The ‘Corruption Problem’: An Assessment of the IMF and the World Bank’s

Approach to Corruption in Client Countries

Georgia Lysaght

Introduction

The call to reform the Bretton Woods and other major international institutions

has been mounting over the past decade. However, in the wake of recent global and

regional financial crises, as well as internal tensions within these institutions, the reform

agenda can no longer be brushed aside as unnecessary. From the latter part of the1980s

and throughout the 1990s, the activity of the International Monetary Fund (IMF), World

Bank and other multilateral lenders grew, but the success rate of their programs did not

improve. The major critics, both from within and outside the institutions, argue that their

programs are faulty and their governance is out of date. Based upon research carried out

for the author’s doctorate1, this paper will specifically address the IMF and World Bank’s

preoccupation with the issue of corruption2 in the developing world, with particular

reference to 1) the case of the financial crisis in Indonesia and IMF-directed Structural

Adjustment Program (SAP) and 2) the recent anti-corruption drive carried out by the

World Bank in 2005/2006.

Since the 1990s, anti-corruption initiatives have become a central feature of the

IMF and World Bank programs, as corruption increasingly was regarded not just a

political problem but an economic problem as well. While there are some arguments that

corruption and governance are exclusively political issues and thus outside the

parameters of the Bank and Fund’s mandate, it may be argued that in an age of market

primacy what is economic is also inherently political and vice versa. However, the

institutions’ blanket approach towards identifying and remedying corruption (briefly

1 The doctorate analyses the impact of the IMF’s SAP in Indonesia upon corruption and subsequently Foreign Direct Investment (FDI) 2 For the purposes of this paper, the term corruption is defined as the intentional misuse or abuse of public office for private or personal gain

1

defined here as the intentional misuse of public office for private gain) is somewhat

problematic. While it is undeniable that corruption is not desirable, it appears that the

institutions have placed a misguided and excessive amount of emphasis on the issue and

also made attempts to abolish corruption to the detriment of development and poverty. If

the IMF and World Bank are indeed to effectively advise upon anti-corruption strategies

in client countries then two essential points must be considered. First, the institutions’

perceptions of corruption and its operations must be more comprehensive, so that the

remedies are applicable. That is, corruption must be understood in respect to the unique

set of historical, political, economic and cultural circumstances of each particular

country. Second, the extension of mandate to include anti-corruption and good

governance initiatives necessitates a degree of structural reform within the institutions.

The recommended reforms would serve two central purposes namely, 1) a more

consultative process with the client countries whereby the corruption problem would be

remedied intrinsically in client countries rather than by external prescription, and 2)

prevent individuals from the Bank and Fund from exercising excessive power and

making decisions to the detriment of client countries.

A Survey of Corruption, Development and Investment

“Corruption does matter…It jeopardizes private sector investment. It hinders growth.

And at last but by no means least, it imposes a disproportionately heavy burden on the

poor”3 (James D. Wolfensohn)

Before examining the aforementioned case studies, it is important to provide a

survey of current debates surrounding the issue of corruption and its impact upon

development and investment. The relationship between corruption and development

specifically, and work on corruption in the political science field more generally, has

exploded since the beginning of the 1990s. Williams and Beare note a distinct shift in

international attitudes towards corruption during the 1990s, whereby it has been re-

3 J. D. Wolfensohn, ‘Corruption Impedes Development—and Hurts the Poor’, International Journal of Government Auditing, 25(4), October 1998, p. 1

2

conceptualised as a global political problem, rather than a domestic issue.4 Moran

maintains a broad range of pre-crisis commentary on the development of South Korea

and the Philippines fails to adequately acknowledge the extent to which corruption played

a part in those states, and instead assumes that corruption either did not exist in those

countries or that it did so that is impact but was minimal, despite the leaders themselves

of the states having reputations for being notoriously corrupt.5 In general it appears that

there is an overwhelming vacuum of publicly stated interest on the issue during the First

and Second World Wars and the Cold War. However, during the 1990s “a number of

international economic and development organizations have responded to this perceived

“crisis” of corruption through a myriad of research initiatives, policy statements, and

legislative reforms”.6 Theobold contends the reason for the dire lack, and then conversely

the mass, of international attention given to the subject, particularly in the developing

world, began with the end of the Cold War. He argues that throughout the Cold War the

US and other western countries turned a blind eye to corruption in certain allied countries

for obvious ‘strategic reasons’. The end of the Cold War, however, brought on a new set

of unanticipated problems that required explanation. Theobold argues:

The evaporation, furthermore, of the triumphalism that followed the collapse of the

Soviet Bloc, the realisation that history had not after all ended, called for a discourse

which would explain the increasingly apparent shortcomings of the international

capitalist system. Not least among these is the manifest inability to deal with the

escalating polarisation between rich and poor. 7

4 J. W. Williams and M. E. Beare, ‘The Business of Bribery: Globalization, Economic Liberalization, and the “Problem” of Corruption’, Crime, Law and Social Change, 32(2), 1999, p. 115 5 J. Moran, ‘Patterns of Corruption and Development in East Asia’, Third World Quarterly, 20(3), 1999, p. 569 6 J. W. Williams and M. E. Beare, ‘The Business of Bribery’, p. 115 7 R. Theobold, ‘So What Really is the Problem about Corruption?’, Third World Quarterly, 20(3), June 1999, pp. 498-499

3

Although the literature disagrees on limitless issues and debates surrounding

corruption, most work will argue that corruption is undesirable.8 This, however, lacks

context and is merely assertion, so it is necessary to adopt an approach that considers the

specifics of the relationship between corruption, development and investment a little

more extensively, rather than relying on an unempirical non-qualitative ideology.

Mauro’s work aims to make the link between state intervention in the economy and

opportunities for corruption. The literature shows that the factors most common or

conducive to rent-seeking behaviour are when, (1) officials have the mandate to restrict

imports (thus increasing the value of import licenses), (2) in the allocation of subsidies to

industry, (3) exchange rate and foreign exchange rate manipulation, and (4) low wages in

the civil service. Mauro extends these points to argue that resource rich developmental

economies are more susceptible to corruption than resource poor developmental

economies, and that what he coins ‘sociological factors’ also exist.9 While Mauro

probably encapsulates here the type of environment most conducive to corruption, he has

drawn universal conclusions on the relationship between corruption, growth and

investment, that is, he maintains that “corruption lowers investment and economic

growth”.10 Similarly, Gupta et al., also from the IMF, maintain that corruption

“interferes with the traditional core functions of government: allocation of resources,

8 See, for example, Bardhan, P., ‘Corruption and Development: A Review of Issues’, Journal of Economic Literature, 35(3), September 1997, pp. 1320-1346; Shleifer, A., and R. W. Vishny, ‘Corruption’, The Quarterly Journal of Economics, 108(3), August 1993, pp. 599-617; Nye, J. S., ‘Corruption and Political Development: A Cost-Benefit Analysis’, The American Political Science Review, 61(2), June 1967, pp. 417-427; V. Tanzi, ‘Governance, Corruption, and Public Finance: An Overview’, in S. Schiavo-Campo (ed), Governance, Corruption and Public Financial Management, Asian Development Bank, Manila Philippines, 1999; Tarling, N., ‘Keynote Speech: Corruption’, in N. Tarling (ed), Corruption and Good Governance in Asia, Routledge, London and New York, 2005, pp. 5-18; Seyf, A., ‘Corruption and Development: a Study of Conflict’, Development in Practice, 11(5), November 2001, pp. 597-605 P. Mauro, ‘The Effects of Corruption on Growth, Investment, and Government Expenditure: A Cross-Country Analysis’, in Kimberly A.Elliott (ed) Corruption and the Global Economy, Institute for International Economics, Washington, 1997. 9 Mauro’s term ‘sociological factors’ refers in this case to 1) ethnic conflict or dislocation in a country and 2) the prevalence of personalized relationships. P. Mauro, ‘The Effects of Corruption on Growth, Investment, and Government Expenditure’, p. 85-86 10 P. Mauro, ‘The Effects of Corruption on Growth, Investment, and Government Expenditure’, p. 87

4

stabilization of the economy, and redistribution of income. These functions influence

income distribution in varying degrees, both directly and indirectly”.11 There is little

point in stating the corruption is ‘bad’ for an economy; rather it is important here to

understand how corruption impacts upon economies and investment, and why.

