Archive for February 2013

Ahmed Moustafa: the Corruption of IMF & WB and its negative impact on Egypt

February 25, 2013

 

 

 

 

 

 

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The Corruption of the International Institutions

IMF & WB

 

Prepared by:

 

Ahmed Moustafa

Socio-economic Specialist/Researcher/Legal Translator at (www.eldibadvocates.com)

Human Rights Activist/Blogger/Youth Trainer

International Law Association (ILA) Coordinator in Egypt

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An Abstract

 

Corruption it is the misuse of entrusted power for private gain. The cost of corruption is four-fold: political, economic, social, and environmental. Whereas International Institutions like International Monetary Fund and World Bank is vulnerable to corruption for the following reasons: the hegemony of US in the world and control thereto on it, US$ dominance and unjustified reserves thereto, elaborating Ad-hoc planning and researches whereas its state has its own economic and political circumstances, issuing reports contradicting with the other international reports, losing control on money leakage whether in developed, developing or underdeveloped countries that are being addressed to corruption or laundry. Therefore, we will see here-after through this paper, with using the comparative methodology to compare in between several cases, how much such reasons affect negatively on Egypt as one of the developing countries and also as a case study here-in, accordingly, through definitions, the importance of the research and the objective thereof, diagnosing the reasons of such problem and finally trying to find proper solutions that may be used by any state to fight such corruption and providing better future for the coming generations in any country.

 

 


Definitions:-

 

What is corruption?

 

According to Transparency International (TI) definition of corruption, it is the misuse of entrusted power for private gain. TI further differentiates between “according to rule” corruption and “against the rule” corruption. When a bribe is paid to receive preferential treatment for something that the bribe receiver is required to do by law, constitute the former. The latter is the case when a bribe paid to obtain services the bribe receiver is prohibited from providing. [1]

 

What are the costs of corruption?

The cost of corruption is four-fold: political, economic, social and environmental losses

 

Background about the relationship between World Bank and Egypt:-

 

Egypt joined the World Bank in 1945. Since then, the focus of World Bank Assistance has been to foster sustainable economic growth and reduce poverty in the country. 

 

World Bank Country Assistance Strategy (CAS):

 

In June 2005, the World Bank adopted its new Country Assistance Strategy for Egypt covering the period 2005 – 2008.  Developed in close partnership with the Government of Egypt, the CAS focuses on areas where the Bank’s contribution will achieve results, such as improving the investment climate and enhancing economic, social and financial reforms. The Government of Egypt spelled out a long term vision of development which includes the twin goals of achieving high and sustainable growth and the alleviation of poverty and income disparity. Its five-year national development plan seeks to achieve growth by making more use of the private sector as a catalyst for development, as well as changing the role of the government in managing the economy.

 

In response to these national goals, the current CAS is aimed at supporting three key development objectives — facilitating private sector development, enhancing the provision of public services, and promoting equity. To achieve these objectives, the strategy proposes a “results-based” financial assistance program in the range of about $2-2.8 billion dollars in support of enhancements in infrastructure, education, poverty alleviation, financial sector reforms combined with the Bank’s non-lending technical assistance, analytical and advisory services bringing world-wide experience and which focus on a variety of areas underpinning the reform program including poverty alleviation-targeted reforms.

September 2009 – Egypt is among the world’s 10 most active reformers for the fourth time. The country moved up to 106 from 116 among 183 economies worldwide in the overall ease of doing business ranking.

 

According to the recently released report by IFC and the World Bank “Doing Business 2010: Reforming through Difficult Times”, Egypt is Among the World’s 10 Most Active Reformers for the Fourth Time and made business start-up less costly, expedited the construction permit process, expanded the information available from the private credit bureau, and created commercial courts to speed up contract dispute settlements.

 

Egypt’s MDGs Country’s Report:

 

Egypt was one of 188 countries which embraced the MDGs and agreed to strive to meet these goals by 2015. In June 2002 the United Nations unveiled the first report on Egypt’s progress towards meeting the Millennium Development Goals, which was followed by the second and third reports in 2004 and 2005 respectively. Although the two reports indicated that Egypt remains on the right track to achieve the majority of MDG indicators, they also exposed the emergence of worrying gaps in income levels and living standards between Lower/Northern and Upper Egypt.

 

The MDG Reports show that the overall percentage of poor Egyptians will decrease from 25% in 1990 to 13% in 2015. However, they also show that while poverty in urban areas of Lower Egypt is expected to go down to 6%, the urban poor of Upper Egypt are actually expected to rise to 39% by 2015. The figures are just as stark for rural areas of the country – with poverty disappearing from the rural governorates of Lower Egypt but increasing to 38% in Upper Egypt in 2015. The Reports also demonstrate how poverty especially affects female-headed households which count for 20 % of total households. And while overall incomes in Egypt have increased from US$ 639 in 1990 to $US 1,390 in 1999, 40% of the poor only receive 22% of nation’s wealth.

