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p. 6 of 10 BACK | NEXT I. Introduction II. ADB'S Response III. Definitions of Corruption IV. The Costs of Corruption V. ADB's Position on Anticorruption Issues Objective no. 1: Supporting Competitive Markets, and Efficient, Effective, Accountable, and Transparent Public Administration Objective no. 2: Supporting Promising Anticorruption Efforts on a Case-by-Case Basis and Improving the Quality of Dialogue on Governance Issues Objective no. 3: Ensuring Bank Projects and Staff Adhere to the Highest Ethical Standards VI. Conclusions and Recommendations VII. Appendixes

Anticorruption : V. ADB's Position on Anticorruption Issues

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Objective no. 1: Supporting Competitive Markets, and Efficient, Effective, Accountable, and Transparent Public Administration

35. As a matter of policy, the major thrust of the Bank’s anticorruption effort will address this problem as a part of its broader work on governance and capacity building. ADB’s approach seeks to be proactive and to place a premium upon continuous efforts to upgrade the efficiency of markets and the quality of the public sector as a whole. This focus upon prevention over prosecution reflects the belief that most priority governance initiatives have significant positive externalities in the struggle against corruption. Long-term success is more likely to come through patient and persistent economic, legal, and institutional reforms rather than short-term and largely reactive efforts to punish wrongdoers.²³

36. There are two priority areas where ADB will concentrate its broader governance effort: policy dialogue directed toward economic liberalization and public administration reform. Regarding the former, ADB can use its dialogue with the DMCs to advance policy recommendations that will help eliminate market distortions and reduce opportunities for rent seeking on the part of firms or officials. The liberalization of licensing regimes, the opening up of access to foreign exchange markets, the reduction of administered prices, the expansion of credit opportunities for small farmers and businesspeople, the removal of subsidies and soft loans to favored companies, and the introduction of a clear distinction between production and regulatory functions are all ways in which policy changes can level the playing field and reduce opportunities for corrupt or illicit behavior. ADB is already pursuing many of these initiatives in its dialogue with the DMCs (Box 2).

37. There are several ways in which the ADB’s work in enterprise reform and financial markets development, along with its private sector operations, is contributing to increased competitiveness, transparency, and accountability. ADB is supporting a range of policy-based reforms in many countries that are intended to amend banking regulations to allow greater competition and to reduce directed lending while strengthening the capacity of regulatory agencies. This is also true in the area of capital markets, where ADB is seeking to enhance disclosure practices and improve market surveillance. Through its private sector operations, ADB invests in catalytic projects such as ratings agencies, which provide transparency in the capital market by publishing independent judgments on the investment quality of debt instruments, thus helping investors make informed investment decisions. ADB is also becoming increasingly involved in strengthening corporate governance in the private companies and investment funds where it has an equity interest. In the wake of the financial crisis that has affected many countries in the Asian and Pacific region, these efforts are being rapidly expanded. ADB is also considering providing support for new initiatives in areas such as money laundering.

38. Particular care must be taken in dealing with issues of privatization. There are often powerful financial and economic rationales for the state divesting from activities where it has little comparative advantage. Preliminary research also indicates that, when done properly, privatization can also help lower the level of corruption.²⁴ However, in many countries the privatization process has often been fraught with allegations of bribery, theft, and embezzlement. To avoid this problem, it is critical that transparent, unbiased, and fully contestable procedures be utilized in the sale of state assets. When the sale involves a natural monopoly, it is also important that capable, independent regulatory agencies be established to provide adequate oversight prior to privatization. Issues of best practice involving corporate governance will also be an important component of ADB loans and TA grants addressing issues of privatization, corporatization, and public enterprise management.

39. Many basic public administration reforms during the late nineteenth and early twentieth centuries came about in response to official malfeasance. By focusing as a first priority upon comprehensive public sector reform, ADB can help its DMCs effect changes that will make corrupt behavior more difficult to engage in and more readily detected once it occurs. A breakdown of broader reform initiatives with significant anticorruption components is presented in Appendix 1.

40. Turning first to the executive branch, there are several priority areas where efforts to upgrade the quality of a country’s public administration will pay significant dividends in the struggle against corruption. Efforts to strengthen information systems, particularly those relating to financial management, should enhance transparency and accountability, and strengthen the capacity of governments to monitor their expenditures. Measures to strengthen internal audit functions and to ensure adequate control over disbursements can play the dual role of helping monitor and improve performance while making theft and embezzlement more easily detected. Procurement reform, which ADB is already pursuing in a number of DMCs, can reduce costs while simultaneously making it more difficult to perpetrate fraud and abuse.

41. Another area where significant progress can be made is civil service reform. As ADB’s Board paper, Governance: Sound Development Management notes, the cumulative effect of poor salaries, low morale and productivity, uncertain prospects for career development, and insufficient linkage of merit to promotion can foster pervasive corruption among public officials.

42. ADB can support a number of initiatives to redress these problems. Measures to strengthen establishment management and control for civil service positions will help ensure that there are no “ghost employees” on the payroll. Efforts to decompress pay scales and improve employment conditions throughout the civil service will lower the incentive for illicit behavior. Initiatives to reduce the number of exemptions and special allowances will make remuneration more transparent. Measures to improve procedures for recruitment and promotion should help avoid abuses of patronage, nepotism, and favoritism, and help to foster the creation of an independent, meritocratic civil service. Efforts to draft and enforce a code of ethics will clarify what is expected of civil servants and ensure adherence to appropriate norms of behavior.

43. Finally, one can improve the efficiency and effectiveness of the public sector while simultaneously reducing opportunities for corruption by narrowing its scope for intervention. Within ministries, agencies, and departments, one of the best approaches is the re-engineering of business processes. As procedures are simplified and streamlined, the need for “speed money” payments to expedite services disappears. At a broader level, deregulation, commercialization, and privatization can, under appropriate circumstances, achieve similar objectives. As the sphere of state activity decreases, then as a general rule the opportunity for soliciting bribes will also go down.

44. Several “good governance” initiatives relating to the legislative and judicial branches can also help in the fight against corruption. One important means to enhance accountability is to strengthen the parliament’s oversight function and improve the capacity of parliamentary institutions, such as supreme audit agencies, to function effectively. Measures for legal and judicial reform, such as efforts to reduce judicial backlogs through alternate dispute resolution techniques, or to improve courtroom management to ensure cases can be tried in a timely fashion, or to enhance the independence and professionalism of the judiciary, will all have positive externalities in the struggle against corruption. The same is true for efforts to reduce critical skill gaps in areas such as accounting and audit.

45. These initiatives are noncontroversial and widely recognized to be the building blocks of solid public sector management. ADB is already pursuing a number of such initiatives within its existing portfolio of loans and TA grants (Box 3). They will serve as the core of the ADB’s anticorruption effort as part of its broader program for strengthening governance and capacity building.

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