As an economist at the IMF, Mauro’s approach to corruption is part of a broader

standardised industry ‘line’ that has been adopted by the Asian Development Bank,

World Bank, and the US Treasury. This position argues that corruption is bad for

economic growth as it deprives the national populations of resources as the capital to be

employed for development is siphoned off into the private coffers of the elite. Thus

capital remains in the hands of an elite few to the detriment of the national population.

Tanzi is from the same camp, and argues that “…there is a negative correlation between

the rate of growth and corruption. Thus, more corrupt countries tend to be poorer, and to

grow slower (if at all)”.12 Such an assertion clearly fails to account for the high economic

growth rates and improvements in human development indicators in Latin America and

Asian states that were considered highly corrupt. This is not to say that corruption

promotes development, but it is clear that neither does it necessarily stifle growth in all

instances.

Leys asserts that abolishing corruption may not necessarily produce different

results in terms of a more egalitarian capital distribution. That is, that the “funds rescued

from the grasp of the corrupt public servant or politician will not necessarily be spent on

good causes, eg education, health facilities for the poor”.13 However, it is the main

contention of the IMF that corruption effectively prevents capital being spent on such

“good causes”. A UNDP report revealed that since the introduction of neo-liberal

11 S. Gupta, H. Davoodi, and R. Alonso-Terme, ‘Does Corruption Affect Income Inequality and Poverty?’. WP/98/76, IMF Working Paper, May 1998, p. 29 12 V. Tanzi, ‘Governance, Corruption, and Public Finance: An Overview’, p. 2 13 R. Theobold, ‘So What Really is the Problem about Corruption?’, p. 492

5

‘reforms’ during the 1980s, the UK, a ‘non-corrupt’14 country, has the highest rate of

child poverty in Europe. The report goes on to say:

In 1998 some 4.6 million children- around one in three- were living below the poverty line. These high poverty levels, double those at the end of the 1970s, were a legacy of the 1980s- a decade characterized by a distinctly pro-rich growth pattern that left poor people behind. At the end of the 1970s the richest 10% of the population received 21% of total disposable income. Twenty years later it received 28%, nearly as much as for the entire bottom half of the population. Average annual incomes for the richest 20% increased at about 10 times the rate for the poorest 20% (3.8% compared with 0.4%). The United Kingdom’s Gini coefficient climbed from 25 to 35 by the mid-1990s- one of the biggest increases in inequality in the world.

Two main forces drove the rise in inequality: changes in the underlying distribution of earnings, and the impact of government policies that cut taxes for higher earners and lowered benefits for the poor15

Thus in actuality, Leys comments appear to have merit in that the absence of corruption

does not necessarily guarantee that resources will be deployed to the benefit of the

population.

The assumption that the impact of corruption is necessarily “bad and important” 16

is common but also incorrect. Egger and Winner’s cross-country study found that FDI

sentiment towards Thailand and China was far more influenced by factors such as

location and production costs rather than corruption. In fact, FDI levels did not vary

significantly in the instances where corruption increased.17 While this does not mean that

corruption aids growth, or that corruption is desirable, it is clear that the relationship

between corruption, development and investment requires extensive critical analysis.

Equally simplistic in the arguments maintaining that corruption is ‘bad’ for growth is the

all-too-common claim that bribing is beneficial as it ‘greases the wheel of bureaucracy’.

This rationalisation fails to recognise the larger implications of a corrupt state or system.

For example, while engaging in bribery to speed up license processing may indeed result

14 The United Kingdom is consistently rated by Transparency International as one of the least corrupt countries in the world. 15 UNDP, ‘Human Development Report 2005’, p. 68 16 C. Leys, ‘What is the Problem About Corruption?’, p. 222 17 P. Egger and H. Winner, ‘How Corruption Influences Foreign Direct Investment: A Panel Study’, Economic Development and Cultural Change, 54(2), January 2006, pp. 479-480

6

in a faster application approval, this does not necessarily mean that production or

economic growth occurs at an increased rate.

Moran’s study demonstrates that the relationship between corruption and

development is contextual and thus varies.18 This may be seen in the case of Indonesia,

where the state sustained high levels of Foreign Direct Investment (FDI) and Gross

Domestic Product (GDP) alongside high levels of corruption between the mid 1980s and

1990s. However, from 1997 levels of FDI and GDP remained low while corruption

remained high.19 Indeed, it appears that in countries where corruption is high the

intricacies which directly and indirectly govern the relationship between corruption and

development are not static, and neither is their impact. This is an important point, as the

nature and function of corruption is not universal, neither are the states and networks in

which it resides. Therefore, each combination of factors produces a unique situation that

impacts accordingly, a point that IMF and World Bank overwhelmingly neglect in their

somewhat universal approach to corruption.

When addressing the effects of corruption, it is useful to consider the approaches

of Shliefer and Vishny, Yushin, and Bardhan, which take into account a range of variable

factors and the subsequent variable effects that result. A better understanding of the

effects of corruption may be achieved by exploring the internal and external political-

economy framework under which corruption operates, rather than simply gauging the

level of corruption. Shleifer and Vishny contend that the two primary factors that render

corruption detrimental to economic development are first, a weak central government (as

there is no agency to maintain parameters on the corruption) and, second, the costs

incurred in the effort to maintain secrecy.20 Bardhan’s approach is similar where he

points out that the disorder that arises from a decentralised corrupt bureaucracy has far

worse effects than that of a centralised system of governance.21 MacIntyre too notes that

18 J. Moran, ‘Patterns of Corruption and Development in East Asia’, p. 570 19 G. Lysaght, Anatomy of a Disaster: The IMF’s War on Corruption in Indonesia and the Effects of Structural Adjustment 1997-2005, PhD Thesis, Forthcoming. 20 A. Shleifer and R. W. Vishny, ‘Corruption’, p. 616 21 P. Bardhan, ‘Corruption and Development’, p. 1322

7

the overall impact of corruption is dependent upon the distribution of state power, as “the

only thing worse than organised corruption is disorganised corruption!”.22 As we shall

see in the next section of this paper, the IMF’s inability to recognise different types of

corruption in Indonesia resulted in this catastrophic shift that MacIntyre warns against.

Where corruption is not exercised under a system of central governance, the

racketeering of ‘independent monopolists’ result in an intolerable degree of uncertainty

and virtual chaos, thus economic development suffers and investor confidence is weak.

