money was leaking and disappearing. In my interviews with Bank officials in Jakarta and the U.S. over a seven year period beginning in 1990, I was always stunned that no one was deeply troubled about admitting that a third of Bank funds get stolen.

While I agree the World Bank should not conduct itself like an imperial power (though some would say it has been doing exactly that for decades), and while it should not take Indonesian law into its own hands, on other matters the Bank routinely imposes its mandates, procedures, rules, and conditions on client countries.

On corruption, it chose to look the other way and take no effective steps to meet the requirements of Paragraph (b). Soeharto's New Order had no right or claim to Bank loans, and the Bank could have threatened to cut off access unless the corruption matter was addressed satisfactorily, or unless there was at least a clear pattern of improvement. The Bank would have been justified in quoting Paragraph (b) as the reason it was required by law to take such severe actions.

Now it is time to decide what should happen. The Indonesian people (and I don't mean the government, but rather the people the government has been intimidating for over three decades) have been left holding all the debt burden. It is true that the Indonesian government bears legal responsibility for how loan funds are used. But it is also true that the World Bank, according to its own articles and regulations, shares that legal responsibility.

Instead of shifting all the blame to the Indonesians, who were, after all, living under a military dictatorship praised incessantly by the Bank, the time has come for the Bank to start preparing a debt reduction package of $10 billion.

The Bank could create a lot of good will by acknowledging its failure to stem corruption in Indonesia and voluntarily absorbing part of the burden that now rest unfairly on the shoulders of Indonesia's poor. If the Bank chooses the path of resistance, the Indonesians have a solid legal basis from which to demand a debt reduction through the proper channels -- including, if necessary, the World Court.

The writer is professor of political economy at Northwestern University and the author of Power in Motion: Capital Mobility and the Indonesia State.