A new global determination to take action against corruption is essential to international economic efficiency and stability.

There are moments in history when things which previously seemed impossible become feasible. I believe this is the case now with action against corruption. This is not a matter of chance. We are living at a time of great change and there are many who have paved the way.

We should applaud those who have battled for change. Peter Eigen of Transparency International, for believing governments could be persuaded to tackle corruption. Mark Pieth, the chair at the OECD conference which broke new ground on agreeing international action against the bribery of foreign public officials. Those in business who have stood out against corruption. The Indian non-governmental organisation – MKSS – who invented public information campaigns in Rajasthan, so that the public could see how politicians and officials corruptly diverted state funds. There are many heroes across the world. Brave hearts all of them.

Individual contributions do matter. They have an important role in changing attitudes. The title of this conference is notable: ‘Corruption as a threat to world trade and investment’. There is no question mark. We are invited to take as read that corruption is bad for business. It was not always so. It used to be commonplace for people to talk as though corruption was embedded immutably in the culture of many countries, especially poor ones. There was an assumption that corruption was an unavoidable part of international business and that grease payments were necessary to get things done. There was even a debate in learned journals over whether corruption made inefficient governments and countries work more effectively!

Perceptions have changed. Today, an increasing number of companies are drawing up codes of good practice and want their performance to be judged against ethical standards as well as the balance sheet. The encouraging response to the Ethical Trading Initiative for developing countries illustrates the trend. Clearly all such businesses will be unwilling to engage in corrupt practices. They therefore have an interest in worldwide action to root out corruption so that they are not disadvantaged by their commitment to ethical business practices.

You will be hearing later from the World Bank about their surveys of businessmen and investors. It is intriguing to learn that those people who do pay bribes end up wasting more time in the offices of bureaucrats than those who don’t. It is important for developing countries to know that investors arc deterred by corruption. And that this is true for foreign and domestic investors. The World Development Report of two years ago authoritatively gave the lie to the idea that corruption might just have a positive effect.

Your debates are bound to take account of East Asia’s economic difficulties. Short-term capital flows may have triggered the crisis. But the origins of the crisis included poor investments and weak regulation. And underlying all this were corruption problems. In the absence of democratic accountability, cronyism and corruption flourish. And this understanding – which is now widespread – is a major change. Many used to dismiss complaints about human rights and point to the economic performance of Indonesia. Now it is clear to all that economic development without transparency and accountability is unsustainable.

And the lesson goes wider. There was a heavy price to pay in the region but the consequences are global. The Chancellor of the Exchequer is clear that to build a more secure international economic system we need better transparency and regulation worldwide. The Asian economic miracle, which saw faster poverty reduction than ever previously experienced, was built on massive inward investment. The crisis has demonstrated the need for investors to seek better information and it is clear that requires greater transparency. The world’s growing interdependence – the mobility of capital and the global flow of information – mean we need to bear down on corruption worldwide and that it is no longer possible to live with one set of standards at home and another in relation to foreign trade and investment.

But it is wrong to see corruption as a problem only for developing countries. Events this week in Europe have certainly disproved that thesis.

We have long been concerned about the quality of the European Community’s external assistance programmes. And I was not surprised that three of the cases closely examined in the report of the Committee of Independent Experts are of external assistance – humanitarian aid, assistance to the Mediterranean and help with nuclear safety in Eastern Europe. The report reveals a serious catalogue of negligence, mismanagement and alleged fraud.

The proposals set out by Tony Blair in the Commons on Tuesday apply in particular to the external assistance programme. I believe that we need a complete overhaul of the approval, auditing and financial management systems – and a new system of accountability in the bureaucracy of the Commission so that individuals are fully accountable for budgets they manage. And we also need new, more transparent procedures for awarding contracts.

The answer is not more layers of controls, but simplification coupled with greater personal responsibility and accountability. We also need to avoid the Commission taking on more responsibility than it is capable of handling. In the past, the Commission has been all too ready to take on more money and powers, regardless of their capacity to deliver.

In the light of events this week, it is vital that the Council of Ministers, the European Parliament and the Commission no longer sanction programmes or budget levels which cannot be effectively managed.

We need to be honest about the UK’s record also. Even with all our history and systems of control, corruption breaks out around central and local government with notable frequency. We rank only eleventh ‘cleanest’ on the Transparency International index of countries. And, while we do have laws on corruption and largish numbers of people have been prosecuted for bribing officials in the UK, there have been no prosecutions for bribery of foreign public officials.

Transparency International has made it clear that it is not impressed with current Inland Revenue guidance. This guidance makes it clear that UK law against corruption applies to offences committed in the UK but is unlikely to apply to an offence committed overseas just because preparatory action was taken in the UK.

This is the law our government inherited and which we are currently reviewing. My interest, and that of my colleagues, is to see how we can make the law more effective. Not only against bribery in the UK, but also against the overseas bribery of foreign public officials and private sector agents.

Some are arguing that our law, like US law, should extend its territorial reach to acts of corruption commissioned and committed overseas by our own nationals. We will need to examine carefully both whether this is desirable in principle and whether it would be effective in practice.

We should also recognise that the flow of corrupt finance is a cycle. Deposits of corruptly acquired money are returned to financial institutions in richer countries. We are implicated at all stages of the cycle.

Bankers in Britain will be aware of the increasing determination of the government to tackle money laundering. Financial institutions, lawyers and accountants must report any transactions where they know or suspect that funds have derived from criminal activities. Most are mindful of their reputation.