One of the most common instances where corruption functions in such a framework is in

former dictatorships that are newly democratic. Shliefer and Vishny argue that

institutions are generally underdeveloped and weak in newly democratic states, and the

government does not command the necessary authority to prevent these institutions

taking bribes independently of one another. The independent monopolists system results

in a much more inefficient rate of capital and resource deployment. For example, in the

Philippines the new powerholders of the post-Marcos era that operated as independent

monopolists rendered much lower levels of resource allocation efficiency than during the

period where political power was highly centralised.23 In his discussion on corruption in

new states, Leys argues that the opportunity for corruption presents itself as the official

rules and regulations are still in the clarification and consolidation process, as is what

constitutes breaking them.24

Explored in detail in the next section, the implementation of Regional Autonomy

in Indonesia, a cornerstone of the IMF’s program, effectively ensured the allocation of

unprecedented and poorly stipulated mandates of power to the local government at the

kabupaten or regency level. And thus, many foreign investors have made complaints

based upon the lack of clarity in rules and regulations regarding investment when

22 A. MacIntyre, cited in H. Hill, ‘Conference Report Indonesia Update 2003. Business in the Reformasi Era: New Challenges, Old Problems’, Bulletin of Indonesian Economic Studies, 39(3), 2003, p. 359 23 A. Shleifer and R. W. Vishny, ‘Corruption’, p. 610 24 C. Leys, ‘What is the Problem About Corruption?’, p. 225

8

negotiating with the bupati or regents.25 However we can also observe other examples

where corruption was plausible as a form of development, such as under the Yushin

constitution (1972-79), where public programs actually benefited from corrupt capital in

rural South Korea. 26 In this case, Moran similarly maintains that corruption was

‘nationalised’ under the Park regime whereby “the state set the parameters within which

corruption took place, and as a result corruption functioned as a dynamic part of the

development process”.27 Park’s strategy of ‘picking winners’ was productive for a period

of time, but let us not forget that this system, with striking semblance to Indonesia, was

largely the beneficiary of external linkages, including the vast amounts of US aid granted

to Korea during the 1960s.28 Of the $2.3 billion in aid extended to Korea between 1953

and 1961, US aid accounted for roughly $1.95 billion or 85 per cent, and by the end of

the 1950, Lie notes, “U.S. economic aid to South Korea accounted for over 10 percent of

South Korean GNP”.29 Shleifer and Vishny too outline how the function of corruption in

Russia was both rigid and checked, where “…bribes were channelled through local

Communist party offices. Any deviation from the agreed-upon pattern of corruption

would be penalized by the party bureaucracy, so few deviations occurred. Once a bribe

was paid, the buyer got full property rights over the set of government goods that he

bought”.30

The point here is not to justify corruption as a legitimate means of development,

but to demonstrate two main points, that is; (1) that the blanket attitude ‘corruption is

bad’ is inadequate, yet as Williams and Beare contend, the IMF, World Bank and

OECD’s preoccupation with the problem of corruption has “contributed to a singular and

highly politicised account of corruption, its underlying causes, and the necessary policy

prescriptions”.31 (2) although corruption is not desirable, reasonable to high rates of

25 Fieldwork Interviews, Indonesia, 2005. 26 J. Moran, ‘Patterns of Corruption and Development in East Asia’, p. 570 27 J. Moran, ‘Patterns of Corruption and Development in East Asia’, p. 571 28 J. Moran, ‘Patterns of Corruption and Development in East Asia’, p. 572 29 J. Lie, Han Unbound: The Political Economy of South Korea, Stanford University Press, Stanford California, 2000, p. 29 30 A. Shleifer and R. W. Vishny, ‘Corruption’, p. 605 31 J. W. Williams and M. E. Beare, ‘The Business of Bribery’, p. 117

9

economic growth and investment may be maintained when corruption exists so long as

power is not diffused. The anti-corruption position also argues that corruption impedes

foreign direct investment, however, this assumes that foreign companies considers moral

or ethical questions when investing. Rather, analysis from previous research has shown

that in its pursuit to raise the profit margin and make investment worthwhile, business

(both domestic and foreign) will willingly engage in corruption so long as it is not

excessively costly.32

The IMF’s War on Corruption in Indonesia and its Effects

The operation and impact of corruption in Southeast Asia has been a topic of

vigorous debate amongst Southeast Asian scholars and commentators. What is interesting

is that corruption was a topic of only peripheral concern to the IMF and World Bank

when the ‘miracle economies’ of East Asia were experiencing rapid economic growth

during the 1980s and early 1990s. However, since the onset of the Asian financial crisis

in 1997 the IMF and World Bank have become far more concerned with the impact of

corruption upon development and the general economic wellbeing of states. This recent

preoccupation with corruption has sparked much debate over the best course of action to

abolish, or at least reduce its impacts. At the UN Conference on Financing for

Development in March 2002, the World Bank and IMF were accompanied by numerous

ministers from donor countries in their conclusion “that wherever corruption reigns,

development aspirations will remain an unattainable dream”.33 These sentiments are part

of the common anti-corruption rhetoric espoused by international financial institutions of

the West over the last decade.

In 1997 Indonesia was caught up in the financial crisis that involved, to varying

degrees, all of East Asia. The crisis was triggered as a result of investor panic, which

began in June 1997 in Thailand, and spread rapidly. As a result, currencies and markets in

East Asia plummeted, subsequently devastating the previously internationally heralded 32 Interviews Jakarta Indonesia, July – September 2005. 33 P. Eigen, ‘Measuring and Combating Corruption’, Policy Reform, 54(4), December 2002, p. 190

10

‘miracle economies’. Thailand, South Korea, Indonesia and Malaysia were the four

countries most severely affected by the crisis.34 The overwhelming majority of

Indonesian debt was in the form of private sector unhedged short-term debt owed to

foreign creditors, and was predominately in US dollars. Due to the rapid depreciation of

the rupiah, the amount owed increased to unserviceable levels. The immediate response

of the Indonesian government to the crisis was to float the rupiah, which was suffering

severe downwards pressure. This, and the selling of international reserves, were the

initial measures enacted by the government in an attempt to at least soften the blow and

restore stability to the exchange rate and prevent dire economic contraction. However,

these responses failed to safeguard Indonesia from plunging into a full fledged crisis

nearing the end of 1997.

As a consequence, nervous creditors were hesitant to reschedule debt or extend

new loans, and investors lacking in confidence pulled out of Indonesia as quickly as

possible, leading to a significant contraction in the size of the economy. The waning of

investor/creditor confidence was followed by a further decline in the exchange value of

the rupiah and these two factors continued to influence each other until the rupiah

bottomed out at 20 per cent of its pre-crisis value. In September 1997, the Suharto

government had little choice but to request the intervention of the IMF as had the

governments of Thailand ($17.2 billion program) and South Korea ($58 billion program).

Malaysia was the only country of the that four declined an IMF crisis package. The

Fund’s US$10 billion regional bail-out package to Indonesia formed part of an overall

rescue package totalling US$43 billion that was subsequently initiated.35

The Fund primarily attributed the cause and severity of the crisis, and Indonesia’s

subsequent inability to recover, primarily to the effects of corruption collusion and

nepotism, or korupsi, kolusi and nepotisme (KKN), to use the common Indonesian

acronym. This resulted in a number of anti-corruption strategies in the form of

34 S. M. Indrawati, ‘Indonesian economy recovery process and the role of government’, in The Journal of Asian Economics, No. 13, 2002, p. 578 35 IMF, News Brief No. 97/22, 31 October 1997

11

deregulation and decentralisation reforms. The intended outcome of the approach was to

wind back the role of the state in the economy and diffuse politico-business relations thus

insulating the economy from vested interests. Such prescriptions are demonstrative of the

general consensus on the prevention and remedying of corruption. However, this highly

structural approach produces a handbook or manual on corruption and its true

effectiveness is extremely difficult to assess. Both statistical data and qualitative research

in the form of interviews carried out in Indonesia by the author indicates that corruption

had a far more detrimental impact on market sentiment and economic growth after the

implementation of IMF-directed reforms than it did during the New Order regime.

The IMF-directed programs targeted the roots of the systems of patronage

inherent in Indonesia’s political and economic system. An Indonesia free of these

elements, it was believed, would encourage the re-entry of much needed capital and

investment into the country which was the key to recovery. Robison and Hewison’s

analysis of the IMF’s intentions argues that neo-liberal commentators “expected a

convergence of a development model”36 whereby the existing economic characteristics,

that of a strong state and the presence of political corruption or predatory arrangements,

would be exchanged for a free market and a transparent system which would possess the

necessary characteristics pertaining to ‘good governance’37. Simply put, “it was expected

that state-led capitalism and ‘crony capitalism’ would be challenged, reformed and

replaced”38. Robison and Hewison also note, however, that this scenario failed to

eventuate despite optimistic anticipation.

