The debt crisis left a trauma in the minds of lenders which developing countries cannot wish away. The trauma is not a chimera of the mind; now information is available on the basis of which countries are being ranked. India has the dubious distinction of being the eighth most corrupt country amongst those ranked. Damning as this commentary is, no one in the Indian government or outside has even tried to dispute the condemnation.
The issue was thrown into sharp relief when the Kenyan government removed its chief customs official three months ago and the International Monetary Fund consequently withdrew its support. Kenya happens to be a member of the Group of 77, the Non-Aligned Movement and all the other trade unions of developing countries by which India sets such store. But no one in our government said a word to defend Kenya.
The finance secretary is reported to have cautioned the Fund and the Bank against haste in matters outside their mandate. This truculence is not unnatural for a country whose rulers have so much to lose from honesty in government. But the fact is that corruption does impinge on the commercial risks of lending to a government, and is therefore well within the two institutions mandate. The World Bank has earlier proceeded much more decisively in matters quite outside their mandate: for instance, on environmental and ecological issues. Corruption is far more central to its business than environment.
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However, what should worry the Fund and the Bank far more is the impact of new competition. The 1990s have seen an enormous upsurge in the flow of private capital to developing countries. Private investors do not worry about corruption and good government; they invest in search of returns, and hope to pull out before government malperformance destroys the creditworthiness of a country. When it does, it is the Fund or the Bank that is left holding the baby--as, for instance, in Thailand today. Herein lies the danger in being market leaders -- that the Fund and the Bank must needs be lenders of last resort -- and the last ones to recover their money. The rule they have followed of never forgiving debt and never lending to a defaulter is a poor defence against this possibility. The new stress on good governance must be seen as a part of the search for a stronger defence against the risks of lending to developing countries.