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World: IMF, World Bank Face Tough Questions on Corruption

The World Bank and International Monetary Fund have been facing tough questions about their lending policies during their annual meetings in Prague this week. Critics are asking how the IMF allowed the disappearance of tens of millions of dollars loaned to Russia, and why the World Bank continues to issue loans in countries where corruption is rampant. RFE/RL's Ron Synovitz looks at the complaints and how the institutions are responding.

Prague, 28 September 2000 (RFE/RL) -- Critics of the World Bank and the International Monetary Fund say the institutions helped enrich corrupt oligarchs in Russia and other eastern European states during much of the 1990s. A concern repeated at the Prague meetings this week is that the institutions are disbursing credits without sufficient loan conditions or monitoring programs to ensure the money goes to the intended projects.

World Bank research released this week shows that government corruption continues to be rife in Russia, Azerbaijan, Kyrgyzstan, Ukraine, Romania, and Moldova. Bulgaria, Croatia, Georgia, Latvia, and Slovakia also topped the World Bank list of states where elite private interests are shaping reforms to their advantage by bribing policymakers.

Yale law professor Susan Rose-Ackerman, one of the world's leading scholars on corruption in emerging markets, says the World Bank needs to carefully consider the issue of loan conditionality.

"There can be countries where the leadership, or at least part of the leadership that has blocking power, is simply not interested in reform. Those [countries] would seem to me to be candidates where the [World] Bank should be very cautious about going in with a lot of funds, and they need to know what is going on there."

Frank Vogl, vice president of a U.S.-based non-governmental organization called Transparency International, told a World Bank seminar on corruption this week that loans should be halted where the Bank's own research shows rampant government corruption.

"Given the massive level of corruption at every possible level of government in these countries, should the World Bank continue to lend to these countries?"

But the World Bank's chief economist, Nicholas Stern, says development loans should only be halted in the most extreme cases of corruption -- as is the case with Kenya. Stern insists that the World Bank must keep communication open, even with corrupt officials, if the institution hopes to have any impact on the situation.

"Development and building governments and institutions is a long haul. You have to stay engaged. You have to be a partner in good times and bad. If you find that you're not going anywhere, then I think it's right that you have to scale back. If you find certain key areas which are causing the problems, then you should try to focus a lot of attention in those key areas."

But other critics, including public officials and private business leaders, complain that the World Bank and IMF have ignored evidence of government corruption in the former Soviet republics out of fear that cutting support might lead to a return to communism. Peter Aven, president of Russia's influential Alpha Bank, is among those critics.

Aven told a World Bank corruption seminar this week:

"If I dare to comment on the question about IMF support to Russia and lending before the election of [Boris] Yeltsin [in 1996], I think it was a huge mistake from my viewpoint. I think to provide support due to political considerations just shows that goals are more important than means. And with all this financial support -- unconditional support -- that's exactly what was shown to Yeltsin by the West."

In one of the most publicized cases of corruption linked to the IMF, U.S. authorities are investigating allegations IMF loans to Russia were illegally funneled through the Bank of New York as part of a $7 billion money laundering scandal. The allegations, and others like it, have brought the issue of corruption to the top of the IMF's reform agenda.

Last weekend, finance ministers from the Group of Seven (G-7) leading industrial nations welcomed steps already taken by the IMF to foster improved accounting standards and legal codes in emerging markets. But the G-7 communique also called for further steps -- including more accountability and transparency within the IMF itself.

Turkmenistan was named by World Bank Vice President Johannes Linn as the only former Soviet republic where loans have been halted because of corruption allegations. Linn, who heads the Bank's operations in Europe and Central Asia, also says Belarus is not receiving World Bank funds because of the lack of economic and democratic reform there.

In the case of Turkmenistan, five private Western firms have been banned from work on any World Bank projects after alleged fraud and corruption -- including bribe payments to Turkmen authorities in an attempt to win contracts for Bank-funded projects.

One project was aimed at building a banking telecommunications network for the Central Bank of Turkmenistan. Another involved the supply of computers to government agencies in Turkmenistan.

But while the World Bank can block private companies from obtaining contracts, senior Bank officials hesitate to speak about steps against Turkmen officials who allegedly demanded the bribes. The Bank says only that the government of President Saparmurat Niyazov has cooperated in a joint investigation. And Linn says there could be an agreement soon to unlock more loans for Turkmenistan.

The case demonstrates that while the World Bank has the authority to discipline Western businesses, it still has to behave diplomatically and prod gently where governments are concerned.