ABSTRACT
Towards the end of his first year in office, World Bank president, James Wolfensohn, identified corruption as a major global problem. In the 50 odd countries Wolfensohn had visited during his debut year, corruption was the most predominant issue of public concern. In July 1996, whilst visiting the G7 summit in Lyons, Wolfensohn warned that the extent of corruption in developing and transitional economies was undermining public support for spending on overseas aid. ‘When voters think that their money is going into a few peoples’ pockets and Swiss bank accounts, that erodes the whole quality of the assistance package.’ In fact, by 1996 there were already signs of serious aid fatigue, with the US cutting overseas aid by around one-third and major donors such as Britain and France reducing aid budgets by four to six per cent. The US decided not to contribute at all during the period 1997–99 to the International Development Agency, the UN's soft lending arm aimed at funding projects in the poorest countries (mainly in Tropical Africa). 1 In addition to its effects on aid, corruption is also widely held to deter investment, undermine good government, distorting government policy and leading to a misallocation of resources:
In a corrupt environment, resources may be directed towards nonproductive areas – the police, the armed forces and other organs of social control – as the elite move to protect themselves, their positions and their material wealth. Resources otherwise available for socio-economic development will be diverted into security expenditure. This, in turn, can cause the weakening of market institutions as rent-seeking, rather than investment becomes the major objective of policy makers. 2