The following section outlines the key elements of the IMF program in Indonesia,

and its outcomes. It focuses predominately on the decentralisation initiative, which has

been regarded as ‘pivotal IMF demands’ in an effort to break down the politico-business

36 R. Robison and K. Hewison, ‘Introduction: East Asia and the trials of Neo-liberalism’, The Journal of Development Studies, 41(2), February 2005, p. 183 37 R. Robison and K. Hewison, ‘Introduction: East Asia and the trials of Neo-liberalism’, pp. 183-184 38 R. Robison and K. Hewison, ‘Introduction: East Asia and the trials of Neo-liberalism’, p. 184

12

relationships.39 Initially, the Fund had assumed that the range of reforms would be

enacted smoothly and in conjunction with new legislation, laws, agencies and institutions

established to support them. However, due to the complex nature of Indonesia’s

executive and judicial branches, and their relationship with the private sector, many of

the reforms were ineffectual.

Up until May 1998, Indonesia’s political framework had been characterised by the

32-year long New Order regime, where President Suharto stood at the apex of a highly

centralised authoritarian system of government.40 Inherent in this system was a highly

developed network of politico-business relationships and subsequently Indonesia was

consistently rated by Transparency International’s Corruption Perceptions Index as one of

the most corrupt countries in the world.41 The IMF and World Bank argued that good

governance, transparency, and economic order was implicit in the devolution of politico-

fiscal power from the centre to the local.42 Hence in Indonesia, rapid decentralisation was

a central element of the IMF’s prescriptions, a reform supported strongly by the World

Bank. In fact the Habibie government (May 1998 – October 1999) was subject to

immense pressure to embark upon a rapid process of decentralisation by both internal and

external forces, that is, by local governments and International Financial Institutions

(IFI’s) respectively. In March 1999 the government announced the impending

decentralisation legislation, and assured that the reforms would be sequenced

accordingly, so as not to jeopardise the macroeconomic framework with the assistance of

the aforementioned institutions.43 The major regional autonomy laws that came into play,

passed by the Parliament in May 1999 (to be implemented in 2001), were Law 22/1999,

the law on Regional Governance, and Law 25/1999, the law on Fiscal Balance between

the Centre and the Regions. According to the government of the day, the laws would

39 Hadiz, V. R., and R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations: The Indonesian Paradox’, The Journal of Development Studies, 41(2), February 2005, p. 226 40 President Suharto was ousted from office in May 1998 41 Transparency International, ‘Corruption Perceptions Index’, 1995, 1998, www.transparency.org/policy_research/surveys_indices/cpi, (date of access 20 November 2006). 42 V. R. Hadiz and R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations’, p. 233 43 Government of Indonesia, ‘Indonesia- Letter of Intent’, 16 March 1999

13

“ensure that central transfers to local government are commensurate with expenditure

responsibilities and revenues from their own sources, [and that] regional disparities in the

quality of public services are reduced”.44

Decentralisation transferred power to the district (Kabupaten) and city (kota)

levels due to fears that separatist powers may have risen with less difficulty at the latter

level. In effect, the decision to focus upon regional powers was part of a ‘divide and rule’

sort of strategy, hence the legislature actually diminished provincial power and increased

regional power, abolishing any formal hierarchical system that may have previously

existed between the two. Subsequently, once the decentralisation laws were actually

enacted, the number of regional governments rose to 336 between 2001-2004, as opposed

to the 292 that existed between 1998-2000 before decentralisation.45 The reforms were

carried out by the Regional Autonomy Advisory Council and the Coordinating Team,

supervised by an IMF/World Bank assistance team, and overseen directly by the Ministry

of Finance in conjunction with the Ministry of Internal Affairs and Regional Autonomy

in order to assure that they were “carried out in an orderly and phased manner”.46

Accordingly in January 2001 laws 22/1999 and 25/1999 were enacted and the regional

governments assumed responsibility for:

all government functions except foreign policy, defence and security, justice,

macroeconomic policy, religion, and various other central government functions such as

national planning, human resource development, natural resource utilisation,

conservation, strategy high technology, state administration and state economic

institutional system.47

44 Government of Indonesia, ‘Indonesia- Letter of Intent’, 22 July 1999 45 F. Fitrani, B. Hofman, and K. Kaiser, ‘Unity in Diversity? The Creation of New Local Governments in a Decentralising Indonesia’, Bulletin of Indonesian Economic Studies, 41(1), April 2005, p. 64 46 Government of Indonesia, ‘Indonesia- Letter of Intent’, 2000 47 G. Fane, ‘Change and Continuity in Indonesia’s New Fiscal Decentralisation Arrangement’, Bulletin of Indonesian Economic Studies, 39(2), August 2003, p. 160

14

However, rather than functioning as a well run, cohesive system of interactions

between the central and local democratic government, fragmentation occurred between

the two. A major issue that emerged from the regional autonomy legislation was the

creation of regulation by the regional governments that conflicted with the national

interest. The Indonesian government insisted that it would counter this by increasing

accountancy measures and “cancelling problematic regulations”48. Despite the promise

of the central government to review any changes or additions, especially to taxation and

levies or charges by the regions, a study by Lewis found that the government in Jakarta

failed to act for less than a half of the more than one thousand of such cases between

April 2000 and June 2002.49

Regional autonomy was quickly regarded as a ‘free-for-all’ amongst those

officials who realised the new potential for control over resources and state institutions.50

In effect, dealing with the regions became, for many, like dealing with ‘hundreds of little

Suhartos’. The decentralisation strategy ultimately resulted in a system whereby rules,

regulation and licensing became arbitrary processes and the bupati exercised

discretionary power. Therefore, it was essential that business, both foreign and national,

made the same sort of alliances at a local government level that were once required at the

centre, yet, due to the fragmented systems of governance, and the absence of a centralised

authority, these relationships of patronage did not yield the same amount of certainty.

The negative aspects of decentralisation have been particularly evident in the

resource rich regions where such “disorder and unpredictability…has led to an exodus of

mining and resource investors”.51 Licensing appears to have provided a good channel of

personal revenue for rent-seeking officials, which led to tensions for both national

business and foreign investors.52 Ironically, in 2005 an IMF Country Report noted that

48 Government of Indonesia, ‘Indonesia- Letter of Intent’, 18 March 2003 49 Lewis. Cited in G. Fane, ‘Change and Continuity in Indonesia’s New Fiscal Decentralisation Arrangement’, p. 159 50 V. R. Hadiz and R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations’, p. 234 51 V. R. Hadiz and R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations’, p. 234 52 V. R. Hadiz & R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations’, p. 235

15

foreign oil and gas companies commonly struggled with conflicting and often

unpredictable licensing requirements between the central and local governments.53

Investment procedure in general became problematic as officials “at all levels of

government- central, provincial and local- claim[ed] ultimate authority over many kinds

of investment activity”54. For many foreign investors the process became excessively

time consuming and costly, with little certainty that agreed outcomes would eventuate, or

that requirements would not change despite the mandatory bribes and ‘extra payments’ to

officials. Increasingly, the kota splits and other bi-products of regional autonomy, such as

newly allocated official authority, drastically increased the overall level of rent-seeking at

a regional level.55 These issues resulted in a situation which rendered Indonesia less

attractive to potential and existing business, and which deterred the much needed

investment essential to the country’s recovery.