 

The reports show that the Egyptian government continued to give attention to critical areas of development, such as health, education, access to water and sanitation as well as improving the livelihoods of the most deprived segments of the population. However, the pace of progress varies among the goals: fast and sustained in some areas (child and maternal mortality, water and sanitation), at acceptable levels for others (education and poverty reduction), while somewhat slowly in others (women empowerment and the environment).

 

In addition, Egypt will have to increase its efforts and investments in order to keep the current rate of progress with respect to some specific indicators (in the area of poverty, mortality rates, and combating major diseases). The third MDG report for Egypt (Egypt MDG Midpoint Assessment) was released in 2008.

 

 


Objectives:-

The objectives of this paper to make the economic researchers answer the following questions, as it is hard and difficult to indict and condemn any international financial institution after being tarnished with corruption and was a big reason to corrupt Egypt for example:-

 

1-      Is that possible to elaborate a monitoring and control system on the international institutions especially WB and IMF?

2-      Are big countries like USA and EU would accept such monitoring procedures and shall leave developing and under-developing countries to be a part of this tool whether Egypt or any other country?

3-      Are international institutions transparent enough, or need more pressure from the new international powers to yield to this request?

 

Does the Corruption of International institutions have an impact on the developing and under-developing countries?

 

In order to answer such problematic questions, the following reasons should be tackled:-

 

  • Hegemony of US worldwide and control thereto on International Institutions:

 

Without any doubt USA still controlling over most of the international organizations worldwide, especially UN and subsidiary institutions especially the World Bank (WB) and International Monetary Fund (IMF), in addition to some programs like United Nations Development Program (UNDP) who are responsible for creating and carrying out economic reform plans for both developing and under developing countries whereby Egypt is belonging to.

 

However, USA not anymore the economic model that should be followed according to their economic deficit and default to repair the bankruptcy of several giant industrial and financial groups and banks (e.g. Leman Broz, City Group, General Motors etc…) resulted by the uncontrolled credit system, the big corruption that occurred especially at the time of G.W. Bush in such sectors. In addition, the extreme liberal economic system that based on pragmatism without the appropriate existence of ethics and codes of social orientation.

 

Paul Wolfowitz’s appointment was also controversial, due to his influential role in architecting the US invasion of Iraq. A former member of staff at the World Bank also noted concerns of cronyism related to Wolfowitz’s appointment way before the scandal that forced him to resign.[2] The US nominee for the next president is the former US Trade Representative and currently an executive at Goldman Sachs, Robert Zoellick.

 

His nomination is also coming under criticism. Bush supports it, saying Zoellick “is the right man to succeed Paul in this vital work.” Former World Bank chief economist, and Nobel Prize winner for economics, Joseph Stiglitz feels that instead of a political appointee, it would be better to get an economist who understands development.[3]

 

As also reported by the BBC, Paul Zeitz, executive director of the Global AIDS Alliance, said that he thought Mr Zoellick was a terrible choice because “Zoellick has no significant experience in economic development in poor countries,” and that “he has been a close friend to the brand-name pharmaceutical industry, and the bilateral trade agreements he has negotiated [for the US] effectively block access to generic medication for millions of people.”[4]

 

  • US$ Dominance and unjustified reserves thereto:

 

At the heart of the problem is the US dollar-dominated international currency reserve-system. The accumulation of extensive foreign exchange reserves by some emerging market economies (China in particular) and excessive consumption by others (the United States in particular) are responsible for large and unsustainable global imbalances. [5]

 

US economic system and the international institutions represented in WB and IMF made some countries declaring its insolvency and bankruptcy, whereas the severe example was Iceland in 2008. Moreover, Greece 2010 and we expect more European states represented in Portugal, Spain and Ireland. And it was just as a result of adhering their economic systems to the American one.

 

Therefore, building up vast currency reserves has an opportunity cost: it diverts resources that could otherwise be used for productive investments in the real economy, exerts deflationary pressures on economies and generates monetary instability. This may be a price that countries are willing to pay, opting for regional initiatives in the absence of more systemic global solutions that work for them. As the past three decades have demonstrated, however, crises are intrinsic to a globalized economy, not exceptions to be treated on an ad hoc basis.

 

If you ask an official at the Central Bank of Egypt or at Ministry of Finance, he/she will be cheerful and answering that we have a reserve amounted to about US$ 34,5 billion[6], however, what is the feasibility of freezing a big amount like this without being used in real economic activity: Industry, Agriculture, Service or Trade. 