I am pleased that the legal community are taking their responsibilities seriously. And that the Society for Advanced Legal Studies intends to establish a series of working groups to look at the legal issues around the transfer of corruptly-acquired funds. I am keen to support their efforts in any way I can. Their aim will be in part to educate the financial and legal community and in part to research unresolved issues. I look forward to the fruits of their endeavours.

But what does all this mean for developing countries and for their prospects for development? This is of course my prime focus.

There are two broad categories of corruption in developing countries. There is grand corruption which is financed by trade and investors and goes to politicians and senior officials. And there is petty corruption where officials exploit those they should be serving. And of course the two feed off each other.

And it is the poorest of the poor who suffer disproportionately from corruption. A ‘National Bribe Index’ was published by the Indian magazine Outlook two years ago. It showed the going rate for some basic government services. For example, a new water connection needed a 1000 rupee bribe. This effectively excludes the poor from having a reliable supply of running water, with all the health and work time consequences that this entails.

Corruption has also contributed to unsustainable debt. All of us who are serious about debt relief recognise that if we fail to root out corruption, debts which arc cancelled will be replaced by new debt for unproductive expenditure resulting from corrupt incentives, and the whole destructive cycle will be repeated.

Corruption also perverts the political process, and undermines effective and equitable government and the rule of law. And it is the poor who suffer most from weak systems of government that fail to deliver effective services and the capricious application of the law which tends to abuse the rights of the poorest and weakest.

We also know from work done in the World Bank and elsewhere that aid made available to countries – where corruption is rife and systems of regulation are weak and ineffective – is wasted. In these circumstances, development aid will simply feed corruption and underpin bad practice.

But, conversely, we know the conditions in which aid does work – where there is a real commitment on the part of the government to tackle corruption, strengthen systems of regulation and improve the economic and social conditions of the poor.

My Department – the Department for International Development – is therefore giving increased priority to action against corruption and to working with governments which are committed to tackling corruption and reducing poverty.

Within our development programmes we put a major effort into improving the effectiveness of government systems. Obviously it would be unacceptable to be putting large sums of money into education or healthcare if other parts of the government budget are being spent wastefully or corruptly. Because aid is fungible, we are necessarily implicated. Increasingly, therefore, controls on corruption are a central theme of our development programme. Our aim is to back governments committed to reducing corruption to put in place systems that help achieve these objectives.

Let me give a few examples of the work that is now typical of our programmes worldwide:

In Tanzania, we are working with President Mkapa who has shown a I strong personal commitment to controlling corruption. Tanzania is also fortunate in having in Justice Wariyoba one of the most effective practical thinkers on corruption in Africa.

What Tanzania needs is international support to help turn that political commitment into practical proposals that will make a difference to corruption on the ground. The UK is working with the World Bank and others to support activities which help underpin an anti-corruption strategy. For example, we are working with the government on civil service reform, in revamping the Revenue Authority and in developing the role of the Accountant General and Auditor General. All of this sounds very dry – but civil servants who are grossly underpaid seek bribes and other income. This hurts the poor directly but also blocks reform because such bureaucracies are incapable of delivering effective systems of basic education and healthcare essential to development.

We are doing similar work in Uganda. Uganda has made a determined effort to stamp out corruption. The new anti-corruption body, the Inspectorate of Government, has had some high-level successes. Our support for the Inspectorate has been on issues of organisation, management and expert support. The Inspector reports directly to Parliament which has shown a healthy capacity to criticise the executive and has done so very vigorously recently. As in many other countries, this is underpinned by support for civil service reform including raising pay towards living wages so that the temptation to be corrupt is reduced.

We are also active in Nepal. Nepal is one of the world’s poorest countries and has for many years been one of the biggest recipients of aid. Entrenched corruption is a major part of the explanation of the failure of development. We have recently made it clear in Nepal that our programmes will be severely slashed back unless we can agree to work together to tackle corruption.

My Department is also working increasingly at the multilateral level. I applaud the work done in this area by Jim Wolfensohn in the World Bank. He personally took the lead in throwing out the old complacency in the Bank. And he has supported his officials in translating good intentions into practical support in a number of countries.

But we are also pushing for more co-ordinated action by aid donors. This includes recognising that donors can be part of the problem, as well as actors in its solution. Our government has broken the link between aid and trade – a link associated with some pretty shoddy episodes in recent development history. We are pressing our colleagues in the OECD to agree to shift from short-term national advantage by untying all financial aid, food aid and technical assistance, to the least developed countries in the first instance. The research is clear that tied aid is massively less efficient. It also brings with it most of the ulterior motives in development programmes, which are motivated by short-term donor interest rather than effective development.

To conclude, I hope I have made clear this morning that there is a new global determination to take action against corruption and that such action is essential to international economic efficiency and stability. I hope I have also made it clear that action is essential, too, to safeguard the interests of the poor – because it is the poor of the world who pay the biggest price for corruption.

Clearly this is a major battle and there are many players. International organisations, business, governments, the legal profession and civil society all have their part to play. But this is also a time when major progress is possible. This is in all our interests but most notably in the interests of the poor of the world.

They pay the biggest price in unpayable debt, bribes they cannot afford and corrupt public services. Most of all, they pay the price in lost development that could have lifted them and their children out of the grinding poverty that one in four of our fellow human beings have to endure.

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