The unregulated increase KKN at the regional level and the continuing disparities

between the wealth of the regions were not necessarily issues that were endorsed by the

local communities subject to the changes. In Riau, the buptai were so notorious for their

pomposity and empire buildling behaviour in the wake of regional autonomy and

subsequent newly-found power that they were dubbed ‘little kings’, by the local

population.56 Throughout Central Java also, many buptai were known to act like raja

lokal, or ‘local kings’.57 Therefore, it is plain to see that the systems of patronage, which

the Fund was so intent on abolishing, survived and multiplied through decentralisation,

albeit in an altered manner.

53 N. Thacker, Y. Khatri, G. Palomba, A. Bhundia, A. Mati, M. Jones and L. E. Teo, ‘Indonesia: Selected Issues’, IMF Country Report, No. 05/327, International Monetary Fund, September 2005, p. 16 54 V. R. Hadiz and R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations’, p. 235 55 F. Fitrani, B. Hofman and K. Kaiser, ‘Unity in Diversity?’, p. 67 56 Anonymous, ‘Asia: Autonomy or Anarchy?; Indonesia’, The Economist, 366(8311), 15 February 2003, p. 16 57 J. Honna, ‘Local Civil-Military Relations During the First Phase of Democratic Transition, 1999-2004: A Comparison of West, Central and East Java’, Indonesia, 82, Oct 2006, p. 82

16

A 2005 article in The Economist made the claim that: “Fears of decentralisation

run amok are beginning to replace fears of Indonesia’s disintegration”.58 This assertion is

demonstrative of the reaction to the results of the changes that had occurred in Indonesia

over the previous 5 or so years due to the IMF’s program and its preoccupation with

‘good governance’ and dissolution of politico-fiscal power. Hadiz and Robison note that

decentralised governance, with reference to the Indonesian case, is not necessarily

synonymous with transparency and ‘good governance’ any more than is centralised

governance; that is, there is no guarantee that these by-products will emerge if they are

also previously absent at a national level.59 Despite original arguments by the Fund that

the decentralisation process (as part of Indonesia’s transition to democracy) would break-

up the central power base and the undesirable elements of governance associated with it

and foster a system possessing the necessary elements of ‘good governance’, the

evidence suggests otherwise. In fact, it may be argued that many of the changes which

occurred as a result of decentralisation had a detrimental impact upon Indonesia’s ability

to recover economic strength. Regional autonomy is often of particular focus given that

its end-function proved unconducive to local business, local government revenue

sourcing, regional populations, and much needed foreign investment. This last factor is

particularly pertinent as it appears that foreign investment was deterred by effects of

regional autonomy even in the extractive industries, despite their being insulated from the

negative currency sentiment surrounding the ailing rupiah to which other sectors were

subject.60

Given the anticipated results and intent behind its prescriptions, it is clear that the

IMF mission failed due to inadequate remedies and an assumptive set of strategies. It

failed both in its mission to aid Indonesia’s economic condition and to transpose a new

free market political economic framework in the place of the extant predatory state

system.61 Indonesia’s macroeconomic indicators suffered, as did other countries’ in

58 Anonymous, ‘Asia: Autonomy or Anarchy?’, p. 16 59 V. R. Hadiz and R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations’, p. 234 60 Oil & Gas business is carried out in US dollars 61 It is not argued that the IMF necessarily should have attempted to transpose the framework, merely that this task was a major theme of its mission.

17

Southeast Asia, but by the time recovery was evident in Malaysia, Thailand and South

Korea in the late 1990s, Indonesia was still struggling to maintain a positive GDP.62 Only

in 2000 do we see some promising signs of recovery as GDP reached above 1 percent for

the first time since the crisis’ onset.63 The anticipated re-entry of foreign investment

failed to eventuate. In 1996, Indonesia had a remarkable rate of FDI inflow at US$ 6,194

million, alongside Malaysia which had achieved US$ 7, 297, and Thailand which

received US$ 2, 338. In 2000 the results were drastically different: Malaysia and

Thailand recovered their levels of FDI inflow to US$3,788 and $3,350 respectively, but

Indonesia still lagged far behind at US$ -4, 550, still in the negative.64

In terms of the Fund’s key economic restructuring objectives, the reforms clearly

failed to alleviate the crisis and place Indonesia upon a sustainable path to recovery.

Contrary to initial expectations of the Fund and many onlookers, economic stability and

recovery in Indonesia was clearly not achieved and fell far short of the other crisis

affected countries. Notably, there was no comprehensive strategy to address the most

central issue of all short-term debt, a key element of the crisis. Rather than addressing the

debt issue, the IMF program was preoccupied with dismantling monopolies, bank

restructuring, fiscal decentralisation, the promotion of privatisation, and complete

economic liberalisation. Over the course of this chapter, it has been demonstrated that

these strategies were all poor in formulation, execution, and outcome.

The program failed to reform what the IMF saw as a predatory and politically

corrupt state and establish a free market and democratic state that was free from

corruption. The Fund made the mistake in assuming that it could and should reform the

state’s existing relationship with the economy. Some of the measures appear to have been

directed solely at Indonesia’s giant conglomerates and President Suharto with the

intention of dissolving their wealth and, more broadly, the standing systems of patronage.

62 ASEAN Statistical Yearbook, The ASEAN Secretariat, Jakarta 2004 63 H. Hill, ‘Managing Industrialization in a Globalizing Economy: Lessons from Indonesia’, conference paper presented at ‘Indonesia: The New Order and Its Legacy”, Australian National University, 19 November 2005 64 ASEAN Statistical Yearbook, p. 139

18

However, they failed to address the economic situation at hand. Thus the IMF program 1)

cost the Indonesian government an enormous amount of money, which the

aforementioned reforms failed to reconcile and 2) waved a red flag to the foreign and

national investment community, which observed a country that was continually missing

program targets, experiencing massive economic turmoil, and which lagged far behind

the recovery rate of other countries affected by the crisis. The reaction of course was a

further deterioration of market sentiment, hence exacerbating the severe economic

condition of the country.

Fiscal decentralisation was a reform that the Fund was intent upon as it believed

this would be one of the key elements to initiate a new system of ‘good governance’

under the new democratic framework, also facilitating equitable growth throughout the

archipelago. As shown, the regional autonomy laws and funding did not promote

equitable growth; rather they appear to have preserved the status quo. Large fiscal

disparities still exists between the regions. Decentralisation was furthermore regarded as

essential to Indonesia’s economic recovery because it would attract much needed foreign

and domestic investment, however, due to the manner in which fiscal decentralisation

was implemented and regulated, the outcome was contrary to expectations, on both

counts. As noted above, post-crisis foreign investment levels were comparatively low to

other crisis-affected countries in the region, and market sentiment remained weak. In fact,

fiscal decentralisation bred new levels of uncertainty for the foreign investment

community as corruption became increasingly prevalent in an unregulated form. The

relationships that the IMF worked hard to rid Indonesia of simply reformulated

themselves around the changes incurred by the programs.

