USIS Washington 

24 February 1999


(Corruption most damaging to developing countries, he says) (2275)

Washington -- U.S. Secretary of the Treasury Robert Rubin says that
international financial institutions (IFIs) should cut development
assistance to those countries with rampant corruption.

"It is very important for the IFIs to cut off assistance when
corruption undermines the viability and effectiveness of their reform
programs," Rubin said in February 24 remarks. "Scarce development
resources should not be wasted in countries that are not prepared to
confront and combat corruption seriously, but rather should be
channeled to countries that will use the assistance most effectively."

Rubin made the remarks to a conference -- "A Global Forum on Fighting
Corruption: Safeguarding Integrity Among Justice and Security
Officials" -- attended by representatives from nearly 90 countries.

Rubin also urged the International Monetary Fund to condition
assistance to its member countries, in part, on efforts to confront
corruption; the multilateral development banks to establish clearer
and more uniform procurement rules; and the World Bank to strengthen
its own international anti-corruption systems.

He said that while corruption is a problem in all countries, its
effects are most profound in developing countries.

"By diverting the scarce resources that are needed so badly for
critical priorities such as health, education and housing, and more
generally, the impact on a less developed economy can be so much
greater," Rubin said.

He said corruption has had repercussions for those countries affected
by the Asian financial crisis. In some countries, corruption increased
vulnerability to the crisis, he said. In others, corruption was an
impediment to implementing the necessary response and a major obstacle
to restoring confidence, Rubin said.

The Treasury secretary outlined several steps for addressing
corruption, including:

-- clearer laws and regulations, adequately funded courts and
well-trained and -compensated regulators, judges, prosecutors and law
enforcement officers.

-- fewer controls on the economy, particularly fewer licensing

-- well-supervised and soundly regulated financial systems.

-- increased transparency and accountability of government operations
and decision making.

-- improved civil service systems with appropriate sanctions for
malfeasance and adequate compensation for employees.

Following is the text of Rubin's remarks as prepared for delivery:

(begin text)

February 24, 1999

It is a pleasure to speak with you today. I believe it is enormously
important that so many of you have traveled long distances to be here
in Washington for this conference, convened by the Vice President, on
the importance of combating corruption.

The fact that so many world leaders, representing some 80 countries,
and nearly as many multilateral and non-governmental organizations,
have gathered here to discuss the importance of combating corruption
demonstrates exactly that, the importance of this issue. I can
remember not so long ago when discussing corruption in any conference
like this would have been unthinkable, taboo. On a personal note, I
was in Kenya a few months ago and gave a speech on corruption. And I
thought it was remarkable, regarding both the level of interest and
the wide ranging discussion we held afterwards, which included
comments by students, government officials, and representatives from
non-governmental organizations about the impact of corruption on their
society. As a result of the leadership of the Vice President, and the
work of others in this Administration, of organizations like the World
Bank, the IMF, the OECD, and groups such as Transparency
International, there is an increased international awareness of the
corrosive effect of corruption and real focus on strategies to combat

Corruption is very much a social and political issue. An accountable,
responsive and honest government is central to a government's
legitimacy and, ultimately, to political and social stability. As
evidence of this, there are many instances of governments that have
lost public support in part because of corruption.

Today I wish to focus on how corruption is also very much an economic
issue. Then I will discuss how sovereign nations -- in both the
developing and industrial world and through the international
institutions -- can address this issue.

The backdrop for my remarks is the development of the global economy
over the last few decades. Liberalized trade and financial flows have
contributed to increased investment, output and efficiency, all of
which has benefited millions of people around the globe. A central
lesson of this period -- and it is a lesson that holds true despite
the financial crisis of the last year and a half -- is that, in order
to succeed in the global economy, nations must be able to attract
private capital to foster growth. There are many dimensions to an
environment conducive to attracting private capital -- sound
macroeconomic policies, a strong financial system, openness to trade
and investment, and an educated work force to name a few. And among
these dimensions I would include here is good governance, in
particular, effectively combating corruption.

Corruption disrupts normal business and public policy decision-making
by benefiting the few at the expense of the majority. It distorts the
allocation of financial and human resources to inefficient uses often
inconsistent with a nation's social, political and economic objectives
and needs. It discourages small business, entrepreneurs, and consumers
who simply cannot afford the costs of bribery. It discourages foreign
investment. And it damages the respect for law and public and
financial institutions, undermines the credibility and effectiveness
of both elected and appointed government officials, and creates an
environment conducive to crime in the private sector, including
organized crime.

The economic dimension of corruption has been demonstrated over the
last year and a half, as the world has experienced a financial crisis.
In some countries, corruption increased vulnerability to crisis. In
others, corruption was a significant impediment to implementing the
necessary response and a major obstacle to restoring the confidence
that is so critical to countries' recovery and stability.

In some countries, corruption is so pervasive it can be a threshold
economic issue that undermines a country's ability to succeed in the
global economy.

Of course, no region or nation -- developed or developing -- can claim
purity in this area. Corruption exists everywhere. But corruption is
especially troubling in developing countries. By diverting the scarce
resources that are needed so badly for critical priorities such as
health, education and housing, and more generally, the impact on a
less developed economy can be so much greater.

Against that backdrop, it seems to me there are at least five elements
critical to effectively combating corruption.