 

  • WB Elaborates Ad-hoc Development Plans and Researches:

 

There is much talk of transparency and participation, but the crunch comes in final negotiations between ministers and World Bank and IMF civil servants. The country manager can say to the Prime Minister, “unless you accept condition X, I will not submit this program to the board”. No agreed program means a sudden halt to essential aid and no debt relief, so few ministers are prepared to hold out. Instead Prime Ministers and presidents bow to the diktat of foreign civil servants. It is also noted that “reforms often bring advantages to some groups while disadvantaging others,” and one of the problems with policies agreed in secret is that a governing elite may accept an imposed policy which does not harm the elite but harms others. An example is the elimination of food subsidies. Whereas Hanlon and Pettifor, Christian Aid partners (a coalition of development organizations), argued that top-down “conditionality has undermined democracy by making elected governments accountable to Washington-based institutions instead of to their own people.” The potential for unaccountability and corruption therefore increases as well.[7]

 

Why WB did not propose a parallel developing plan for such alleged loser insolvent Egyptian Public Sector Companies instead of ad-hoc privatization and sale thereof?

 

Bearing in mind that ad-hoc sale and privatization of the Egyptian Public Sector Companies made the Egyptian people lose at least EGP 450 Billion, because the sale was done against only EGP 50 Billion, whereas the corrupted commissions thereof was about EGP 33 Billion, without exerting due diligence from the side of the world bank in this regard.[8]

  

Structural adjustment programs imposed by WB to lift the governmental subsidies in addition to leave the everything occurred to the free market mechanism (severe capitalism) without imposing a mechanism of control over this market e.g. urging the Egyptian government to affect free competition and consumer protections laws, made the rich monopolist people richer and the poor people poorer, whereas such phenomenon is very evident not just in Egypt but in all of Middle East & North Africa region. (Even Euro-Med Partnership faced the same destiny)

 

  • Contradiction of International Reports:

 

The reports that issued each year about the economic growth showing contradicted results sometime alleging that Egypt is running in the right track of economic reform and achieved a reputable growth (such assumed growth is intangible for no reasons).

 

Sometimes not, however we notice that when we adopt the World Economic Forum (Rich People Summit) here in Sharm El-Sheikh and spending about (EGP 100 Million) each time, WB issues good reports about us!!!!!!!!!.

 

However, a respected organization as International Transparency showing annual logical figures ascertaining that our area including Egypt (Rank No. 115 according to the latest statistics) still near to the bottom of their Classification/List. Furthermore, another factor ascertaining that assumption represented in that our universities still away from being in the best 500 universities worldwide including American Universities existing here, in addition to Cairo and Alexandria Universities.

 

Also the quality of life indicators showing figures similar to the above mentioned information about us.[9]

 

  • Indebtedness & Money Leakage:

 

Much of the debt burden of developing countries including Egypt has arisen through irresponsible lending practices. In the context of the current crisis, countries are in debt due to a crisis they didn’t cause — and there is an urgent need to assess and cancel these odious debts. Indeed, governments and civil society organizations are conducting audits to identify these debts. In the longer term, a renewed debt cancellation initiative should ensure future lending is responsible and transparent, and establish a fair, transparent and sovereign debt restructuring mechanism.

 

Over $600 billion, or nearly three times the current levels of external debt of sub-Saharan Africa, has leaked from the continent in illicit financial flows since 1975. 20 Global Financial Integrity estimates that globally US$500-800 billion of illicit flows exit developing and transitional economies every year. The Tax Justice Network has estimated that “wealthy individuals hold $11.5 trillion offshore in secrecy jurisdictions”. Furthermore, Christian Aid estimates that developing countries including Egypt lose around $160 billion each year in tax revenue as a result of secrecy jurisdictions — more than 30 percent higher than the amount of aid given by northern donors in 2008.

 

While the G20 has begun to address the issue of tax havens, the UN Commission of Experts on the Financial and Monetary System has noted the G20’s approach through the Organization for Economic Co-operation and Development (OECD) has led to, “discriminatory targeting of small international financial centers in developing countries while a blind eye is turned to lax rules in developed economies.”

 

In fact, the Commission notes that, “the principal sources of tax evasion, tax secrecy, money laundering, and regulatory arbitrage [are] located in developed countries’ on-shore banking systems, such as Delaware in the United States and the City of London.[10]

 

Comparative cases of WB corruption:-

 

Perhaps the figures of WB corruption in Egypt not yet disclosed, however there is another examples and figures for such corruption in similar cases in our continent were published by some former officials of WB e.g. Steve Berkman in his book the World Bank and the Gods of Lending that published in June 2008.