The cost of the Fund’s faulty programs were not only paid for by the government

which spent 50 per cent of the state budget on debt service in 1999, 40 per cent in 2000

and 28 per cent in 200465 but also incurred a massive humanitarian cost. In hindsight, the

Fund has admitted that there were problems with the Indonesian program, however, it

65 Toussaint, E., ‘IMF and WB: the Destruction of Indonesia’s Sovereignty’, Jubilee Australia, Country Data, Background Papers, p. 9

19

failed to heed the warnings of key commentators at the time. In 1998 Pincus and future

Co-ordinating Minister for Economics, Finance and Security, Rizal Ramli argued that

“based on humanitarian considerations alone, the IMF should now consider sacrificing

ideological purity in favour of experimenting with more innovative approaches to the

crisis”.66 The nature of the prescriptions in general fail to acknowledge that the

implementation of changes necessary to reduce or eliminate corruption must be an

initiative of that state and the government, as the mandate of an external agent is

problematic. For example, the IMF’s attempts to tackle corruption in Indonesia and Latin

America were generally misguided in terms of the actual prescriptions that the Fund

administered, and the fact that the national governments did not respond well to the

pressure from the institution. Hamilton-Hart concludes that the deregulation initiative,

implemented in Indonesia under the auspices of the IMF, was “politically naïve” as the

Fund did not adequately understand the complex network of interests in the private sector

that were linked to vested interests in the government.67

The World Bank’s Preoccupation with the ‘Corruption Problem’

In 2007 issues of international institutional governance, transparency and

accountability were further cast into the public spotlight when Paul Wolfowitz, president

of the IMF’s sister institution the World Bank, begrudgingly resigned upon the admission

he had arranged for a pay rise for his girlfriend, Shaha Riza, who also worked at the

Bank. However, this was not the only nepotistic activity that Wolfowtiz has been accused

of during his time at the Bank. It has also been noted that he chose “to bring on board [at

the Bank] ‘close associates and supporters’ of the Bush administrations’ so-called ‘war

on terror’”.68 This event lends evidence to mounting criticisms over the Bretton Woods

institutions’ arbitrary application of policies and practices, which appear to be enforced

more stringently in the developing world but not so both in regards to the industrialised 66 J. Pincus and R. Ramli, ‘Indonesia: From Showcase to Basket Case’, Cambridge Journal of Economics, 22(6), November 1998, p. 372 67 N. Hamilton-Hart, ‘Anti-Corruption Strategies in Indonesia’, Bulletin of Indonesian Economic Studies, 37(1), 2001, p. 67 68 B. Berkowitz, ‘Wolfowtiz Signs on as a Scholar at Conservative Think Tank’, International Press Service, 11 July 2007, nopgcit.

20

states nor their own governance: Wolfowitz headed the Bank’s massive anti-corruption

drive, whereby countries that did not comply with new, strict anti-corruption polices were

to be denied funding. Thus the authority and advice, which an already shaky World Bank

dished out to an array of debtor countries throughout the developing world, has been

further de-legitimised as result of the Wolfowitz affiar. What is interesting, is that the

corrupt and nepotistic behaviour of the Suhartos of the developing world have constantly

been seen as the cause for the underdevelopment, economic crises, and other

development/growth related problems in their countries. By this logic therefore, why has

Wolfowitz not been held accountable for the recent problems in the global financial

system?

In heading up the World Bank from 2005 Wolfowitz vehemently pursued anti-

corruption strategy and policies. His single-minded approach resulted in multiple

suspensions and terminations of funding for pre-approved poverty reduction and

development projects in the developing world. Wolfowitz maintained that corruption was

the primary cause of poverty and impeded growth, and that the issue should assume

absolute priority at the Bank. While it may be argued that Wolfowtiz’s predecessor James

Wolfensohn, also emphasised the need to reduce corruption in the developing world,

Wolfensohn’s primary concerns lay with poverty alleviation and development. In 2005,

the year that he became president of the World Bank, Wolfowitz terminated funding for a

number of ‘corrupt’ countries, including the Republic of Congo, despite protests from

IMF and World Bank in-country staff.69 On 6 January 2006 the World Bank deferred

around $124 million in financing to Chad, and terminated around $35 million of funds to

Bangladesh.70 In the same month Wolfowitz threatened to suspend $375 million in World

Bank and multilateral donor funding to Ehtiopia citing corruption as the reason.71

Perhaps the most outrageous case involved a threatened suspension of $400 million in

69 Anonymous, ‘Wolfowitz Anti-Corruption Push Risks Debt Relief’, Morning Edition, Washington DC, 12 April 2007, nopgcit 70 D. K. Rubin, ‘World Bank Sunshines Anti-Corruption Efforts’, ENR, 256(16), 24 April 2006, p. 12 71 Anonymous, ‘Ethiopia Economy: Donors Threaten to Withhold Aid’, EUI Newswire, New York, 31 January 2006.

21

Bank and multilateral funding to Ecuador when then President Dr Palacio amended the

law so that a portion of Ecuador’s oil windfall revenues could be redirected towards

social spending.72 Subsequently, in September 2005, the Bank announced that it would

suspend $100 million to Ecuador.73 Amongst a number of other countries, India and

Kenya’s funds were suspended by Wolfowitz on grounds of corruption, although he did

not consult the board of the Bank on the decision. He later also ordered the suspension of

aid to Uzbekistan because the government expelled US soldiers.74

While one of the main concerns expressed by institutions such as the World Bank

and the IMF about the problem of corruption is the danger of private interests being

pursued through public channels. In the sunset of his short tenure as president of the

Bank, the neo-conservative Wolfowitz indicated the financing for family planning

services in Africa would be vastly reduced or abolished. According to an article at the

time,

…the banks’ team leader for Madagascar indicated that one of two managing directors

appointed by Wolfowitz ordered the removal of all references to family planning from a

document laying out strategy for the African nation. And a draft of the bank’s long-term

health program strategy, overseen by the same official makes almost no mention of

family planning, suggesting a wider rollback may be underway75

Wolfowitz’s preoccupation with corruption while he was World Bank president

was pursued to the detriment of growth and development in the developing world.

Perhaps the lesson here is not to put a war-architect in charge of a development

institution. An article in The New York Times reported that Wolfowitz’s ‘punishment’ of

corrupt countries was considered by many officials from within and outside the bank the

72 Anonymous, ‘The Americas: Free-for-Oil; Ecuador’, The Economist, 376(8441), 27 August 2005, p. 44 73 Anonymous, ‘Wolfowitz Shows His True Colours’, Euromoney, September 2005, p. 1 74 E. Beiser, ‘The Morning Brief: World Bank Rift Exposes Deeper Fault Lines’, Wall Street Journal (online edition), 13 April 2007. 75 N. Gaouette, ‘World Bank May Target family Planning’, Los Angeles Times, 19 April 2007, nopgcit.

22

bank as largely arbitrary “in a way that jeopardizes the bank’s longtime mission to reduce

poverty”76 One senior Bank official commented that “‘It was the unpredictability…he

would be very tough on Kenya and not as tough on Ethiopia…If you can’t rationalise it

makes you nervous’”.77 While the IMF and World Bank were so keen to get rid of

Suharto because of his corrupt behavior, the difference here is that while the New Order

may have been corrupt, the President was able to achieve substantial reductions in

poverty and promote economic growth. On the other hand, the World Bank President’s

obsession with corruption directly and indirectly increased poverty. There was a

definable period during the New Order where corruption and economic growth co-existed

but Wolfowitz’s refusal to move away from corruption in favour of development had

ramifications that were felt most pertinently by the poorest strata of society in those

already poor countries to which funding was cut or suspended. This demonstrates that

those who run the institution neither understand the intricacies of political-economic

relations in the developing world, but incorrectly expect to provide workable inherently

western-based solutions.