First, nations must have good, clear laws and regulations that can be
easily and reliably enforced. This, in turn, requires courts that are
adequately funded and independent of political pressure, as well as
honest, well-trained and adequately compensated regulators, judges,
prosecutors and law enforcement officers. All of this is a very tall
order, especially in poor countries that can not afford proper
training or adequate compensation, and this puts an even greater onus
on the international community to help.

Second is to eliminate unnecessary controls on the economy and reduce
state involvement in the economy. Reducing both the scope and the
administrative discretion of government reduce the potential for
corruption. For example, the fewer licenses that need to be granted
and the fewer approvals that need to be obtained, the fewer
opportunities there are for bribes to be demanded and paid.

Third is to create a well-supervised, soundly regulated, and
competitive financial system that operates on a commercial basis and
is not subject to credit decisions based on personal or political

Fourth is to increase the transparency and accountability of
government operations and decision-making. Shining light on the
activities of government by publishing information about its
operations and decision making and by including public participation
in those decisions, is a powerful deterrent to corruption. Let me also
add that a free and vibrant press can make an enormous contribution

Fifth and finally is to create a sound civil service system with
strict conflict of interest rules, appropriate sanctions for
malfeasance, and adequate compensation for employees. As I have
already mentioned, this last point may be particularly difficult for
developing countries, which may lack the resources to pay its civil
servants adequate salaries. In some countries, it may be desirable to
reduce the size of the bureaucracy to enable the country to pay higher

A key part of strengthening the civil service system is creating
strong, independent anti-corruption investigative units with real
authority and power. As I said earlier, no nation is immune to
corruption. In the United States we have placed a strong emphasis in
our government on creating units within the government, such as
Inspectors General, to prevent and combat corruption.

While much of the responsibility for putting in place these five
elements to combat corruption lies with developing nations, there is
much the industrial world can do.

To begin, developed countries must deal directly with their own
involvement in developing country corruption. Corruption is a two way
street and for every bribe taker, there is a bribe giver. In 1977, the
United Stales passed the Foreign Corrupt Practices Act, which outlaws
bribery by our businesses and investors in other countries. For the
last several years, we have been urging the OECD countries to do more
to discourage bribery. The OECD Bribery Convention, which was signed
in December 1997, and went into effect just a few days ago, was a
critical step in recognizing the responsibility of industrial
countries to discourage the giving of bribes. While most of the OECD
have ended the tax deductibility of bribes, there are still several
OECD countries that have not, and they should do so forthwith. We urge
vigorous monitoring of the implementation of the Convention, and would
like to see more work in the OECD Export Credit Participants Group to
encourage increased efforts by official export credit agencies to
eliminate bribery.

In addition, industrial nations can help by providing technical
assistance to developing nations who are building the sorts of
institutions I mentioned that are critical to combating corruption.
Treasury has created a specific program to work in this area -- with
Treasury's help, for example, the government of Bulgaria has develop a
national strategy to combat corruption, passing a financial disclosure
law and developing an internal corruption investigative unit within
the Ministry of Interior among other activities.

Separately, the international financial institutions -- including the
International Monetary Fund, World Bank, and the Regional Development
Banks -- have been active in combating corruption and should take
further steps. The IMF has developed a code of fiscal transparency
which calls for governments to accurately track and disclose
expenditures and thereby helps hold them accountable for their
spending decisions. However, we believe the IMF should include more
explicit consideration of weakness in governance in all Fund programs
and provide assistance conditioned on efforts to confront corruption.

The Multilateral Development Banks are in a unique position to fight
corruption. With annual disbursements of about $50 billion per year,
the MDBs can have real impact through the conditions they place on
loans and with the standards they set for themselves. Recently, the
World Bank and the African Development Bank agreed to put in place
systems linking new lending to performance on key governance and
corruption criteria. The World Bank is providing direct assistance for
anti-corruption programs in many countries and has strengthened its
own international anti-corruption systems.

But the IFIs still need to do more to help countries help themselves
combat corruption. The IMF needs to raise the bar still farther on
transparency in member countries. The MDBs need to establish clearer
and more uniform procurement rules and documents of the highest
standard. All of us need to work with the MDBs and IMF to focus their
efforts more on providing appropriate incentives and technical and
financial assistance to help countries develop anti-corruption laws
and anti-corruption efforts.

Finally, and maybe most fundamentally, the international community is
gaining a consensus that it is important for the IFIs to target
development assistance to those countries that can use it the best. In
making judgments about assistance, corruption is -- and must be -- an
increasingly important factor for the IFIs. Similarly, it is very
important for the IFIs to cut off assistance when corruption
undermines the viability and effectiveness of their reform programs.
Scarce development resources should not be wasted in countries that
are not prepared to confront and combat corruption seriously, but
rather should be channeled to countries that will use the assistance
most effectively.

Let me conclude by saying again that it is extremely important you
came to Washington to discuss this critical issue and that the Vice
President and so many other world leaders have exercised their strong
leadership on this issue. As I said earlier, conferences like this one
demonstrate that with intensified international focus, corruption is
becoming a mainstream issue. In fact, just by shining a light on
corruption, and its corrosive effects on a society and an economy, I
believe we make progress in demonstrating how behavior that was once
tolerated, is now unacceptable and that those people who engage in it
are subject to condemnation. As a byproduct of that process, we may
thus deter that behavior from happening in the first place. But this
is just a first step, albeit an important one. All of us must continue
to work together -- developed and developing nation, large and small,
and the international financial institutions -- to combat corruption.
And by doing so, I believe we will lay the groundwork for stronger
economies around the world, and benefit all of us. Thank you very

(end text)