 

Berkman reports how Nigerian officials charged $2,200 for 18 cups of tea and snacks at a roadside stall under a World Bank loan (and got away with it). A project office with eight staff in the same country charged a switchboard for 60 telephones, 48 air conditioners, 14 shredders and 12 refrigerators to the operating expenses of another Bank project – all at prices well above the going market rates. They also claimed expenses for television and video sets at 249,999 Naira apiece – more than ten times the equipment’s street value, but just one Naira less than the amount which triggers stricter controls.

 

In a gripping chapter, Steve Berkman takes us on a trip to The Gambia, a poor West-African country. We travel there to investigate suspicions of corruption in a $12.3 million agricultural services project in 1998. The very first payment under the project was for four Japanese cars – a transfer of $95,700 in Danish kroner to a bank account on the Bahamas. The cars are nowhere to be found, and the company which supposedly sold them doesn’t exist. When the ministry responsible for the project finally provides the serial numbers of the cars in question, the Nissan corporation states that such cars were never produced.[11]

 

 

Conclusions:-

 

  1. Finally, it summarizes a number of policy measures for international tax cooperation that address capital flight, including the following:
  2. Adopting automatic information exchange procedures along the model adopted by the European Union;
  3. Promoting country-by-country reporting on accounts by multinational companies;
  4. Ensuring alternative sustainable development paths for jurisdictions that have become dependent on financial secrecy; and
  5. Giving countries the space to set their own domestic fiscal policy and supporting stronger tax authorities in developing countries.
  6. A two-year moratorium on all external debt service payments of developing countries including Egypt, for example, would free up additional resources in the amount of US$30.5 billion annually for 64 of the world’s most indebted countries. This would be an effective way to release extra funds for critical social investment, while ensuring no additional debt would be incurred.

 

  1. Accordingly, I wonder why Americans handing over the Board of Directors (B.O.D) of such institutions whereas they were unable to solve their domestic severe economic crises? Why not new strong promising economies as China, Brazil, India, Asian Tigers and Turkey having bigger quotas in the quorum of (B.O.D) of such institutes? Why the developing countries also did not obtain the appropriate representation quota in such (B.O.D) of those institutes?

 

  1. World Bank, International Monetary Fund and Security Council have to be reformed according to the global hurricane of change that taking place worldwide now, because they are not credible and not able anymore to lead the world solely. However, we have to claim and push big countries to yield to our requests and such pressures shall never be existed without Arab-Arab Alliance, Arab-Afro Alliance and South-South Alliance and cooperation.

 

Bibliography:

 

1-      http://www.transparency.am/corruption.php#q1

 

2-      Fifteen years is Enough – what’s changed in the international financial system and its institutions, what hasn’t and what needs to – Halifax Initiative Coalition – March 2010

 

3-       Mohamed Hakki “Wolfowit’s at World Bank”, Counterpunch – March 2006

4-       US to replace Wolfowit’s swiftly – BBC May 18, 2007

5-       US nominates new World Bank Chief – BBC May 30, 2007

6-       Fifteen years is Enough – what’s changed in the international financial system and its institutions, what hasn’t and what needs to – Halifax Initiative Coalition – March 2010

7-       (1,7%) increase in the Egyptian Monetary Reservoir at the Central Bank of Egypt – May 3, 2010 http://www.currency-price.com/133

8-       Joseph Hanlon and Ann Pettifor, Kicking the Habit; Finding a lasting solution to addictive lending and borrowing—and its corrupting side-effects, Jubilee Research, March 2000

9-       Privatization program in Egypt is being transferred into a scandal – Fact International Studies Center Aug 22, 2007

10-   http://www.mercer.com/qualityoflivingpr#Mid_East_and_Africa

11-   Fifteen years is Enough – what’s changed in the international financial system and its institutions, what hasn’t and what needs to – Halifax Initiative Coalition – March 2010

12-   The World Bank and the Gods of Lending – Steve Berkman – June 2008


[2] Mohamed Hakki “Wolfowit’s at World Bank”, Counterpunch – March 2006

[3] US to replace Wolfowit’s swiftly – BBC May 18, 2007

[4] US nominates new World Bank Chief – BBC May 30, 2007

[5] Fifteen years is Enough – what’s changed in the international financial system and its institutions, what hasn’t and what needs to – Halifax Initiative Coalition – March 2010

[6] (1,7%) increase in the Egyptian Monetary Reservoir at the Central Bank of Egypt – May 3, 2010 http://www.currency-price.com/133

[8] Privatization program in Egypt is being transferred into a scandal – Fact International Studies Center Aug 22, 2007

[10]  Fifteen years is Enough – what’s changed in the international financial system and its institutions, what hasn’t and what needs to – Halifax Initiative Coalition – March 2010

[11] The World Bank and the Gods of Lending – Steve Berkman – June 2008Image

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