Not long after Wolfowitz’s departure, the British Chancellor of Exchequer,

Alistair Darling, called for a thoroughly revised, more transparent, selection process for

the managing director of the International Monetary Fund. In fact, both the Asian and

Latin crises, topped off with the Wolfowitz affair have bought into the media spotlight

issues of structure, governance, accountability, and appropriateness not only of the World

Bank, but of all major international institutions, that is, the IMF, the Bank for

International Settlements WTO, ADB, the Inter-American Development Bank, the

African Development Bank, APEC, and the UN that have been long-contested by

academics and other observers. Of these, however, the World Bank and IMF have

received the most attention in the debate over international institutional reform as they

are regarded as central to the operations of the international financial architecture. As

Joseph Stiglitz notes, “So far the debate about the reform of the international economic

76 S. R. Weisman, ‘Wolfowitz Corruption Drive Rattles World Bankers’, The New York Times, 14 September 2006, p. C1 77 Anonymous, ‘Parting Shots From Wolfowitz at the Door’, Financial Times, 29 June 2007, p. 13

23

architecture in the aftermath of the global financial crisis has gone nowhere, other than a

growing consensus that reforms need to be made and that at the center of those reforms

much be changes in the IMF”.78

Discussion and Conclusion

While there are broader issues regarding program formulation, conditionality and

the institutional structure of the IMF and World Bank, they cannot be comprehensively

covered within the parameters of this paper. Therefore, two central issues will be

addressed here, that is 1) the need for the IMF and World Bank to reform their approach

towards corruption and 2) the importance of structural change so that the program

formulation and execution is a consultative rather than prescribed process. Two major

reports were released that addressed the viability of, major problems with, and

recommended reform for the IMF (and other international institutions). The first Report,

Safeguarding Prosperity in a Global Financial System: The Future International

Financial Architecture (henceforth the Task Force Report), was complied by a Task

Force for the Council on Foreign Relations, headed by Peter G. Peterson (The Blackstone

Group), Morris Goldstein (Institute for International Economics), and Carla A. Hills

(Institute for International Economics), in late 1999. The second, the International

Institutional Advisory Commission, was established by the US Congress as part of $18

billion conditional funding to the IMF in 1998. The Commission carried out an in-depth

assessment of the IMF, World Bank, Inter-American Development Bank, Asian

Development Bank, African Development Bank, the WTO, and the Bank for

International Settlements. In 2000, the Commission published a report titled, Report of

the International Financial Institution Advisory Commission, or as it is more commonly

known, the Meltzer Report (as Allan Meltzer was the Chair). Although there were a

number of different findings between the reports, both reports cited serious structural,

governance, procedural, and program problems with the Fund.

78 J. E. Stiglitz. ‘Democratizing the International Monetary Fund and the World Bank: Governance and Accountability’, Governance, 16,(1), January 2003, p. 134

24

Both the reports flagged the problem of the institutions’ flawed track record and

discussed at length, but both reports rejected proposals to abolish the IMF or Bank.79

Both reports also contend that the IMF has failed to provide programs for their clients

that would ensure economic growth and stability and have therefore also failed in

maintaining a system that is not subject to international financial crises. The Meltzer

Report’s comments on the World Bank point to a track record that is no better than the

Fund’s, stating that the Bank’s “…evaluation of its own performance in Africa found a

73% failure rate”80. Subsequently, the Task Force Report made seven key

recommendations and it is point seven, “Generate political support for and ownership of

financial reforms”,81 that is most pertinent to our discussion.

The IMF and World Bank have been subject to much criticism for their anti-

corruption policies being ineffectual or detrimental to the countries in which they are

implemented. As discussed throughout the paper, it is necessary that corruption is not

viewed as something static nor a ‘problem’ that may be remedied by a standard set of

prescriptions. Such a set of prescriptions that fail take into account a country’s specific

political, economic, and social circumstances may actually result in a situation where

corruption functions in a more harmful manner. As Nadna notes “based upon the past

experience and current trends, for governance reforms to succeed, the history and culture

of the recipient country matter the most and must be given top priority. The World Bank,

in applying its own conceptualisation of good governance and seemingly not showing

enough sensitivity to these issues in developing states, may not be able to succeed in

achieving the results it seeks”.82 Furthermore, an over-zealous approach to corruption, as

79 Council on Foreign Relations, Safeguarding Prosperity in a Global Financial System: The Future International Financial Architecture, 17 October 1999; International Advisory Commission, Report of the International Financial Institution Advisory Commission, Washington DC, US Government Printing Office, 2000. 80 International Advisory Commission, Report of the International Financial Institution Advisory Commission, p. 16 81 Council on Foreign Relations, Safeguarding Prosperity in a Global Financial System, p. 3. For more detail on this point see pp. 8-9 of the report. 82 V. P. Nanda, ‘The “Good Governance” Concept Revisited’, The Annals of the American Academy of Political and Social Science, 603, January 2006, p. 276

25

adopted by the World Bank in previous years, may supersede the original objective of the

Bank, which is to reduce poverty.

In order to improve their anti-corruption initiatives, it is imperative that the IMF

and World Bank allow the client countries’ representatives to exert greater institutional

influence. At the end of 2006, under the auspices of Managing Director Rodrigo de Rato,

the Fund committed to governance-related changes in the future. These included a re-

alignment of quotas, an increase in basic votes and more resources for the African chairs

as part of the ‘Quota and Voice Reform’ strategy.83 The new strategy will also seek to

further align quota shares so that the larger economies are recognised, and increase the

participation capacity of the low-income member states.84 It is also important to consider

the mandate of individual office within the IMF and World Bank. As noted in the section

on the World Bank, a number of the president’s decisions were executed against the

advice of World Bank representatives in the affected member countries. Increased

transparency and a system whereby such power may be checked would indeed help

prevent a repeat of such events.

Importantly, the reformation of the IMF and World Bank cannot just consist of a

re-shuffling of quotas and seats, but also must include the broader involvement of other

actors. As previously mentioned, the IMF and World Bank have been criticised as

‘politically naïve’ in their program formulation and execution, thus an effective remedy

for this is the creation of a consultative process whereby domestic actors may be

involved. Consultation with national parliaments would encourage the contribution of

local knowledge to Fund decisions and programs and subsequently increase program

ownership.85 Program ownership is more likely to result in program compliance and thus

more effective change. Boediono, from the Central Bank, Indonesia, argues that a large

83 IMF, ‘The IMF’s Governance’, http://www.imf.org/external/np/exr/key/quotav.htm, (date of access 2 January 2008) 84 IMF, ‘Report of the Managing Director to the International Monetary and Financial Committee on IMF Quota and Voice Reform’, 14 September 2006. 85 G. C. Yen, ‘Bringing More Voices into the Policy Debate’, in B. Carin and A. Wood (eds), Accountability of the International Monetary Fund, Ashgate, Burlington, 2005, pp. 65-66

26

part of the program failure in Indonesia can be attributed to the absence of involvement

of the government or other in-country actors.86 Other actors that should be involved in

the Fund include NGOs, government institutions and other specialised interest groups.

This would help to create broader, better fitting programs and ensure that the governance

process in general was more transparent. This sort of eclectic participation would serve to

improve the anti-corruption initiatives approach in all relevant IMF and Bank programs.

This paper has shown that with the expansion in mandate of the Fund and Bank to

include anti-corruption initiatives it is essential that both institutions refresh their

approach to the issue and incorporate a wider body with which they may consult. This

will contribute to a positive move towards the reduction of corruption without

compromising economic or social development.

86 Boediono, ‘The International Monetary Fund Support Program in Indonesia: Comparing Implementation Under Three Presidents’, Bulleting of Indonesian Economic Studies, 38(3), 2002, p. 386

27

References

Anonymous, ‘Asia: Autonomy or Anarchy?; Indonesia’, The Economist, 366(8311), 15

February 2003, p. 16

Anonymous, ‘Ethiopia Economy: Donors Threaten to Withhold Aid’, EUI Newswire,

New York, 31 January 2006.

Anonymous, ‘Parting Shots From Wolfowitz at the Door’, Financial Times, 29 June

2007, p. 13

Anonymous, ‘The Americas: Free-for-Oil; Ecuador’, The Economist, 376(8441), 27

August 2005, p. 44

Anonymous, ‘Wolfowitz Anti-Corruption Push Risks Debt Relief’, Morning Edition,

Washington DC, 12 April 2007, nopgcit

Anonymous, ‘Wolfowitz Shows His True Colours’, Euromoney, September 2005, p. 1

ASEAN Statistical Yearbook, The ASEAN Secretariat, Jakarta 2004

Bardhan, P., ‘Corruption and Development: A Review of Issues’, Journal of Economic

Literature, 35(3), September 1997, pp. 1320-1346

Beiser, E., ‘The Morning Brief: World Bank Rift Exposes Deeper Fault Lines’, Wall

Street Journal (online edition), 13 April 2007.

Berkowitz, B., ‘Wolfowtiz Signs on as a Scholar at Conservative Think Tank’,

International Press Service, 11 July 2007, nopgcit.

28

Boediono, ‘The International Monetary Fund Support Program in Indonesia: Comparing

Implementation Under Three Presidents’, Bulleting of Indonesian Economic Studies,

38(3), 2002, pp. 385-391

Council on Foreign Relations, Safeguarding Prosperity in a Global Financial System:

The Future International Financial Architecture, 17 October 1999.

Egger, P., and H. Winner, ‘How Corruption Influences Foreign Direct Investment: A

Panel Study’, Economic Development and Cultural Change, 54(2), January 2006, pp.

479-480

Eigen, P., ‘Measuring and Combating Corruption’, Policy Reform, 54(4), December

2002, pp. 187-201

Fane, G., ‘Change and Continuity in Indonesia’s New Fiscal Decentralisation

Arrangement’, Bulletin of Indonesian Economic Studies, 39(2), August 2003, pp. 159-

176

Fitrani, F., Hofman, B., and K. Kaiser, ‘Unity in Diversity? The Creation of New Local

Governments in a Decentralising Indonesia’, Bulletin of Indonesian Economic Studies,

41(1), April 2005, pp. 57-79

Gaouette, N., ‘World Bank May Target family Planning’, Los Angeles Times, 19 April

2007, nopgcit.

Government of Indonesia, ‘Indonesia- Letter of Intent’, 18 March 2003

Government of Indonesia, ‘Indonesia- Letter of Intent’, 2000

Government of Indonesia, ‘Indonesia- Letter of Intent’, 22 July 1999

29

Gupta, S., Davoodi, S., and R. Alonso-Terme, ‘Does Corruption Affect Income

Inequality and Poverty?’. WP/98/76, IMF Working Paper, May 1998, p. 29

Hadiz, V. R., and R. Robison, ‘Neo-liberal Reforms and Illiberal Consolidations: The

Indonesian Paradox’, The Journal of Development Studies, 41(2), February 2005, p. 220-

241

Hamilton-Hart, N., ‘Anti-Corruption Strategies in Indonesia’, Bulletin of Indonesian

Economic Studies, 37(1), 2001, pp. 65-82

Hill, H., ‘Managing Industrialization in a Globalizing Economy: Lessons from

Indonesia’, conference paper presented at ‘Indonesia: The New Order and Its Legacy”,

Australian National University, 19 November 2005.

Hill, H., ‘Conference Report Indonesia Update 2003. Business in the Reformasi Era: New

Challenges, Old Problems’, Bulletin of Indonesian Economic Studies, 39(3), 2003, pp.

359-360

Honna, J., ‘Local Civil-Military Relations During the First Phase of Democratic

Transition, 1999-2004: A Comparison of West, Central and East Java’, Indonesia, 82,

Oct 2006, pp. 75-96

IMF, ‘The IMF’s Governance’, http://www.imf.org/external/np/exr/key/quotav.htm, (date

of access 2 January 2008)

IMF, ‘Report of the Managing Director to the International Monetary and Financial

Committee on IMF Quota and Voice Reform’, 14 September 2006.

IMF, News Brief No. 97/22, 31 October 1997

30

Indrawati, S. M., ‘Indonesian Economic Recovery Process and the Role of Government’,

The Journal of Asian Economics, 13(5), September-October 2002, pp. 577-596

International Advisory Commission, Report of the International Financial Institution

Advisory Commission, Washington DC, US Government Printing Office, 2000.

Lie, J., Han Unbound: The Political Economy of South Korea, Stanford University Press,

Stanford California, 2000.

Lysaght, G., Anatomy of a Disaster: The IMF’s War on Corruption in Indonesia and the

Effects of Structural Adjustment 1997-2005, PhD Thesis, Forthcoming.

Moran, J., ‘Patterns of Corruption and Development in East Asia’, Third World

Quarterly, 20(3), 1999, p. 569-587

Mauro, P., ‘The Effects of Corruption on Growth, Investment, and Government

Expenditure: A Cross-Country Analysis’, in Kimberly A.Elliott (ed) Corruption and the

Global Economy, Institute for International Economics, Washington, 1997, pp. 83-116

Nanda, V. P., ‘The “Good Governance” Concept Revisited’, The Annals of the American

Academy of Political and Social Science, 603, January 2006, pp. 269-283

Nye, J. S., ‘Corruption and Political Development: A Cost-Benefit Analysis’, The

American Political Science Review, 61(2), June 1967, pp. 417-427

Pincus J. and R. Ramli, ‘Indonesia: From Showcase to Basket Case’, Cambridge Journal

of Economics, 22(6), November 1998, pp. 723-734

Robison, R., and K. Hewison, ‘Introduction: East Asia and the trials of Neo-liberalism’,

The Journal of Development Studies, 41(2), February 2005, pp. 183-196

31

Rubin, D. K., ‘World Bank Sunshines Anti-Corruption Efforts’, ENR, 256(16), 24 April

2006, pp. 12-13

Seyf, A., ‘Corruption and Development: a Study of Conflict’, Development in Practice,

11(5), November 2001, pp. 597-605

Shleifer, A., and R. W. Vishny, ‘Corruption’, The Quarterly Journal of Economics,

108(3), August 1993, pp. 599-617

Stiglitz, J. E., ‘Democratizing the International Monetary Fund and the World Bank:

Governance and Accountability’, Governance, 16,(1), January 2003, pp. 111-139

Tanzi, V., ‘Governance, Corruption, and Public Finance: An Overview’, in S. Schiavo-

Campo (ed), Governance, Corruption and Public Financial Management, Asian

Development Bank, Manila Philippines, 1999, pp. 1-17

Tarling, N., ‘Keynote Speech: Corruption’, in N. Tarling (ed), Corruption and Good

Governance in Asia, Routledge, London and New York, 2005, pp. 5-18

Thacker, N., Khatri, Y., Palomba, G., Bhundia, A., Mati, A., Jones, M., and L. E. Teo,

‘Indonesia: Selected Issues’, IMF Country Report, No. 05/327, International Monetary

Fund, September 2005.

Theobold, R., ‘So What Really is the Problem about Corruption?’, Third World

Quarterly, 20(3), June 1999, pp. 491-493

Toussaint, E., ‘IMF and WB: the Destruction of Indonesia’s Sovereignty’, Jubilee

Australia, Country Data, Background Papers, p. 9,

www.jubileeaustralia.org/files/_526_country_data_papers/IMF_WB_Indonesia_Sovereig

nty.pdf, (date of access 13 December 2007)

32

Transparency International, ‘Corruption Perceptions Index’, 1995, 1998,

www.transparency.org/policy_research/surveys_indices/cpi, (date of access 20 November

2006).

UNDP, UNDP Human Development Report 2005.

Weisman, S. R., ‘Wolfowitz Corruption Drive Rattles World Bankers’, The New York

Times, 14 September 2006, p. C1

Williams, J. W., and M. E. Beare, ‘The Business of Bribery: Globalization, Economic

Liberalization, and the “Problem” of Corruption’, Crime, Law and Social Change, 32(2),

1999, p. 115-146

Wolfensohn, J. D., ‘Corruption Impedes Development—and Hurts the Poor’,

International Journal of Government Auditing, 25(4), October 1998, p. 1

Yen, G. C., ‘Bringing More Voices into the Policy Debate’, in B. Carin and A. Wood

(eds), Accountability of the International Monetary Fund, Ashgate, Burlington, 2005, pp.

65-66

33